Gaming Companies Aim to Enter Online Gambling Market

In 2012, the global gambling market was estimated to be worth $417 billion.  According to H2 Gambling Capital, only 8.1% of that $417b came from online or interactive gambling.[1]  In light of those numbers, the opportunity for enormous revenue growth by gaming companies via online gambling is obvious and has not gone unnoticed.  A prime example of a gaming company’s attempt and struggle to capture their share of the gambling market is Zynga.

Image Zynga is a social gaming company that was founded in 2007.  Some of Zynga’s most popular games are FarmVille, Words  with Friends, Mafia Wars, and Zynga Poker.  These games are  available for download as app’s on smart phones and through social media websites.  I used to play Words with Friends all the time and many of my friends and family members still do.  If you are a Facebook user, these games are probably familiar to you via annoying notifications inviting you to join a friend in their virtual mafia battle or crop cultivation.  (And if you were like me, you were wondering why your friend was spending so much time growing virtual crops.)  Zynga’s customer acquisition strategy, incentivizing users to send invitations on Facebook and thus creating viral loops, is responsible for these notifications and Zynga’s meteoric rise.

You might be wondering how Zynga is able to monetize customers playing their games when they are free to join on Facebook and the app’s are free to download on smart phones.  In games like FarmVille and Mafia Wars this is done through the sale of virtual currency.  Zynga sells FarmVille Bucks, a closed loop currency, in exchange for real world money.  FarmVille Bucks allow users to advance in the game faster (like crops growing faster).  Because of the addictive nature of these games and the competitive aspect of users wanting to have a larger and better farm than their neighbors (fellow Facebook friends that also have farms), this business model proved to be very lucrative.  In February of this year, Zynga announced that FarmVille had over 40 million users, with over 8 million daily active users, and just passed the $1 billion mark in total player bookings![2]

Despite the popularity of FarmVille and their other games, Zynga has failed to parlay this popularity into profitability.  In December 2011, Zynga launched an IPO at $10 a share.  A year after the IPO, Zynga’s stock price had fallen 75%.  After repeatedly failing to meet revenue and profit projections Zynga is currently trading at under $4/share.

Image

Note the spike in late 2012 when Zynga announced their Nevade gambling license plans and the dip in June 2013 when Zynga abandoned their license application.

Zynga saw online gambling as an opportunity to drastically increase revenue and in late 2012 Zynga applied for a Nevada gaming license with plans to convert their popular play/fictional money game Zynga Poker (formerly Texas HoldEm Poker) into a real money version.[3]  But there were two main problems with Zynga’s plans.  The first is the lengthy and complicated application process Zynga needed to navigate in order to get approved in Nevada.[4]  The second is that even if Zynga was approved in Nevada, that would only allow the approximately 2.8 million residents of Nevada to play the game and gamble with real money.  And even if the Nevada model proved workable, there are only two other states in the United States (Delaware and New Jersey) that have legalized online gambling that Zynga could expand into.

In June 2013, Zynga abandoned their bid for a Nevada gaming license.  Zynga’s founder CEO Mark Pincus was replaced and the new CEO stated that Zynga would focus on free to play gaming.[5]  Despite Zynga’s struggle to introduce online gambling in the U.S., in April 2013 Zynga opened an online casino available to residents of the United Kingdom.[6]  But it remains to be seen how profitable their U.K. venture will be considering the U.K. online gambling market is highly competitive and over saturated.

paddy-power-launch-facebook-appsIn the United Kingdom, online gambling has been legal and regulated since 2005.  Starting in July of 2013, Facebook partnered with the online gambling company Paddy Power to allow sports gambling on their site via a Facebook app.  As a response to criticism lobbied at Facebook, a Facebook spokesman said: “Online betting is a popular and well-regulated pastime in the UK. Our carefully chosen partners work within stringent regulatory guidelines to ensure their products and services are used safely and responsibly by adults. These products will be invisible and inaccessible to people aged under 18 on Facebook.”[7]

chumba worldShifting gears, a look at the Kickstarter campaign of Chumba World combines the issues of crowdfunding, virtual currency, and online gambling.  Chumba World is a game in development that is a MMO where players can build their own virtual casinos that other users patronize with a form of closed loop currency, but the casino owners can earn real world money via revenue sharing with Chumba– if they generate enough traffic to their casino.  Chumba World is self described as “Second Life meets Farmville meets Las Vegas.”  After launching a Kickstarter campaign looking for $50,000, their campaign was shut down.  According to the CEO of the company behind Chumba World, Laurence Escalante, he does not know why Kickstarter shut down their campaign and Kickstarter’s Terms of Service state that they do not comment on specific reasons for a campaign’s cancellation.[8]

Chumba World does not have much recourse with Kickstarter considering their TOS give them the discretion to discontinue a campaign at any time for any reason.  The TOS state:

[Kickstarter] reserves the right to change, suspend, or discontinue the Service (including, but not limited to, the availability of any feature, database, or Content) at any time for any reason. [Kickstarter] may also impose limits on certain features and services or restrict your access to parts or all of the Service without notice or liability.[9]

One wonders why Kickstarter would shut down the Chumba World campaign.  It appears that Kickstarter’s general counsel decided that allowing the campaign to progress would be more hassle than it is worth considering the legal gray area of online gambling in the United States.  Another possible reason for the shutdown is that the TOS are governed by the laws of New York.  The TOS state:

These Terms of Service (and any further rules, policies, or guidelines incorporated by reference) shall be governed by and construed in accordance with the laws of the State of New York and the United States, without giving effect to any principles of conflicts of law, and without application of the Uniform Computer Information Transaction Act or the United Nations Convention of Controls for International Sale of Goods. You agree that the Company and its Services are deemed a passive website that does not give rise to personal jurisdiction over Kickstarter or its parents, subsidiaries, affiliates, successors, assigns, employees, agents, directors, officers or shareholders, either specific or general, in any jurisdiction other than the State of New York. You agree that any action at law or in equity arising out of or relating to these terms, or your use or non-use of the Services, shall be filed only in the state or federal courts located in New York County in the State of New York and you hereby consent and submit to the personal jurisdiction of such courts for the purposes of litigating any such action. You hereby irrevocably waive any right you may have to trial by jury in any dispute, action, or proceeding.[9]

Although New York does not expressly prohibit online gambling, New York courts have taken a strict stance in opposition of online gambling.  In United States v. Scheinberg [10], and on April 15, 2011– what became known as Poker Black Friday, the DOJ shut down three of the most prominent online poker companies (Poker Stars, Full Tilt Poker, and Absolute Bet/Ultimate Bet).  The indictment included UIGEA charges (for accepting payments) but was based on New York law that prohibits gambling because there are no Federal laws expressly prohibiting online gambling (except for sports betting).

Despite Chumba World’s Kickstarter setback, investors believe in the growth of online gambling through the MMO medium.  Month’s after Kickstarter shut down their Campaign, Chumba World announced it had raised just over $2.5 million in venture capitalism investment.[11]

There appears to be no stop in the rise of popularity of both gaming and gambling, while there is no doubt that gaming companies will continue efforts to capture a share of the vast gambling market.  The law has failed to keep up with the rapid progression of technology, legislation needs to be passed that legalizes online gambling in the United States and creates an oversight commission to tax and regulate the industry.


[1] http://www.forbes.com/sites/afontevecchia/2012/12/06/can-online-poker-save-zynga-417b-global-gambling-market-throws-pincus-a-risky-lifeline/

[2] http://techcrunch.com/2013/02/05/farmville-1-billion/

I witnessed the addictive nature of FarmVille and I think it can be illustrated through this anecdote.  Before attending law school, I worked at Regions Bank as a personal and business banker.  Several times a client came in and tried to get overdraft fees taken off his account.  Every time the overdraft was caused by a FarmVille purchase.  On one occasion the client’s FarmVille purchased ended up costing him well over $100.  The client initially overdrafted his account with a $9.99 FarmVille charge (I’m assuming for purchasing FarmVille Bucks) and was then charged a $30 overdraft fee.  The client then had 5 more $0.99 FarmVille charges and received a $30 fee for each charge.  I felt bad for the client and implored him to stop using his debit card for FarmVille purchases and to keep his register up to date.  I also wondered how sweet his virtual farm must be.

[3] http://www.pcworld.com/article/2018803/zynga-applies-for-nevada-gambling-license.html

[4] http://gaming.nv.gov/index.aspx?page=51

[5] http://www.theregister.co.uk/2013/07/26/zynga_q2_results/

[6] http://techcrunch.com/2013/04/03/zyngas-real-money-online-casino-is-now-live-in-the-uk-with-minimum-bets-starting-at-0-01/

[7] http://www.telegraph.co.uk/technology/10173072/Gambling-comes-to-Facebook-with-Paddy-Power-real-money-sport-app.html

[8] http://venturebeat.com/2013/03/18/chumba-world-bounces-back-from-kickstarter-suspension-with-2-6m-in-investor-funding-exclusive/

[9] http://www.kickstarter.com/terms-of-use

[10] 10 Cr. 336 (2011).  See also United States v. PokerStars, et al., 11 Civ. 2564 (2011).

[11] http://venturebeat.com/2013/03/18/chumba-world-bounces-back-from-kickstarter-suspension-with-2-6m-in-investor-funding-exclusive/

About these ads

~ by ajacksonf on October 6, 2013.

13 Responses to “Gaming Companies Aim to Enter Online Gambling Market”

  1. I am curious about how the exceptions to the general prohibition of online gambling for Nevada, Delaware, and New Jersey works. You said that if Zyga received a license to operate online gambling in Nevada, they would only be able to serve the 2.8 million residents of that state. If online gambling is treated like regular gambling, anyone should be able to go to Nevada for the weekend and gamble online all they want. Right? And if that were the case, shouldn’t people be able to participate in gambling “in Nevada” by using some server or internet connection that is based in Nevada, rather than actually be physically present in the state? Since the law only allows residents of Nevada, New Jersey, and Delaware to gamble online, may residents of those states gamble online while out of their home state? These state’s exceptions to the general prohibition of online gambling seem somewhat arbitrary to me, and hard to enforce. Technology such as alternate IP address services and virtual private networks make disguising one’s location quite simple. Great post!

    • I’m not totally sure but I assume that any adult actually in Nevada can gamble online through the approved sites. And I do not think you can gamble when physically in a jurisdiction that does not allow, regardless of where you are a citizen. That is a good point about being able to manipulate the system and go through a server or VPN in Nevada. That’s certainly an option, but compared to the way it is now I actually think that would be an upgrade. Industry experts estimate that Americans wager somewhere between $2 to $5 billion illegally online at offshore sites. So they are going to gamble anyways, better to have it regulated and taxed domestically.

    • I think that’s a really good point, Drew. I think this is yet another reflection of how current lawmakers simply don’t understand how the internet works. It would seem impossible to regulate internet use within certain physical boundaries because the internet transcends our arbitrary lines in the sand that we draw. Who’s to say United States citizens aren’t at this moment using a VPN to gamble in UK online casinos? It’s certainly something that occurs regularly when trying to access media content that airs either solely in the UK or months before it does in the US.

  2. I find Kickstarter’s decision to discontinue the Chumba World campaign particularly interesting. I’m not too familiar with the gameplay mechanics of Chumba World but, from what I gather from the OP, it is surprising that Chumba World would fall into a legal gray area. The winning of real currency appears to be dependent on the amount of traffic drawn to a particular user’s casino, not the actual gambling on casino games. It would be interesting to see how Kickstarter would react if Chumba World kept the same gameplay mechanic but, instead of building casinos, users built amusement parks or zoos.

    • I definitely think Kickstarter would not have a problem with a similar game based on amusements parks or zoos. I think one of the main issues is that no one is familiar with the gameplay mechanics of Chumba World. The game designers have not released many details when it comes to gameplay mechanics– and to this day they still have not released a demo. I should have been more clear in my post but from what I understand the earning of real currency will be dependent on traffic and actual gambling. If your casino earns enough virtual money, then you can convert that virtual money into real money. Another issue that I should have raised in my initial blog post is that gambling prohibition is much more explicit in regards to and prosecution more likely for the taker of bets rather than the one placing bets.

      • Oh, I can definitely see why Kickstarter decided to shutdown the Chumba World campaign.

  3. In the follow-up discussion, the poster brings up an interesting point in that gamblers are going to gamble no matter if it is legal in this country or not. He mentions that industry experts guess that between two and five billion dollars are waged illegally in offshore sites. His point is that, if outlawing gambling fails to stop gambling, then it is in the U.S.’ best interest to ensure its legality and tax it domestically. This certainly has merit, as was explained in the article regarding New Jersey’s push for the legalization of sports gambling. That article explains that allowing New Jersey to legalize sports gambling could revitalize the once thriving Atlantic City area. One of the arguments raised by lawyers for New Jersey is the same one that has been raised by the poster, that the state is merely seeking to regulate conduct that it already thriving on the black market. Even those that support online gambling understand the need for strict governmental regulation and oversight. But those on the other side of the debate would argue that the black market will exist despite the legality or illegality of online gambling; thus, they would argue that legalizing online gambling in the interest of eliminating the black market is ill-founded and cannot in and of itself be reason to change to the law.

  4. The lawyers for Kickstarter were probably worried about potential liability if some governmental unit decided that Chumba World was really more about promotion online gambling as opposed to creating virtual worlds that allow some form of gambling. From the post above concerning the complexity of the gambling laws you can understand why the lawyers may have been nervous.

    Ultimately the problem is this: the world is gambling because in most places it is legal – online as well as brick and mortar. The internet allows people to cross geographical boundaries with the click of a mouse button. How to we control and regulate the mouse click. Adoption of UIEGA did not stop Americans from gambling on line. They still do so only now it is under the cover of dark, unregulated and untaxed (!). Legalizing any form of gambling will not eliminate a black market form of the same gambling. We already know that from the move to legal lotteries versus policy (or numbers running). However, it can provide a more regulated environment, help collect taxable income, and make it more costly for criminal forms of gambling to continue.

    I think it is fascinating that FaceBook went to the UK for the gambling app. Don’t forget that FaceBook also had a shaky year after their IPO and needs to shoe its investors that it can provide a profit stream. I would be very interested to see a year from now what kind of revenue that UK partnership is producing.

  5. Really interesting to see actual real world examples of companies trying to navigate the confusing legal world of online gambling. The more I read about the law surrounding online gambling the more I realized how confusing and uncertain a state it is in. The UIGEA has created a situation in which no matter how well or responsibly a company is willing to conduct internet gambling that it is almost impossible to do so. I share the concern that a lot of my classmates have that the UIGEA appears to be a possible sell out to the brick and mortar casino industry. However, even for casinos it most likely would have been more profitable to setup online casinos that could have been played by players nationwide under a uniform of set of regulations. The cost of setting up and maintaining the hardware necessary to operate an online gambling system is not cheap and may not be worth the cost of doing so only for intrastate gambling. As it stands now existing gambling establishments are left to the mercy of state law regulation of online gambling.

  6. As you pointed out, these online gaming platforms are having a had time navigating the tricky waters of online gambling for a variety of reasons. Just as Zynga underestimated the application process, so too have games like SecondLife simply abandoned any attempts to legitimize gambling. (http://www.informationweek.com/second-life-gambling-ban-gets-mixed-reac/201201441) To me the most interesting (perhaps unfair and upsetting would be better terms) part of how Second Life chose to handle the issue was how one sided the decision came. Yes, Linden Labs created the game and maintains control over what can and cannot be done. But they should be more understanding of those like Anthony Smith who had invested thousands of dollars in getting his online gambling operation up and running in second life. Without the participation of vendors like Smith, Second Life as we know it will cease to exist and Linden Labs will have nothing left to offer patrons.
    It seems that time and gain when Linden Labs is faced with a problem their answer is tyranny–we take your assets, your account, your everything, goodbye. This reality is in direct opposition as to how the CEO would like to characterize Second life ( “owned, controlled, and built by the people who are there). This reputation is beginning to make itself known and when we consider the prevalence of other similar worlds popping up, suddenly these vendors now have a choice in where they set up shop.

  7. This issue of gaming companies setting up their own virtual shops allowing digital houses of gambling was an inevitability of modern technology and the information age. Once we have the means to do so we will venture into all of human vices be it relating to sex, drugs, and now gambling. Legislation such as the UIGEA is far too stern and overbearing and of course does not address the root issues at hand. The problem of users funneling real money in and out of offshore bank accounts to fund online bets through networks masked with VPNs is thoroughly ignored and the $2-5 billion market continues to perpetuate and grow. This type of lawmaking skirts a real solution as many outright bans before it, e.g. alcohol prohibition, etc. The legislation may appease brick and mortar casinos and those who are not technologically savvy but those in the know will bypass it and those like it unless world governments unite to attack the ‘vice’ en masse on a global scale.

  8. As a candy crush lover and former words with friends junky, I just think all the red tape is unnecessary. People love to play these games. They love it so much that they are willing to pay real money just to advance quicker in a fictitious game. What would happen if these same people knew that they could pay $5 and not only advance forward but win real money? I agree there should be restrictions to prevent fraud and to prevent minors from playing these games. It just seems that companies would generate so much revenue if a system was invented where people are gambling from their iPhone. It seems like every other country is capitalizing on the opportunity to bring more revenue to the economy , while the U.S. continues to struggle with red tape… actually I guess there isn’t a struggle right now since the government has been shut down.

    • I think its funny how after reading this blog post I have changed my mind. Before I was worried that gambling addictions could be a drain on the economy, but once I see it in a friendly game like setting such as farmville it makes me feel that the red tape is unnecessary. This reveals my ignorance of the issues of online gambling more than anything. I think the more I learn, the more I feel this isnt such a big deal and the red tape is a “sell out” to the brick and mortar casinos. What’s the big deal with an online gambling game like farmville? While I worried that gambling addicts would be crazy loose, I feel again that this is an unfounded fear. Any drain on the economy would surely be supplemented by the potential revenue, right? I guess for me to fully form my stance on this issue I would like to see a full breakdown on the potential economic repercussions that gambling could bring.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

 
Follow

Get every new post delivered to your Inbox.

Join 34 other followers

%d bloggers like this: