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. 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.
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!
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.
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. 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. 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. 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. 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.
In 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.”
Shifting 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.
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.
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.
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 , 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.
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.
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.
 10 Cr. 336 (2011). See also United States v. PokerStars, et al., 11 Civ. 2564 (2011).