How Will The Facebook IPO Impact Zynga's Stock Price?

Zynga's stock price has had a less than stellar performance post IPO late last year. However, since the announcement of Facebook's IPO and the publication of the Facebook S-1,  Zynga stock has steadily risen from about $8 per share to a high of $13 and change. This is interesting and does make sense. Prior to the Facebook S-1 publication many investors did not even know who Zynga was or what they where all about. A social game company? Also, in looking at Zynga's S-1 it is filled with more doubt about the future than hopeful optimism. It also spelled out that Zynga was heavily dependent on Facebook for their future growth. Without the benefit of seeing the Facebook S-1 Zynga was a relatively hard sell even to savvy institutional investors.

Per my analysis of the Facebook S-1, which I recommend you read if you really want a good understanding of the relationship of these two companies, 20% of Facebook's revenue is coming from Zynga's virtual currency sales. Facebook clearly states, without Zynga Facebook will be significantly challenged to keep its projected revenue growth rate. These companies are in a symbiotic relationship if they like it or not. The question is how deep does this co-dependency  go and who benefits most or gets hurt the most if this relationship thrives or deteriorates?

"According to AppData, we have more monthly active users on Facebook than the next 15 social game developers combined. Our players are also more engaged, with our games being played by more than 60 million average DAUs worldwide. According to AppData, we have more daily active users than the next 30 social game developers combined. "

This Zynga S-1 statement reveals that no other social game company comes close to contributing the amount of revenue Zynga is contributing to Facebook.

"In July 2010, we began migrating to Facebook Credits as the primary payment method for our games played through Facebook, and by April 2011, we had completed this migration. Facebook remits to us an amount equal to 70% of the face value of Facebook Credits purchased by our players for use in our games played through Facebook. We record bookings and recognize revenue net of the amounts retained by Facebook.

Facebook is the primary distribution, marketing, promotion and payment platform for our games. We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future. Any deterioration in our relationship with Facebook would harm our business and adversely affect the value of our Class A common stock."

This statement indicates that Zynga is giving 30% of its revenue to Facebook for the privilege to publish its  games within Facebook. This is a serious amount of money for using a payment platform. If Facebook increases this percentage it will hurt Zynga. If Facebook is forced to reduce this percentage for all E-commerce applications within the Facebook environment it will help Zynga. This is a real possibility if Facebook really wants to expand its payment processing to other no-social game companies. 


Zynga) have benefited from Facebook's strong brand recognition and large user base. If Facebook loses its market position or otherwise falls out of favor with Internet users, we would need to identify alternative channels for marketing, promoting and distributing our games, which would consume substantial resources and may not be effective."

The Zynga brand is not the important brand the Facebook brand is. Zynga can call itself anything it wants. Essentially, Zynga is Facebook's social gaming company.  

Reading the Facebook and Zynga S-1's reveals that at this time these companies are heavily dependent on each other. With Zynga being the most vulnerable and most co-dependent. The Facebook stock price will and should impact the Zynga stock price.This may explain why Zynga has not been particularly aggressive with adding games to Google+. I suspect they do not want to rock the Facebook boat. Facebook also has to be careful about how it treat Zynga. Having 20% of your revenue coming from a single source is non-trivial. A breakdown of this relationship will put a dent in the Facebook stock price. This also means that their fortunes and stock price will rise and fall with Facebook's performance. This also begs the question should Facebook buy Zynga with its new found IPO cash. You also wonder if Facebook can do any deals with big international social game companies like Tencent in China? Will this force Zynga out of Facebook? Google is also in play here. It is no surprise that Google's stock is slipping as the Facebook IPO becomes imminent.Google needs a boost to counter Facebook's impending big IPO cash trove. Should they buy Zynga? 


Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

What Facebook's S-1 Filing Reveals About Social Gaming

Many analysts have dissected Facebook's Security and Exchange Commissions S-1 filing. For the most part the goal of this evaluation has been to determine the risk/reward ratio of investing in the Facebook IPO. My interest in looking into the S-1 was to focus on the role of social games in Facebook's business model and how that impacts their future projections. The following are key portions of the S-1  relevant to that subject and my own opinion on how to interpret Facebook's social game commentary.

"When users purchase virtual and digital goods from our Platform developers using our Payments infrastructure, we receive fees that represent a portion of the transaction value. Currently, substantially all of the Payments transactions between our users and Platform developers are for virtual goods used in social games. According to an industry source, the worldwide revenue generated from the sale of virtual goods increased from $2 billion in 2007 to $7 billion in 2010, and is forecasted to increase to $15 billion by 2014. We currently require Payments integration in games on Facebook, and we may seek to extend the use of Payments to other types of apps in the future."

 Facebook's introduction of  its own virtual currency payment system was clearly the result of research conducted on the virtual gaming/currency bonanza  initially developed in China, Korea and Japan. The projections for a 15 billion dollar industry in 2014 is astounding and speaks to the shift away from the importance of physical goods and "traditional (Dollars, Euros, Yuan") currency. Clearly Facebook wants to establish itself as the issuer and manager of a universal currency to attract and retain social gamers and virtual currency transactions around the world. It also wants to draw social gamers and publishers in Asia that have already accepted virtual currency as a viable transaction model. Should Facebook use its IPO money to buy Tencent in China?

" The substantial majority of our revenue is currently generated from third parties advertising on Facebook. In 2009, 2010, and 2011, advertising accounted for 98%, 95%, and 85%, respectively, of our revenue."

Why is advertising revenue dropping as a percentage of total revenue? It is dropping because social games are beginning to generate more and more revenue based on virtual currency and virtual goods transactions.  Essentially, game related revenue is growing faster than advertising revenue. 

"Apps built by developers of social games, particularly Zynga, are currently responsible for substantially all of our revenue derived from Payments"

Social games are the only application(s) currently generating revenue from virtual currency and virtual goods transactions. This is likely to change as "gamification" begins to take hold and other types of Facebook applications begin to integrate virtual goods and currency into their models. The concept of loyalty points traditionally issued by airlines, credit card companies, etc would be a great target market for Facebook. Facebook also needs to leverage its virtual currency outside of the US and especially in Asia if it expects to support aggressive growth projections.

"If Facebook-integrated websites draw users away from our website, it may reduce or slow the growth of our user activity that generates advertising opportunities, which could negatively affect our advertising revenue.

Although we believe that there are significant long-term benefits to Facebook resulting from increased engagement on Facebook-integrated websites, these benefits may not offset the possible loss of advertising revenue, in which case our business could be harmed."

 So what is Facebook talking about here? Recently web sites and game sites have decided they do not want to go through the effort of building Facebook specific applications. Instead, they are redirecting people from Facebook to their web applications by embedding a redirect in Facebook. Facebook realizes this and worries that this will result in Facebook users realizing that there is a world outside of Facebook. Facebook wants to keep you in Facebook. They have already taken steps to shut down the ability to move Facebook users out of Facebook via the fake Facebook application strategy. 

"We currently generate significant revenue as a result of our relationship with Zynga, and, if we are unable to successfully maintain this relationship, our financial results could be harmed." In 2011, Zynga accounted for approximately 12% of our revenue, which amount was comprised of revenue derived from payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga’s apps generate a significant number of pages on which we display ads from other advertisers. If the use of Zynga games on our Platform declines, if Zynga launches games on or migrates games to competing platforms, or if we fail to maintain good relations with Zynga, we may lose Zynga as a significant Platform developer and our financial results may be adversely affected. "

Clearly Zynga's influence on Facebook is enormous. It also indicates that social gaming has an impact on advertising revenue as well. Not sure if the 12% takes  into account the advertising revenue that Zynga generates and how much of the total revenue Zynga contributes to Facebook. We will have to dig into Zynga's own S-1 to sort that out. Also, Facebook does not mention the total revenue influence of all social games in Facebook from a virtual currency and advertising perspective. I suspect Wall Street was not wise enough to ask this question. If you are going to invest in Facebook you should find out the answer to this questions. There are several large game publishers in Facebook and I suspect the aggregate has a big influence on Facebook's bottom line. 

So what is the total revenue contribution of social games to Facebook's bottomline? I suspect far greater then the 12%  that they are reporting from Zynga. If you add up the other social game publishers and the advertising revenue they generate for Facebook the story is very different than the one pitched in the S-1.

"Our users can use the Facebook Platform to purchase virtual and digital goods from our Platform developers using our Payments infrastructure. Depending on how our Payments product evolves, we may be subject to a variety of laws and regulations in the United States, Europe, and elsewhere, including those governing money transmission, gift cards and other prepaid access instruments, electronic funds transfers, anti-money laundering, counter-terrorist financing, gambling, banking and lending, and import and export restrictions. In some jurisdictions, the application or interpretation of these laws and regulations is not clear. To increase flexibility in how our use of Payments may evolve and to mitigate regulatory uncertainty, we have applied for certain money transmitter licenses and expect to apply for additional money transmitter licenses in the United States, which will generally require us to demonstrate compliance with many domestic laws in these areas. Our efforts to comply with these laws and regulations could be costly and result in diversion of management time and effort and may still not guarantee compliance. In the event that we are found to be in violation of any such legal or regulatory requirements, we may be subject to monetary fines or other penalties such as a cease and desist order, or we may be required to make product changes, any of which could have an adverse effect on our business and financial results."

There are a number of things we can derive from this statement. Clearly government  regulators are beginning to look more deeply into Facebook's virtual currency payment platform and social game transactions that allow or require players to "buy" virtual currency with traditional currency. There are all kinds of issues that could arise from drawing so much attention and revenue from these transactions. First and foremost is the age of people transacting with virtual currency and especially in games like poker and other gambling style games.  If people under the age of 18 are buying currency to enter gambling games and losing is this legal? If it is should the authorize do something about it? Even if they are not gambling games should these people be allowed to buy unlimited amounts of virtual currency and goods?

With the opening up of US legalized gambling and the history of  legal Internet gambling in Europe Facebook is rumored  to be interested in allowing gambling games in its environment to serve these markets. How will Facebook make money on this and how will they safely implement gambling within Facebook?   Regulators will be watching.

"Twelve percent of our total revenue in 2011, and less than 10% in 2010 and 2009, came from a single customer, Zynga. This revenue consisted of payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. In May 2010, we entered into an addendum to our standard terms and conditions with Zynga pursuant to which it agreed to use Facebook Payments as the primary means of payment within Zynga games played on the Facebook Platform. Under this addendum, we retain a fee of up to 30% of the face value of user purchases in Zynga’s games on the Facebook Platform. This addendum expires in May 2015."

Zynga begrudgingly entered into this agreement with Facebook. They even threatened to pull out of Facebook all together.  Zynga did  cut a deal with Google to put games into Google+ to offset their dependence on Facebook. 2015 is certainly  light years away in social networking time. However, if the Zynga/Google partnership can make a dent in Facebook's social gaming dominance Zynga will have more negotiating power to reduce the 30% haircut.

"When users purchase virtual and digital goods from our Platform developers using our Payments infrastructure, we receive fees that represent a portion of the transaction value. Currently, substantially all of the Payments transactions between our users and Platform developers are for virtual goods used in social games, for example virtual tractors in the social game FarmVille. According to an industry source, the worldwide revenue generated from the sale of virtual goods increased from $2 billion in 2007 to $7 billion in 2010, and is forecasted to increase to $15 billion by 2014. Payments integration is currently required in apps on Facebook that are categorized as games, and we may seek to extend the use of Payments to other types of apps in the future. Our future revenue from Payments will depend on many factors, including our success in enabling Platform developers to build experiences that engage users and create user demand for their products, and the fee arrangements we are able to negotiate in the future." 

Facebook is clearly thinking about how it can encourage "force" all e-commerce transactions though its payment system. Not a bad idea really if they can pull it off. Facebook's current dependence on social games to generate all of its virtual currency revenue is certainly dangerous, especially if Zynga threatens to withdraw from Facebook unless the fees are reduced. The more Facebook dominates the E-commerce world requiring all business to have a presence in Facebook the more likely this will occur. 

In conclusion the Facebook S-1 does not reveal much more than most followers of Facebook already know. The dependence on social games for Facebook's long term growth is obvious. Add the advertising revenue generated in social games with their virtual currency and goods sales will expose a much higher dependence on games then the S-1 has revealed. From an investor perspective impeding legislation to regulate virtual currency transactions may have a significant impact on Facebook's revenue if many of the social gamers are under the age of 18. The introduction of gambling in Facebook could be paradoxical adding an additional revenue stream and at the same time resulting in regulation of existing virtual currency transactions. Although Zynga has made a fortune off of Facebook they have also become a prisoner of this relationship. They have to be thinking about how they can diversify outside of Facebook to reduce their own risk and to increase revenue outside of Facebook.  This means that Facebook should, and is going to decrease, its revenue dependence on Zynga by expanding virtual currency beyond games and to attempt to gain market share with Asian game publishers.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

Australian Senator Is Stunned To Find That Facebook Virtual Currency Gambling Is Not Regulated

Well, I never thought that the first political and legal challenge to Facebook gambling virtual goods and currency games would come from down under.  I have written several blogs about the loop hole in gambling law that considers cash payout as the only form of "consideration" and not other forms of payout such as virtual goods or virtual currency. 

Apparently, Senator Nick Xenophon sees things differently after spending money on a social casino game site in Facebook and not being able to get his conventional money equivalent for the chips he won and obviously lost. I suspect with Zynga's (ZNGA) public debut on  NASDAQ,  the soon to be listed Facebook IPO,  the onslaught of gambling companies putting their "cash" gambling propositions into Facebook taking advantage of US legal Internet gambling  are events that will put the virtual currency legal loophole into question.

The European gambling sites are just now realizing that they may be able to make more money using virtual currency as a transaction currency instead of conventional currency. There is no age restriction on buying virtual currency and using it to play Facebook "credits" gambling games creating a much bigger market for them and less regulation to deal with.  Anyone can buy these credits, wager on a gambling site and never see a single dollar, pound or euro as a result of their play. It all stays with  the gambling operator minus the 30% that Facebook takes on these transactions.

Certainly the legalization of gambling in the US is a big deal and gambling sites are all over this building, buying  and launching their own Facebook conventional gambling games with the hope  of capturing Facebook gambling market share. 

These same gambling operators may be the ones that challenge the off the books gambling revenue being scooped up by virtual currency and goods gambling sites once they realize that a significant portion of there expected revenue and players are still tied up in playing virtual currency/goods gambling games.

I would make a wager that a US state or federal politician is going to float a bill in the next year that makes virtual currency gambling sites to play by the same rules as the "real" gambling sites. 

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

Internet Games Driving "Big Data" Requirements

Venture capitalists are all over the "Big Data(BD)" category investing heavily in a sector they feel is the next big tech sector that will grow quickly and consolidate into few big winners over the next two years.

The Internet gaming space is one of the verticals that ran up against the deficiencies of the traditional DB and BI(data analytics) providers early on requiring them to look for alternatives and to create their own solutions and to take risks with newly minted BD solution providers.  Given the early adopter status of Internet gaming as it relates to BD we can speculate about products and services that BD vendors will have to provide based on the Internet gaming experience.

The challenges that BD will have to solve boils down to solving the standard challenges that have faced computing and especially data solution providers from the beginning of computing.  Latency and storage are the two areas that all data solution providers  must have an answer for. 

Latency - Latency comes down to response for a game. In gaming it is very important for a game to keep up with a player's expected pace of a game. If it does not, players will become frustrated and in some cases the game will become inoperable because the game requires a certain cadence to be considered functional. In mulitplayer games high volumes of players trying to play or compete in a game can put a heavy strain on infrastructure if all parts of the infrastructure are not capable of handling high concurrent usage volumes. This means that "latency" caused by an portion of the game stack or the  infrastructure supporting the game could be disastrous for a game. In social games that depend on their success in the first 48 hours of game launch, any issue that causes the game to be unappealing could sink the game. 

Data Storage- Games that have high volumes of players or associated players can generate extremely large amounts of data in short periods of time because there are many transaction events that occur within a game. We use the term terabytes as a measure of data storage. However, we are getting to a point where terabytes  squared or to the power of x could be a reality if games and especially social games, continue to grow in sophistication and popularity.

The latency and storage challenges associated with games set the gaming sector apart from other verticals such as banking operations, web applications and mobile apps that are not gaming related. This is not to say that applications in these categories are not also driving  BD  requirements. The "gamification" of conventional applications are beginning to transform applications into games. With this transformation comes consumer game play expectations and potentially bigger data storage requirements for other verticals..

BD is not a new challenge. Social game providers experienced the DB storage and retrieval issue very early  after they began to launch games in Facebook. With the domination of Facebook as the leading social game platform the issue has become exacerbated because of the K  or virality effect that can result in a very quick ramp of game usage and in short period of time. This means that a game publisher/developer has to have an out of the box answer to large data requirements.   

NoSQL Data Depositories - The social game companies were  early adopters of NoSQL data storage  providers such as Cassandra, Membase, Hadoop, etc. because they experienced the "how do I handle all of this data problem" in the early days of game deployment in Facebook.  NoSQL DB's as the name implies do not use a table structure to organize and store data.  Instead the NoSQL data depositories use a key value combination to store and identify data. Because there is no "sophisticated" organization of the data and no immediate need to retrieve it or even report on it (we will get back to this point later) these DB's can handle transaction rates with less overhead and more efficient data storage relative to conventional data base products. 

Analysis - Gaming companies and especially Internet gambling companies have historically conducted sophisticated data analysis on game play, player acquisition, player retention, etc. to maintain a competitive advantage and to keep their businesses  growing. Cost of acquisition is extremely high for gambling companies requiring them to be especially careful about retaining existing players. In many cases the success of an online gambling site rests with only a few players that contribute high amounts of revenue. Finding and keeping those players is a very high priority which requires just in time data analysis mining a relatively large data, slicing and dicing the data in a number of different dimensions.

Social gaming companies have a different challenge. Social game companies have a  low revenue per player number relative to Internet gambling or even e-commerce companies. This requires them to drive high numbers of players, which causes the data storage issues previously mentioned, and the need to fully understand how and if players are inviting and associating with other social gamers that are or could drive revenue. Social gamers do have their "wales" just like gambling companies. However, the ratio of total social game players to "high rollers" is significantly different then gambling companies. Social game publishers need data analysis to keep this all in balance.

Both Internet gambling companies and social game companies need almost instantaneous data analysis to react quickly to changing traffic patterns, take advantage of successful marketing programs, retain "high rollers" and to control player drop off.

Unfortunately the current crop of NoSQL data storage solutions does not easily allow someone to analyze that data leaving an entire depository of data off limits to BI.  In a perfect work you would like to be able to combine NoSQL and SQL depositories in a BI roll up to give you the complete picture your business. There are BI vendors attempting to do this as this blog is being written. 

The opportunity and the challenge for BD investors, infrastructure providers, DB vendors, DB analytic engines is to address data capacity and latency issues created by larger data storage requirements and data formats that do not fit conventional SQL structured data . More importantly, creating an analytic feedback loop that farms NoSQL and SQL data,  satisfies standard marketing funnel analysis, game mechanics optimization and social interaction optimization needs to be in place to get real value out of BD. Getting this right will create the wealth effect investors, stockholders and entrepreneurs are looking for. If the BD vendors can solve the Internet gaming companies challenge they will most likely be successful in other verticals.

 Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

Impact Of US Justice Department's Decision To Legalize Internet Gambling

The politics of US Internet gambling law are certainly intriguing. In 2006 it  became illegal (UIGEA) to gamble online resulting in the collapse of an entire industry. Six years later it is all of a sudden legal again! The bad economy, high debt loads for individual states and the rise of social gambling using virtual currency as a cover for real gambling have all contributed to pulling us back to 2006. The justice department has capitulated to the tremendous pressure it has been getting from bankrupt state governments and land based casinos that are feeling the heat from Internet gambling alternatives. So what does this news really mean for US consumers and for businesses involved in the gambling industry?

There are certainly major differences between the old days of US Internet gambling and where we will be in 2012. 

The Big Poker Rooms Are Gone - Back in the day Party Poker, Doles Room, Full Tilt and others dominated the Internet poker space. These business are all gone or merged with other businesses. Essentially there is no obvious online poker room that is ready to fill the void.

State By State Gambling Legislation - The way I read the new Justice Department ruling is that it gives states the right to run Internet gambling operations. I do not see an interstate component. If this is true the actual size of the opportunity and market is significantly less then (minus the growth in population) the 2006 market. Prior to UIGEA the US Internet gambling business was federal in the sense that Internet gambling providers target marketed the entire US market not individual states.

Learning For Europe - Gambling has been legal in most countries in Europe since the inception of Internet gambling. So what can we learn from the European experience?  Historically, Europe has had an odd relationship with Internet gambling. Its citizens were able to gamble online. However, the Internet gambling businesses were not allowed to operate in most European countries. This evolved into a bizarre situation where British protectorates such as Gibraltar , Isle Of Man and Alderney were allowed to host the gambling operations and not pay taxes.

Europe has since taken about face on this position with countries like Italy and France creating their own in country gambling legislation. The early assessment of this change indicates that a country by country Internet gambling is not nearly as lucrative as regional or international gambling operations. Social games like poker and bingo are the hardest hit by this change because they cannot command the "liquidity" necessary to drive and support a vibrant business.  The new European law is also resulting in a business consolidation forcing many Internet gambling operations out  of the business or into the "illegal" gambling category.

Social Networks And Social Gaming - Ironically Zynga runs the largest and most successful poker room in the world. Fueled by virtual currency and virtual goods(poker chips) it has steamed ahead to an IPO. Many of the main stream European gambling business are now fully represented on Facebook and launching social gambling games. Facebook has indicated that it will allow gambling operators the ability to offer Internet gambling to Facebook users.  Facebook was at its infancy in 2006 and did not even support applications like Zynga poker until 2007. Will social networks be the key to the success and perhaps the consolidation of the US Internet gambling business within Facebook or Google+?

US Land Based Casino's - The big US casinos have been flirting with traditional European gambling companies recently in the hopes of partnering with companies that have Internet operational gambling experience. The fact that casino's realize that they do not have the experience to operate an online gambling property is a wise assessment. However, what are land based casinos expecting from these relationships? The big problem with land based casinos is that they have little or  no Internet brand.  This begs the question:  What company will most benefit from the joint ventures. Will it be the European gambling Internet gambling operators or will it be the US casinos?

Indian Casino Operators - Will Indian casinos get any benefit from legalized Internet gambling or will they be hurt by it? Most of the Indian casinos are relatively small regional casinos. They thrive on addressing the needs and gambling interests of local communities. In many cases the tribes are not united and frequently compete with each other. In the Internet world consolidation and size matters. Regulation aside the US Internet gambling  space could consolidate very quickly with  a few players in each state owning the market. How will Indian casinos respond to this business dynamic?

We are certainly at the beginning of a new era for US Internet gambling with many hopes, dreams and aspirations for the industry.  Overall, it is a positive step that the US has decided it cannot control the Internet and must give US citizens the chance to decide for themselves if they want to gamble online. The big question is what business or businesses will be the winners of the Internet gambling game.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

Facebook Opening Facebook Platform to Support Internet Gambling?

Recently, I returned to San Francisco  from a four week trip abroad(Nepal). Within several hours of my return I was confronted by a colleague telling me that Facebook was going to allow "real" gambling on its platform. I found this interesting but not surprising. Further investigation has revealed that Facebook has been in discussions with legal online gambling companies that have successfully acquired large numbers of social gamers and Facebook gambling enthusiasts in Facebook. 888 and Gamsys are a few of the names explicitly mentioned in the context of the Facebook gambling initiative.

I am not surprised by this because Facebook has been  considering online gambling as a revenue stream for longer then people realize.

In 2005 I returned from the UK after having spent 3 years launching and running online gambling sites for US based casino operators. One of the first people to approach me about European Internet gambling was a representative form Facebook. This meeting was very hush hush with the representative from one of Facebook's VC investors leading the charge on questions about revenue per player, cost of acquisition, age and identity checking, the regulatory process, etc. relative to Internet gambling. 

I never heard from or saw this investor again. However, it was clear then as it is now that Facebook continues to view Internet gambling as a potential source of revenue.

Fast forward to the introduction of applications on the Facebook platform in 2007 with Mark Pincus' poker application being one of the first applications launched in Facebook(this is a story in and of itself) and the eventual domination of Facebook social gaming by Mark and Zynga. Zynga eventually began to sell leads/players to traditional Internet gambling companies to generate revenue. It is no accident that the first really successful application in Facebook was a social gambling application.

Zynga and other social gamers adopted  virtual currency and goods(poker chips) in early 2010 as a means of generating revenue from games in Facebook. By the way they actually copied this model from the Chinese casual game companies that proved this model could work. This step was a big one with the leap from advertising as the primary Facebook application revenue source to a transaction model leveraging game virtual currency as the primary source of revenue.  This move also conditioned players to pay for play in Facebook.

Later in  2010 Facebook's counters the social gamers virtual goods and currency initiative by creating their own virtual currency in the form of Facebook credits and forces all of the social game companies to use this currency and pay Facebook 30% of the proceeds! Virtual currency and goods revenue is now 60% of Facebook's revenue exceeding advertising revenue. Facebook realizes at this point that its fate and success are directly linked to games and social game revenue.

In 2009 I started to talk to the Internet gambling companies about the importance of social games as a means of acquiring potential real gamblers. I was not taken very seriously until late 2010 when traditional gambling companies began to realize that social gaming itself was a market they wanted to explore. In 2011 the entire Internet gambling industry is all in in regards to social games with most of them launching Facebook games and Facebook Fan pages.  The Internet gambling companies are experimenting with up sell from their social games into traditional gambling venues. They are also using social gaming as a holding area for fatigued gamblers. 

The 2011 IPO filing with the SEC has also driven Facebook closer to flirting with allowing Internet gambling because Facebook needs that revenue if it wants to have post IPO(float) revenue to support its stock price. Facebook does not want to be another  Groupon with a falling post IPO stock price due to disappointing earnings. Facebook realizes that its overall growth wil began to taper off after its current growth markets in Asia begin to cool off. In a world of slow or slower growth Facebook needs to get more revenue per Facebook member. Gambling is an additional source of revenue they can exploit.

So will Facebook officially allow sanctioned Euro zone licensed gambling operators to take wagers within the Facebook environement from Facebook members in 2011?

I suspect Facebook will explore this if the SEC, US and EU authorities give them the nod. I would be surprised if it happens before the IPO. Expect this sometime in 2011 after the IPO.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

Cloud Computing And Online Gaming

Social game companies have been some of the early adopters of the cloud realizing that the cloud can offer them just in time server and DB storage to address spikes that online games normally experience. Also, a number of social games can go viral, or something like it, early on in the introduction of a game which makes the cloud a perfect answer for the social game world. In addition, social games can a have a very short half life growing quickly and then fading into the history books in only a few months. Why buy a bunch of servers if you are only going to use them for six months?

The realization that social games are driving the adoption of the cloud and in some cases challenging traditional cloud providers such as Amazon(AWS) and Rackspace has spawned a new crop of companies that are focused on the social gaming space either exclusively or as a special sales vertical.

RightScale, Fusion Storm, and Joyant are traditional hosting companies that have setup special game cloud operations with social gaming as the primary target market. For the most part their offerings are not necessarily unique even with the social game focus. However, an interesting service some of them are providing is the ability to deploy to a number of clouds in addition to their own distributing traffic and load across facilities. I suppose the reason for this is to avoid any one cloud provider from failing causing a complete shut down of an application and perhaps a cost control mechanism.

XingCloud    This company is is a bit different from the other game focused cloud provider. They are a Chinese company exclusively cloud gaming focused.   They are  leveraging the company's experience hosting Chinese games sites and integrating games into social networks. Their service is definitely exclusively focused on game developers providing cloud hosting services and quick integration of games into a number of social networks. They are actively looking to get into the US and European markets.

Clearly social game companies are taking the lead in the adoption of  the cloud and in some cases resulting in new cloud services for this space.

How about the other game providers such as casual games, console games  and online gambling?

These groups have largely ignored cloud computing. The console game and downloadable  providers are essentially offloading  game processing to the console or the PC resulting in a diminished server processing load. Therefore the cloud is not a big deal for them.

The casual game and online gambling companies that host web based games are server centric and in some cases taking on some serious volume so why are they lagging?

The primary reason they are not quickly adopting the cloud model is a legacy of traditional hosting. Many of these game companies have built large server farms and IT staffs around a self hosting environment. Despite the obvious cost benefit to switching there is usually a strong push back from the IT staff to maintain the status quo. Also, I doubt if management in these companies are cloud aware. They are using Vmware  to virtualize their hardware creating pseudo private clouds. However, this is likely an unsustainable position as their current hardware becomes obsolete and they have to upgrade or expand hardware  to handle traffic or to keep up with the increasing effciency of hardware.

Overall the gaming world is pushing the envelope of cloud computing because of the extreme volume and peaks and valleys of game usage. Cloud vendors are addressing this space with new and interesting offerings. The next interesting challenge is what do you do with all of this data that is being accumulated and how do you analyze it. This is ultimately more important then all of the hardware and network plumbing combined.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

 

Asia Pacific Lottery Association (APLA) 2011 Conference Summary

I had the pleasure of speaking  and attending the Asia Pacific Lottery Association (APLA) conference in Malaysia this year(2011). The main topics addressed at the conference where Social Media/Social Network Integration, Green Initiatives and Responsible Gaming. My primary focus was on Social Media/Social Networks and Social Games. My presentation covered the popularity or social games in the context of the social web with special emphasis on the volume of play that is occurring and the use of virtual currency and virtual goods as a means of monetizing games in social networks. I also emphasized marketing, community building and CS using social media. My presentation can be found online at: http:/bit.lyKevinFloodAPLA2011.

Overall the audience was surprised by the shear number of players, transactions and growth rate of social network adoption around the world. Of special interest to them was the use of virtual currency and goods to monetize social games.

The growth of social network adoption in Asia is much higher relative to other parts of the world driving increasing interest in this sector by organizations like APLA. This is most likely attributed to increased access to the Internet, the proliferation of web enabled devices such as smart phones and the demographics of Asian communities which is skewed heavily to 18 to 24 year old. 

The adoption of the social web as the primary form of interaction is a challenge that all businesses face and especially lottery operators constrained by regulation and a history of slow technical innovation in their sector. In Asia it is even more of a challenge and opportunity because social networks may be the only place lotteries can interact with their potential audience and the audiences are split over a number different social networks.  

The lottery companies have an added challenge and benefit given their "regulated" status and the need to address under age gambling. However, European gambling companies have been using social networks for years to market their products to social network participants indicating that regulated environments do not prohibit a company from engaging consumers in social networks. 

Many of the Asian lottery companies do not have a social network or social media strategy. This was a bit surprising given the statistics previously mentioned. Why have Asian lotteries largely ignoring the most important and potentially lucrative  form of online communication currently available to them?

I do not want to paint all Asian lotteries as having ignored this sector. The Hong Kong Jokey Club for one has been aggressive in this area and witnessing benefits. I am sure there are  others as well.   However, the majority of them are just beginning to understand the significance of this market channel.

So what is it about the lottery world that is holding them back from adopting social networks as a lucrative sales lead and monetization source? What are the opportunities for the lotteries if they decide to engage social networks and social media?

Dependency On Retail Outlets: The lotteries have a long tradition of peddling their products through retail channels. This is their "bread and butter" as we say in the US and they view the world from this perspective. The lotteries have not seen social networks as a big threat to their business. However, things are changing as witnessed by the topic selection for the conference. 

Granted the lotteries should not ignore this retail channel. However, if this focus is resulting in them ignoring the social web as a channel the decision could be dangerous and may result in the lotteries  losing market share to more aggressive online, social media and social network marketing efforts. 

Monopoly and Regulatory Protection: Essentially lotteries operate in a monopolistic environment supported by government regulation. This certainly does explain why a lottery would not aggressively exploit new marketing channels because there is no one to challenge them. Also, regulators themselves may construct bureaucratic obstacles that make it difficult and expensive to initiate new marketing efforts.

I would caution lotteries from relying too heavily on this perceived protective fence. Social game companies and legal online gambling companies are aggressively building games that look and feel like lottery games. This is certainly a threat to the future growth and well being of regulated lotteries.

Illegal Operators:  There is evidence that illegal lottery operators are alive and well in Asia with many of them closely allied with government agencies. If these illegal operators decide to aggressively exploit social media and social networks to attract   players the illegal operators will take market share away from legal operators. It is very likely that they either are or will exploit social media and networks to grow their market share.

Mobile Devices Challenge Lottery Outlets: One of the speakers from the Malaysian police department spoke about the reasons why illegal operators are so successful competing against legal lotteries. One of the reason he gave was service and availability. Illegal operators go directly to a persons house to sell tickets and they also deliver winnings to punters that have won lotteries. Essentially, a person does not have to go to a retail lottery outlet to play a lottery.   

If you think through this further it is not hard to image a time when the majority of lottery transactions are done through mobile devices. Asia is becoming more connected and connected through mobile devices. What a better way to buy a ticket and redeem your prize? Why do you need a retail outlet??? Yes, the bread and butter of the industry could be challenged if mobile Internet enabled devices proliferate.

Attracting the 18 to 25 Year Old Market: It is very interesting that the lotteries want to attract younger age players, realize that these potential players are all interacting in the social web and have not aggressively taken action to address this age group within social networks? I am not exactly sure why there is a disconnect between the realization and execution.  However, it is clear that the disassociation will dissolve as lotteries grasp the fact that all of these potential players are alive and well in social networks.

Virtual Currency/Virtual Goods - I did get a number of direct inquires from lottery operators on this topic. This interest is well founded given the special place lotteries find themselves in their communities. Many virtual currency systems are designed for social causes and to stimulate interaction among various groups in society. They are also used as a legal means to monetize social games. People can legally transact in Facebook using virtual currency and virtual goods. These are many ways that lotteries can use the virtual world to increase sales, revenue per consumer and to promote brand identity.

Social Responsibility -  Lotteries engage in social programs to assist and enrich their communities. In some cases the history of lotteries has emerged from  lotteries that where created specifically to  raise funds for social causes. Given this historic emphasis lotteries should explore the numerous web related socially responsible focused organizations. They are too numerous to mention all of them. With some of them focusing on micro-funding, corporate sponsorship, organization building, donations, etc. I have direct experience with a few that the lotteries should consider as models or potential partners.   SocialVibe.com is very interesting because it merges corporate sponsorship and advertising with socially responsible investing.  I became aware of this because of the clever way they use rich media to monetize their visitors. Taproot.org   is an organization that works with non-profits to help them staff and execute on projects. Taproot engages a pool of pro bono consultants that they attract from well established companies and place them into projects for non-profit organizations. I have worked with them to integrate their service into social networks. 

Social Games And Lotteries - Many social game companies offer a number of social games and monetize players over the full range or their game portfolio. The concept is simple and effective. If you spend the time and money acquiring a player why not monetize them across a range of games to increase revenue per player. Lotteries should consider this strategy for obvious reasons. 

Generate More Revenue Per Player

Engage In The Social Web

Offer More Content To Attract More Players

Social Media - If a business does not have a Facebook fan page, is not developing a community within a relevant social network and does not use a tool like Twitter to communicate and interact with its target market market then the business is really missing out on relatively inexpensive ways to engage its customer base. Also, social networks and social media will evolve. Lotteries need to engage in these social tools if they want to keep pace with the march of the social media phenomena. 

Overall the APLA members get the importance of the social web for their world, businesses and consumers. The challenge going forward for them is where to start and how do they keep pace with the  rate of change in this sector. This is a good question. My recommendation is that the more you work with these social tools the more you will understand how they work and how best to exploit them.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

EiG 2011 Milan Gaming Conference: What A Difference A Year Makes!

I attended and chaired a two day session on game development at the 2011 European Internet Gambling (EiG) conference and was surprised at how the European online gambling business community had  changed its positions and attitudes on a number of different topics from the year before.

So what was the catalyst  for this change and what changes are occurring ?

Social Networks - For years the I-gaming industry has dismissed or only partially entertained a relationship with social networks seeing the networks as at best, distantly related to their business and not a significant source of gaming revenue or player acquisition. The argument being that "gambling" was not allowed in Facebook, the potential players were to young, the players would not transact for "real" money, etc. 

Well that has changed evidenced by the opening CEO panel direct acknowledgment that they see social networks as one of the most important initiatives over the next year. More importantly they are actually executing on this plan now by launching exclusive social games and closer integration of their gambling games with their social game offerings.

 Despite all the attempts by gambling operators to dismiss Zynga and other successful social network game companies as low revenue, not real gambling, and not a source of quality gambling leads the numbers are so overwhelming that gambling operators have to take notice. Zynga has a predicted 2011 revenue on the low end of 600 million USD.  Social games in aggregate are now producing more revenue then advertising for Facebook. It is estimated that 1 billion USD and 60% of Facebook's revenue is coming from social games. If you are a CEO of a gambling company and especially a public company you have to have an answer for the social gaming phenomena.  To give the gambling business credit they are actually doing more then talking about their position relative to social networks and games they are  actively engaged in a number of social network and game initiatives.

US Online Gambling - The potential that the US market might open up to online gambling is also driving more awareness of the role of social networks and social games in the US market. The fact that the US market has banned online gambling has resulted in US players seeking a proxy for gambling within social networks and casual games. Zynga poker is the obvious corollary and the most visible one. However, fantasy sports is big in the US with a number of sites launched in Facebook and in standalone web sites. These gambling models may actually remain popular even after online gambling is legalized in the US. The gambling companies will have to launch similar sites or engage in business deals to up sell players to traditional gambling propositions.

Social Networks As A Player Acquisition And Retention Tool - With so many people active in social networks  many of them playing games in social networks the operators are realizing that there is a potential up sell opportunity. Also, the appetite for gambling style social games has been proven (Zynga). If you can publish a game in Facebook that is like a gambling game and you have good profiling business intelligence to profile players you are going to get conversion.

Retention is also very much an issue with gambling operators. There focus on acquiring, monetizing and not retaining players with alternative lower cost or alternate game play results in very high fall off of players. Social games could be an answer to this problem.

Virtual Currency/Goods - The social games that European gambling companies are building are taking advantage of virtual currency/goods transactions. Virtual currency is a proxy for traditional gaming money transactions and is legal because the prize payout is in a virtual format and not a "cash" payout. The gambling companies are starting to realize that this is a better business model then their cash business because players do not get paid for their winnings and their is no concept of a traditional wallet. All of the money stays with the operator.   A previous barrier to gambling companies taking virtual currency transactions seriously was the low individual transaction amounts. The gambling operators, based on the Zynga model, realize that if a game becomes truly social the amount of transactions can be very high resulting in good revenue per game. The other phenomena that gambling operators may be aware of is the social game "whale" phenomena. At the GDC conference in San Francisco this year a speaker identified a class of social gamers  as whales (sound familiar). These social gamers are transacting up to $150,00 USD a year in virtual currency/goods transactions! Granted the number of players in this classification are small relative to the overall social gamer numbers. However, their profiles and gaming behavior is very similar to the high rollers at land based casinos.  These players are getting VIP treatment from the social game operators for obvious reasons.

Social  Gambling Games - The majority of the games being developed by the gambling operators are social games that mimic real gambling games or could potentially have up sell potential into traditional gambling games. Bingo or bingo derivations  are the obvious choice because they are inherently social games and they have gambling cross over potential.

 Social Game Mechanics In Gambling Games - More interesting is the development of traditional casino games injected into a social network context. Clearly standalone casino games have very little chance of being successful in the  context of the social web. Games have to have social components to encourage communication, rivalries, status among peers, etc. to grow a large enough communities to make the economics of social games work.   The components being added to traditional casino games are leader boards,  competitions around the leader boards to encourage players to invite others to the competitions and to provide visibility  and status recognition of players. Essentially, gambling operators are learning how to create communities of gamers. According to one operator the addition of "game mechanics" have proven to be very successful.

Branding/Monetization/Upsell - In the game development sessions I chaired participants where keen on making money in social games that deviated from gambling transaction revenue.   In the ICE Game Monetization sessions this year this topic was discussed with little enthusiasm from the traditional gambling community. That positioned has changed. I am not sure exactly  why. This new position could be influenced by the developers study of social games where branding is one of the most lucrative ways to monetize games. Branding is such a good revenue source for social games because of the "engagement" time of social games. Real gambling games have  the same engagement characteristics. 

Game Development And Mobile Game Influence - The rise of multi platform game deployment and the increased importance of mobile gaming has changing the way gambling game operators are approaching game development. Traditionally games have been developed for the native platform(PC, Web, Phone, etc) to extract as much functionality from the platform to create an optimal game experience. This approach has been challenged by two developments. The market requirement to launch games simultaneously on Android, Apple, Facebook and web is making this approach expensive and increasing the amount of time it takes to realize the full potential for a game.   HTML5 is now seriously being considered as the game development environment of choice to allow for cross platform  near simultaneous  game deployment. It is also being employed to decrease the cost of development. In the CEO panel one of the CEO's  specifically stated that their future games would be developed in HTML5.

Sophistication Of Games -  The area of game development that really impressed me at the conference was the level of sophistication of casino style games. The multi-level and multi-dimensional games being developed are fascinating and speaks to the study of player behaviour invested in these games. The sophistication is not necessarily expressed by increasing complexity. In some cases the game itself is very simple with added emphasis on key aspect of the game that increase game play time and of course revenue.

.Com Versus .Country - Europe has decided it is going to create a country by country regulatory regime forcing gambling operators to offer games only to their residence and excluding gambling operators that do not have licenses within a particular country.   The motivation for this is well understood as each country struggles though the current economic environment looking for revenue anywhere a government can find it.     However, the impact on Internet gambling in Europe will be profound.   Essentially, the cost of doing business will go up, innovation will be constrained and over all gambling revenue will decrease especially for social games that require large communities to keep the games interesting.  This model may also  break down and not be viable in  countries with smaller populations. What will be the options and approach in this situation?

This trend may also be one of the reasons why European gambling operators are going social. They realize that they have to find other less costly. accessible  and lucrative markets to survive and to grow.

Overall, this conference was the first European Internet Gambling conference where I got the sense that the European gambling community understands that it is part of a much larger online gaming community. This realization has given new life to an industry that traditionally defined itself as an isolated online gaming island. The conference was refreshing, with high energy exhibited by the people actually building the games. They where excited about the social gaming opportunity, mobile game development, cross platform development, etc.

 The new and emerging European gambling regulatory model will be challenging resulting in a consolidation in the industry and fewer competitors. US legislators will no doubt be looking at the new European regulatory model and decide if the would work in the US(.state versus .com).

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.