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Monday, November 1, 2010

How Will Social Gaming Impact US Legalized Online Gambling?

Lobbyists, state legislators, businesses and federally elected officials continue to encourage state and federal authorities to legalize online gambling in the US. The primary motivation continues to be the dire budget situation that most states find themselves in.

These efforts are largely focused on "traditional" online gambling games such as poker, blackjack, roulette and slot machines. The expected audience for these games are the 25 to 50 age group using the standard deposit, play and cash withdrawal models.

To date the efforts to legalize online gambling in the US have ignored the growing popularity of social games and their potential impact on players, conversion to gambling, virtual currency and virtual goods sales. The assumption is that social games are something different and will have no impact on legalized online gambling in the US.

Is this assumption correct?

I would argue that the current proponents of US legalized gambling should reconsider this position for a number of reasons.

Social Games As An Alternative To Traditional Online Gambling - Have entrepreneurs already figured out a way to circumvent US gambling laws? US entrepreneurs are a creative lot. When anti gambling legislation was passed in October 2006 entrepreneurs went to work figuring out other ways to attract online players to other forms of online gaming. In 2007 Zynga immediately launched a poker game in Facebook and later started to monetize players with virtual currency and goods sales. This has lead to an onslaught of online poker games and other monetized social games.

Average Age Of Facebook - Social gaming players are getting older. Facebook is the leading social gaming platform and its demographics have decidedly turned to the over 21 years of age crowd. This means that many of the potential US online gamblers are playing social games.

The Rise Of Virtual Gambling -Most social games monetize their games through virtual currency and goods sales. This form of "virtual gambling" is widespread with Zynga's and Playdom's poker sites rivaling the largest poker site in the world in terms or transactions and players. Zynga, Playdom and Facebook exploit virtual currency and virtual goods to simulate the real gambling experience.

Non Traditional Gambling Games - Farmville is the most commonly referenced social Virtual World/Role Playing Game with millions of players participating. This is just one example of a number of online games that simulate an investment, achievement and reward system that results in a significant amount of virtual currency and goods transaction.

Does The Popularity Of Social Gaming Signal A Change In Online Game Play Behavior? - The assumption is that when online gambling is legalized players will naturally convert to the traditional online gambling model. With all of the other social game options available and the associated restrictions inevitably associated with legalized online gambling is this assumption correct?

Will New Online Gambling Brands Have A Chance? In the US social gaming businesses own a large number of players with many of these players in the 21 and older category. What is to prevent them from converting many of those players to "real gambling" platforms operated by them?

Do European Online Gambling Operators Understand Social Media and Social Gaming? - Many of the European gambling operators are keen to get into the US market once online gambling is legalized. However, do they really understand how to market(and will they be able to?) their brands within the social networks? Are the existing US social gaming companies holding all the cards when it comes to player ownership and loyalty?

The points I have made are very real despite the fact that they address virtual online gambling. In many ways US social game operators have created their own form of virtual gambling and are doing very well. Even Facebook is in on the act with their newly minted virtual currency. That currency is fueling the social gambling phenomena despite what they would like everyone to believe.

The one point that traditional gambling operators make to support their differentiation from social gaming is the fact that a player can not "cash out" of a social game. This is true! However, with the world going completely virtual with Facebook credits being redeemed at Starbucks, Best Buy and WalMart does it really matter?


Jamie Thompson said...

Kevin - excellent insight you raise here!

As someone intimately involved in the business of new social game development, the thought of premature and unnecessary regulation concerns me a lot. As America transitions into a stronger and stronger knowledge economy (something we MUST do as a nation in order to grow/thrive), we need to allow entrepreneurs to experiment with these new concepts and technologies without creating overly burdensome restrictions. My fear with the talk about even remotely lumping social gaming into the lottery or gambling systems is that we will stifle innovation - or worse, see it go elsewhere.

Anyway, your points are quite interesting and ought to spark a lively conversation in many dimensions.

The bottom line, however, is that the stakes in regulated gambling involve two major components (among a few significant others) that are inherently missing from social gaming: fungiblity and material value.

Winning money at a casino gaming table or via a lottery ticket is a lot different from obtaining a social reward or acknowledgment of one's coolness. Also, with most social games (that I'm aware of) some element of "skill" is essential to "earning" your way into the ranks of a championship farmer or brand ambassador (a la Farmville and Pongr respectively).

I'd like to think/hope that there's an existing corpus of knowledge on the subject of regulated gambling that a very clear/simple litmus test could be applied. 'Err.. wait, maybe there's a new game there too... :)


Kevin Flood said...

I agree with the innovation part of your comment. The online and offline gambling industry has suffered from a lack of innovation due to regulation.

I have a different opinion about the categorization of gambling and non-gambling games. Poker is a skill game and is considered gambling. Zynga runs the largest poker site in the world and is therefore considered a gambling proposition.

This issue of what you get in return for winning a social game is a very fine line. The Chinese online gaming sites have been straddling this for 2 years and are under constant scrutiny by the authorities.

I suspect that the online gambling companies are going to challenge the "legality" of social games because they are going to have a big impact in taking players and profits away from online gambling operators.