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Thursday, December 27, 2012

Social Gaming Companies Entering The Online Gambling Space: Think Before You Leap

A number  of social gaming companies are either contemplating or actually starting the process of entering the online gambling space. These companies have been attracted to online gambling for a number of reasons. The primary reason is the higher ARPU's in gambling relative  to social gaming. Gambling ARPU's on average can be in the hundreds or USD's with some wales contributing in the thousands of USD. Another reason is that social casino games look like traditional gambling games and do have game mechanics similar to traditional gambling games.

However, there is a much more to consider beyond the expectation of acquiring high yielding players before a social gaming company commits to engaging in the online gambling business. Launching and running an online gambling business is much more expensive and complicated relative to operating a social gaming business.  Many business processes have to slow down to avoid the risk of errors in the code and product. Financial records have to be kept for audit purposes and a delicate balance maintained between speed to market and adherence to regulatory standards. Marketing costs are considerably higher for online gambling operators.

The following are a number items that a social gaming company should be aware of and be prepared for if they expect to be successful in the online gambling arena.

Licensing Fees -  Operating a "legal"  online gambling business requires licensing from a recognized  gambling authority usually associated with a state, country, district, principality, etc. This fee can be in the vicinity of 200,000 USD and higher with an annual fee to retain the license. In Europe,  country by country regulation is emerging requiring an online gambling operator to pay licences to every country they want to operate in. If the US decides to legalize gambling it could be on a state by state basis mimicking the same regime that is emerging in Europe. An online gambling company could easily spend a 1,000,000 USD on licensing fees with some annual fee to maintain a licence if that company wishes to be licensed in several countries, states or jurisdictions.

Background Checks And Vetting Of Key Staff Members -  Legal online gambling operations are subject to scrutiny by law enforcement to determine if staff members have been charged and or convicted of any crimes that may suggest that they  intend to operate illegal gambling operations. Key personal will have their backgrounds checked to determine if they have an affiliation with people that have a criminal record. Staff members will be subject to a review of their financial records to determine if there is any suspicious transaction history that would imply that their interest in online gambling could be used for the diversion of funds from the online gambling operation.

Regulatory Review And Audits - Regulators are going to want to audit the game platform and perhaps the games themselves. The RNG(Random Number Generator) is the key piece of code that will be scrutinized. However, other portions of the stack could be of interest. Intrusion detection is another area of concern by regulatory authorities. These audits may come randomly or at scheduled times during the lifetime of the operation. This means that your code has to be up to the standards required by the regulators, it should be well commented and the sensitive code can not be changed without permission from the regulatory authority.

Player Age/Location/Identity Check - All players interested in playing on a gambling site have to be screened to make sure they are above the gambling age limit and they are coming from a location where it is legal to gamble. If a player's age, identity and location cannot be verified they must be rejected and cannot play. In some cases players that do fit the criteria  to play will be rejected because their is not enough evidence that they are who they claim to be. Location is becoming more important with many European countries only accepting players from their country. The US state by state model will most likely take this position. In Europe some countries are requiring pre-screening of potential players by the authorities before the player can interact with the gaming property resulting in player drop off prior to ever experiencing game play.

Marketing and Retention Costs - The overall market size of "real" gamblers versus social gamers is significantly different with gambling players representing only a fraction of the number of social game players. Regulation itself restricts the numbers of players with only a small segment of the population having access to "legal" gambling properties.  Age restrictions also constrict the total size of the market. Playing for "real" is also a deterrent curtailing the number of players and the amount of time they gamble.

 It is not uncommon to pay on average  of between $300 and $500 USD's to acquire an online gambling player.  Placing Ads either in electronic or physical mediums are higher as well.  The methods of acquiring gambling players  differs as well. Affiliate marketing is a key component of online gambling with certain affiliates focusing exclusively on online gamblers. 

Competition can be fierce  for  the acquisition of gambling players requiring online gambling business to provide extra incentives for gamblers to play on their properties. Players my be given free chips to start play and to encourage players to return to play if they have been absent for a period of time.

 Many traditional marketing tools are not available to marketers  For instance, paid search in Google is not allowed by Google  and certain e-mail providers will filter gambling related e-mail campaigns.  It is unclear on what restrictions Facebook will place on online gambling within Facebook. 

Gambling Legal Counsel  - An attorney specialized in online gambling will have to be added to the budget. In some cases different legal counsel will have to be added for each jurisdiction that a company seeks to enter. Obviously, this can add a significant expense item to a game operators budget.

Transaction Reporting - The European country by country online gambling model has lead to the requirement for licensees to report on all gambling transactions. It is highly likely that this model will be replicated in the US. This means that a special feed of gaming transaction has to be constructed in a way that the data feed complies with the regulatory specifications and that data is transmitted in real time to a special location external to the game hosting site.  The experience in Europe indicates that the setup of these game transaction systems is time consuming and expensive. 

Game Play - Social games, even if they are social casino games emphasize the "fun" part of gaming.   They encourage other people to join  a player in this fun activity and players often gift other players with free virtual currency and perhaps virtual items.  Gambling is different. Believe it or not "real" gamblers may not be all that interested in letting others know they are gambling or how much they are spending on their gambling wagers. If you are going to extend your social game into the gambling realm think about opt in and opt out features that let players remain anonymous.  If you launch a gambling game in Facebook realize that the social graph may be restricted in Facebook and certain gamblers will not want to make others aware that they are gambling in Facebook. Traditional gamblers may want a more traditional gambling game experience. This means that if you have modified a game like blackjack or roulette  to fit a more play for fun environment it may have to reworked to look more like the original game.  Gamblers want to know what the payouts are for various games and what the different wins in a game will payout. They want to know the odds of winning in a specific games. Player game time may decrease because they only have so much in their wallet requiring a social game company to think of clever ways to keep a gambler engaged.

Regional Game Preferences - I participated in the development and launch of two online gambling platforms targeting UK players and learned  the hard way about regional game preferences.  We developed our game content based on the land based preferences of US casino players and free to play gamers. Needless to say, when we launched our games in the UK we were surprised at how different the UK gambling preferences where relative to  an American  land based audience. The biggest difference was in slot preferences. However, table gable preferences where skewed differently as well. The moral of the story is know your audience before you start building your gambling content.

Game Development - There will be tighter restrictions on how games will be developed and who develops them. Overnight peer programming mash ups to jam a game out as fast as possible may not work. Certain best practices such as code documentation is very important. Code has to be developed with security in mind to avoid intrusion attempts and changes  to the code by internal personal that could result in preferential game play features that could be unlocked during game play. The wallet function is an especially vulnerable  area that could easily be tampered with by a developer or an IT tech for the purpose of redirecting funds to an external account.  The game development process inevitable slows down. Changes to games can not be pushed as quickly as in a social gaming environment. Agile processed can still be used. However, the velocity of releases slow down and change control gets more stringent. 

IT Infrastructure  - Many social game companies are using cloud hosting facilities to host their games. This may not be an option for them when they move into the gambling business. Regulators will want their hardware isolated and in total control of the operator and a certified hosting facility. This will increase the cost of hosting requiring computer and net working equipment purchases with steady  and continuous upgrades as hardware evolves.  Additional IT staff will have to added to monitor and service the equipment making sure that it is operational on a 7/24 hour basis.  Hosting facilities will be limited to the ones specifically sanctioned by regulators to be "certified" hosting facilities.

Game Platform - The underlying mechanisms that determine the out come of a game have to be random and not modifiable. The random generator (RNG) that is required for most gambling games has to be truly random and will be subject to audit. Currently many social game out comes are not random. They are programmable and frequently changed to adjust a game to particular audience or event. This practice will have to stop.

The Odds Of Winning - The odds of winning a game have to be clearly stated and the odds cannot change unless players are made aware of it. No more changing or manipulating the odds at random times to increase or decrease a player winnings.

Gambling Companies Need To Be Profitable - Many social game companies, especially new ones, are not profitable. It is unlikely that an unprofitable social gaming company is going to get a gambling license. Also, a gambling company needs to have the financial reserves to cover a large bet that goes well for the player and not for the gambling business. Running a gambling business is expensive. Overall, the business must be profitable. However, there are times when the players beat the house and the house must cover the bet even if this means a losing quarter for the company.

QA -  The reliability, stability and accuracy of a gambling game has to be at a standard higher then most social games. Social game operators have the notion that if they push a release to Facebook and they find out it is not working properly they can always fix and push another release. This mentality will not work in a gambling environment. Any release pushed to production, especially, ones involving payout, wallet functions, player security, etc, has to have a very low margin of error. The need for speed to market has to be tempered with the need for security and fair play for the player.  

Virtual Currency,Wallet And Payment - A gambling environment requires a "wallet" function were a player deposits  "real" money funds to be wagered in game play and where the player stores "real" money won during game play. Essentially,  a gambling game operator acts as a bank for its players. Social games usually monetize players through the purchase  of virtual currency using Facebook credits, other virtual currency platform providers or they create a virtual currency of their own. The social game operator sets the valuation of the virtual currency by creating a conversion rate from virtual currency to chips. There is no need to have a conversion rate back to "real" currency because  there is no cash out function in social games. Conversion rates can change at the whim of the social game operator and the operator can inflate or deflate the value of the virtual currency at their own whim. This all changes  in a gambling environment. Valuation of currency are established by the public market for that currency and the policies of government banking institutions. Currency inflation and management is impossible in a real gambling environment.

Managing the player's  wallet  is extremely important to make sure their are no errors with the deposit, and withdrawal processes. balances  always have to be accurate with players having access t their funds to cash out when they see fit withdrawing all or a portion of the funds. The wallet is consistently a potential  target for fraud and intrusion threats. Only a handful of employees of a gambling company have access to this wallet, knowledge of players balances and the financial instruments(credit cards, bank transfers, etc) used by a player to deposit and withdraw funds.

Obtaining payment processors for gambling operators can be challenging with many banks and payment processors not willing to work with online gambling operators. One of the first things a social game company should do is seek out a payment processor and bank that will support their gambling operation.

Gamblers will have various  deposit and withdrawal preferences requiring the gambling operator to offer all of the standard transaction methods used by the gambling community.  These payment methods may differ depending on what jurisdiction the gaming company is targeting. Also, the transaction fees form some of these services can be vary. However, they are not as high as the 30% tax that Facebook levels on social games. 

Denial Of Service Attacks Fraud Detection And Collusion - Traditional online gambling operators have large and sophisticated fraud detection organizations within their businesses. The sole purpose of these groups is to detect and stop fraud attempts. Collusion amongst players is a common threat with Poker and sometime Blackjack as the most vulnerable because of their multi-player basis. Sophisticated crime networks work from around the world to conduct fraud and collusion attempts on gambling sites. DOS attacks are common were an individual or group will high jack thousands of computers loading them with programs that send thousands of requests to a gambling site resulting in the site grinding to a halt. They then post a ransom letter to the game operator with a price tag for them to stop.  In some cases to operator has paid up. Preventing these attaches requires network equipment purchases and real people observing players game play to detect and avoid fraud and collusion.

Clearly  the "real" online gambling  business differs significantly from a social gaming environment. There certainly is upside potential in the online gambling space for social game companies. However, all of the special considerations associated with gambling have to be taken into consideration before committing to an online gambling business model. 

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes  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.   


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