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Monday, December 3, 2012

Will Social Casino Games Be Subject To Regulated Gambling Laws?

At a  recent social gaming conference in London the question of regulating social casino games was raised. This is not surprising given the increased interest by traditional online gambling business in the social casino space and the significant amount of players  in  Facebook and on mobile devices playing freemium slot games. The questions surrounding regulating casino style social and freemium games has been popping-up regularly for the past two years for a variety of reasons. This subject has most often been debated in the UK because of the UK's history of regulating online gambling and financial services. Now that Gamesys has launched a Facebook gambling game and Zynga is partnering with Bwin the close association between "social casino" and regulated online casino's is apparent. 

To fully understand this debate one must understand the history of how online game monetization has evolved over time and how this evolution has resulted in our modern day concern over the increasingly blurred distinction between "traditional" online gambling and social/freemium casino games. 

Virtual Currency/Goods Transactions - Before one can evaluate the debate to regulate social casinos one needs to understand virtual currencies and goods and what role they play in social casino games. Virtual currency is the primary way to monetize social casino games and perhaps one of the primary reasons why legal experts are questioning the classification of social casino games as "real" gambling games.

The creation of virtual economies using currencies created for the specific purpose of monetizing games has been around for a decade or more. It started with Role Playing Games (RPG's) and eventually migrated to  Massively Multiplayer Online Games (MMOG) as  RPG's began be played over the Internet and not just on consoles. These games leverage the accumulation of points for the purpose of acquiring virtual goods that enhance a players ability to be successful competing in a game. 

Over time MMOG games evolved to allow players to purchase currency and virtual goods to improve a players chance of winning a game and to enhance a players "status" in a game. Sophisticated economies grew around MMOG's with virtual goods won or obtained in games becoming very valuable assets in a game. 

Eventually  players began to trade and buy these virtual assets outside of the games in chat rooms and on sites like Ebay. This activity created an economy in and of itself. With the actual game virtual currency becoming a valuable asset as well. The currency began to be traded and valuations set against traditional currencies like the dollar and yuan.  The virtual currency trade became so large in China that the Chinese government prohibited it because  virtual currencies was being pegged against the Yuan with potential impact on the valuation of the Yuan.

The dynamics of  what happened in Asia migrated to the US with social game sites like Hi5 and eventually Facebook  adopting a virtual currency system to facilitate social game play. Thus the creation of Facebook "Credits" to allow Facebook to financially participate in the gaming virtual currency and goods  phenomena. We think primarily of Zynga games as the first Facebook game application to leverage virtual goods and currency. However, there were certainly many other social game companies in Facebook that were using their own virtual currency before Facebook figured out that virtual currency could be a real money maker for them. Facebook now takes 30% of all virtual currency "credits" transactions in Facebook. This accounted for approximately 12% of their overall revenue at the time of their IPO.  

Zynga Poker And Other Social Casino Offerings - The Zynga Facebook poker phenomena is the most obvious social casino game that people know. However, Zynga's poker room is now being dwarfed by perhaps hundreds of slot machine and casino table games in Facebook and outside of Facebook using Facebooks social api's and on mobile platforms.  

It is unclear as to the amount of money being expended in the "social casino" sector at this time. However, it is easily in the millions of dollars per month and perhaps higher. 

Definition Of Gambling - This brings us back to the UK and the growing awareness by UK legal experts as to the rather close and perhaps blurred relationship between social casino's and online gambling casinos. Gambling in the UK and the US is defined as a combination of chance, consideration and prize.

Chance - A completely random outcome not influenced by a player.

Consideration - A bet or wager that involves a traditional government supported currency such as the dollar, euro or pound.

Prize - The reward offered to a player for "winning" a game. The reward is defined as a traditionally supported government currency such as the dollar, euro or pound or a voucher for a physical good or service. Consideration can also be a physical good such a car, hours, book, magazine, etc.

Is Social Gaming Gambling? - It is not as long as you  use virtual currency and goods as consideration or prize. 

So, if social gaming is not "legally" considered gambling what is everyone worried about? There are a couple of concerns that are making people nervous about social games as gambling games.

1.) They Look and Feel Like Real Gambling - Despite, the perhaps arcane way gambling is defined, the social games we see and play in Facebook and on mobile devices are essentially the same games we see on a slot floor in Vegas or in an online casino in Europe. The only difference is that there is no prize being paid out in traditional government backed currency or  physical goods.

2.) Land Based Casinos and Online Gambling Businesses Launching Social Casinos - Traditional gambling operators are very much invested in social casino's for a number of reason.

 Social Casino Standalone Business - Social casino games are so popular that land based casinos and online gambling businesses are either operating or planning to operate  social casinos. They are doing this for a number of reasons.

1.) To attract online players to land based casino properties
2.) To brand land based casinos as Internet properties
3.)To grow online gambling communities for online gambling operators
4.) As separate profitable businesses for both land and online gambling businesses

Should Social Casinos Be Regulated? - I doubt if the UK or US government want to regulate an activity that is so prevalent and that will require a "new" definition of gambling that includes virtual currency and goods as tangible ways to monetize games and provide prizes for social casino players.  The entire issue of "virtual" is an intriguing intellectual challenge for the legal community. This community does not appear to be anxious to address the virtual world as it relates to gambling because a position on this subject could have widespread implications including all the loyalty points we are now seeing issued by airline, credit card companies, etc. With that said governments may be forced to take the social casino phenomena more seriously if online gambling operations successfully begin to profile social gamers as Internet gamblers and begin to market to them with the intent of moving players from social to traditional gambling venues. 

Self Regulation - The firm of Harris and Hagan, a London based law firm that specializes in UK online gambling law, suggests that social casino businesses self regulate to avoid the need for governments to regulate the industry. They are not specific in their recommendation. However, I suspect they are referring to age identification and restricting social casino access to people over the age of 18. It could also mean that access to social casino sites would be preceded by a warning about the dangers associated with gambling  and where people can seek help to address gambling addiction.

In conclusion,  the popularity of social casinos in Facebook and on mobile devices is resulting in thousands of people playing these games. The opportunity and challenges associated with the popularity of this form of entertainment is causing legal experts to questions social casino as a "gambling" category subject to the same or similar laws that traditional online gambling is subject too. Playing gambling games in a social casino environment also brings more attention to the virtual goods and currency economy that is fueling these games and the new business models that are emerging combining social casinos, virtual currency and virtual goods. The social casino sector is growing and evolving quickly primarily because it is is not regulated. Any imposition of regulations will retard the rapid evolution of the sector causing it to fall into a traditional gambling regulatory environment and cadence that has historically struggled with the speed of technical and business innovation occurring in a rapidly evolving Internet world. The recommendation to "self" regulate is a good one. However, this may be hard to achieve without redefining the entire Internet gambling legal framework. The longer authorities what to address the regulation of social casino gaming the harder it will be to regulate. Businesses have been and are forming around the social casino model. Too much regulation too late in the game could destroy an entire sector.

Despite the potential too little too late impact of social casino regulation it could happen if social casino operators do not become more conscious of the consequences of not "self" regulating. Social casino operators would be wise to preempt the authorities and start to impose age and location systems that can identify who is playing and where players are coming from. Also, allowing players to put governors on the money they spend in a social casino may help to keep the authorities at bay allowing the social casino business an opportunity to grow without interruption. Ironically, this last recommendation will lead to profiling information about the players that are monetizing in social casino games. Providing these players are not below the age of 18 this process could lead to better marketing sand targeting of players that will monetize at a  high rate and hopefully a low cost of acquisition.

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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