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Thursday, February 28, 2013

Yes Or No? - Should Social Casino Companies Convert To Real Internet Gambling?

Over the past several months I have had many social casino developers and publishers ask me  questions about the viability of adding an  Internet gambling business model to their  current social game business.

The recent announcements about the legalization of Internet gambling in New Jersey and Nevada has intensified the interest, on the part of social casino operations in  considering Internet gambling as a viable add-on to  or alternative to their current social casino business model.

I am a good person to ask considering the fact that I have built and launched a number of "real" gambling games, businesses and platforms for the European Internet gambling market. I have also build and launched social casino style games in the US, in Facebook and have worked closely with US based casino's in launching and exploring Internet gambling as a business. I have also engaged in the cross-over subscription gaming model in Europe and the US.

My  short answer to the question is that you should look before you leap and not assume that the Internet gambling business model is a slam dunk as an alternative to or perhaps a replacement to your social casino business model.

The following are a number of items to consider before a successful social game company jumps full-on into the Internet gambling pool.

Market Size/Growth - Some current estimates of the size of the larger social gaming category are in the hundred  million social gamers and growing. Social casino is a smaller segment of this market. However, it is estimated that social casino play could reach into the ten's of millions if adopted by a larger world audience(China). The market size for Internet gambling is much smaller perhaps in the millions of players. It is also unclear as to the true legal growth potential of this market given the nature of gambling regulations.  Growth estimates for the online gambling sector are heavily dependent on the direction of legalization. Also, there are no dependable numbers for the illegal Internet gambling audience. Speculatively, it is significantly higher then the legal Internet gambling market. The take away from this is that the current online gambling market is relatively small when compared to the social gaming market and difficult to fully quantify because  of the existence of a robust illegal online Internet gambling audience. 

Market Fragmentation - There is certainly a degree of market fragmentation in social casino. This fragmentation is based on cultural preferences, language and access(China) to certain markets.  However, the Internet gambling market is highly fragmented based on existing regulation, growing regulation in addition to language and cultural preferences for certain types of games for specific markets. This fragmentation drives up all kinds of costs in terms of regulatory compliance, development, operations. It also means that each market is relatively small when compared to the universe of a more generalized social  casino gaming. 

Marketing Cost - The cost of marketing to an online gambling player is significantly higher then marketing to a social casino application. It is not uncommon to pay $600 to acquire a legitimate gambler and average costs can be in the $300 per player range. Compare this to what you are paying for a social casino player in Facebook and on mobile. Also the method of acquiring gambling players is different with a heavy dependence on affiliate networks as opposed to ads. This translates to the need to have a staff of marketing experts that understand the affiliate gambling market, unique gambling markets associated with restrictive access and a marketing department that pays special attention to the conversion rate of acquired players to revenue generating gamblers.

Conversion Of Social Gamers To Real Gamblers -  I have written about the conversion of social gamers to gamblers in  previous blogs.  The conversion rate or up-sell of a social casino player into a gambling domain is still relatively unchartered water and untested to any significant degree.  This could be a game changer in terms of marketing costs  to acquire gamblers online. It could also be a very important factor in the decision process to determine if a social casino operator should launch an Internet gambling operation. If a social casino company can not convert a meaningful (10-20%) number of their social casino players to gambling does the business even make sense.  Current conversion estimates are in the 3 to 5% top end range. If this is the case a social casino operator has to have a significant number of concurrent social players to justify the cross over business.

Distraction - Focus Focus Focus has always been the mantra for start-ups and for businesses interested in furthering their core business. Taking on a gambling operation in addition to a robust social gaming business is going to be a distraction on a number of different fronts. To name a few of the many new tasks that a social game company will have to take on: legal and regulatory compliance; technology to address gaming law; multiple versions of software to address the different gaming regulatory environments; player filtering to reject people that cannot gamble on your property and those that can; Special payment options for gamblers; The addition of a wallet function; collusion and fraud detection 24/7,  etc. All of these items add up to a big distraction from the core social casino business.

Cost And Size Of Operation - Inevitably the cost and size of the business will increase. Need I say more. Where is the additional funding going to come from to support the gambling effort? 

Agility - It is amazing how agile and fast moving a social game company can be. They add  and delete content and games at a rapid pace and change game mechanics and add features at an equally quick pace. This all slows down and comes to a screeching halt when a game company enters  the gambling space. Anything related to the outcome of a game or upsetting the economy surrounding a game  has to be carefully thought-out and perhaps be reviewed by a third party auditor before the change is implemented. This slowdown in the ability to change game mechanics and  game offerings leads to inherent slow down of the development process and the emergence of me to product offerings.  Overall, the development process and rules change leading to online gambling  content that looks remarkably the same across the online gambling space. 

Regulatory Compliance And Politics -  Regulation and politics come hand and hand with Internet gambling. Social game companies will have to adjust at the executive level and begin to participate in the politics of online gambling. Techies beware this is not your element.  You will need to get a licence,  gambling lawyers, etc if you plan to offer online gambling legally. Also, where gambling is legal and what is  not legal changes overtime. You may be in a market one day and have to exist it the next day. On, the other hand you may have not had access to a market and all of a sudden a market opens up.

Black And Grey Market Competition - For all the virtues of  regulated online gambling it has lead to a robust illegal and "gray" market gambling.  This is a difficult sector to compete with and is difficult for a consumer of online gambling to differentiate between the legal and illegal gambling properties. Consequently, in addition to the  legally certified gambling operators there are online gambling companies that do not play by the rules. You still have to compete with them.

There are certainly other things for social game companies entering the gambling space to consider. Also, the goal of outlining special online gambling considerations is not intended to discourage social game companies from entering the space. Just be sure you know what you are getting into. Develop a business plan for the Internet gambling operation and make sure you have the working capital and regulatory authorization to engage online gamblers. Also, be very careful about how you present an online gambling option to your current social players. This could be a big turn-off for them or a great opportunity.

Kevin Flood is the CEO of Gameinlane, Inc. Gameinlane works with companies in the social, Internet gambling and land based casino sectors developing game content and online gaming strategies. Kevin is a frequent speaker at social game, Internet gambling and casino events and conferences in Asia, Europe and the US. Kevin is currently working with organizations to determine their acquisition and merger strategy as it relates to the growing interdependence of the various game content and delivery platforms.

1 comment:

Stephen Hutch Baguios said...

Yes..Convenience obliviously, what can be more convenient than playing your favorite casino game in the comfort of your own home while listening to your favorite music and drinking your favorite beer? Not to mention being able to put your dealer on hold each time up you want to take a break. Just like my TVG online gambling sites.