Is It Gambling, Skill Or Play For Fun? "The Confusing Intersection Of Fantasy Sports, Social Casino, Skill Gaming And Traditional Gambling"

I have to believe that at this juncture a person, business or regulator entering the US online gaming space must be totally confused as to what is "real" gambling and what is not and what is regulated and what is not. Even for a veteran of the online gaming space the world has become confusing, if not downright contradictory and perhaps even a bit strange.  The traditional definition of "gambling" has been "an activity that involves three elements; "chance", "consideration" and "prize". In a a game of "chance" a players' knowledge and acumen are not factors in the outcome of a game. However, this definition has been stretched by the advent of virtual currency, skill gaming and fantasy sports creating a bit of confusion over what is or is not gambling.

Even before the advent of the "skill" game category people have argued that poker and blackjack are skill games and not games a chance. The dictionary definition of skill actually identifies poker as a skill game. "poker is a game of luck and skill"!!  Despite this definition  poker and blackjack retain their "gambling" status. Fantasy Sports has further complicated the  gaming universe making for an even more confusing world of conflicting and perhaps misleading notion of what is or is not fun, gambling, skill or "other". Fantasy sports is "categorized" as a skill gaming yet "unregulated".

  Facebook And Social Casino - Confusion over what is or is not gambling intensified with the launch of gambling game content in social networks. The first real challenge to the notion and definition of online gambling started in 2009  when "social" casino entered the scene in the form of Facebook games  leveraging Facebook "credits"  as a wagering currency. These games allowed  game/gambling publishers to launch gambling style games in the Facebook environment without being subject to a "regulatory" process or regime.  Facebook "virtual" currency credits could be purchased but not redeemed allowing game developers. operators  and Facebook to  circumvent the traditional  "prize" element of online gambling law.    The term "social" became attached to any gambling style games that used virtual currency as a transaction currency. The term "social casino" has now extended beyond Facebook  gambling style games and includes all "gambling" style games played on mobile and web that are either freemium(no virtual currency) or virtual currency based. Essentially, no "cash" payout and no social network required.

Fantasy Sports - Coincidentally, and perhaps serendipitously "fantasy sports" entered the scene in 2009 as well with the launch of FanDual and eventually the launch of DraftKings fantasy sport businesses. One of the factors leading to the creation of fantasy sports is the fact that "traditional" online sports wagering is considered illegal in the US.    In  Europe online sportsbook is legal and a very successful business model.    Interesting to note is that wagering in fantasy sports is with "real" money and not with virtual currency. Thus, North American fantasy sports operators are not much different then their European "real" sportsbook cousins.

Legal US Online Gambling - Further complicating the online gaming/gambling world is that  states such as New Jersey, Delaware, Nevada, etc. are offering  regulated  gambling content online. This market is estimated to grow to 5.2 million in 2020!!

Land Based Casino's  - US land based should also get a mention here as it is apparent that the online online gambling has not impinged on their revenue and growth. In 2014 the land based casinos  raked in 34 billion dollars in revenue!!   Players are engaged in both venues.  There are US land based casino operators that still fear the impact of legal online gambling even if there is no proof that online gambling has any negative impact on land based casino businesses. It could be argued that operating a land based and online gaming/gambling business may actually improve revenue and traffic for both forms of gaming/gambling. 

The complex and evolutionary nature of US online gaming  and online gambling regulation has created a confusing, and  complicated collection of laws, regulations, definitions and business models. The most recent ascent  of "fantasy" sports has made the environment even more confusing.

 Despite, the confusing and contradictory nature  of regulations and the lack of regulation gaming and gambling sectors of all kinds continue to grow and thrive.  Consumers continue to seek out   gambling style content no mater what the wager is the payout is. However,  The desire to "gamble accompanied by confusion over what is legal and what is not  has  given rise to very robust and successful "illegal" online gambling business sector  targeting US players. To date these offshore sites have peddled their businesses in a clandestine fashion. Despite this marketing approach they have grown successful offshore businesses targeting US players.

 The complexity of  the  online gambling/gaming  space combined with the continued demand by consumers for gaming/gambling begs the question; Should "gambling/gaming" of any format that involves "wagering" be folded into a singular regulated regime or should all regimes be deregulated with the exception of "problem gambling" legislation?  This is certainly a question that is worth answering yet very challenging from a practical perspective. Certainly the ultimate goal for regulation is the protection of citizens. However, if the laws are contradictory and confusing then the laws themselves lose their value and the respect of the citizens they protect.

Kevin Flood is the CEO of Gameinlane, Inc. Gameinlane  has developed, launched and operated Internet gambling sites in Europe,  social casino,   freemium and subscription gaming in the US.   The company engages with land based casino  operators, online gambling operators, social casino operator and game developers to assist them in determining their strategy and implementation  of game content in an online context.   Kevin has worked for and with US land based casino operators helping them evaluate social casino and iGaming platforms for the purpose of joint ventures and acquisitions in addition to launching online gambling operations in Europe. Gameinlane is also startup "friendly" understanding the unique value new gaming companies bring to the marketplace.  Kevin frequently speaks at gaming conferences around the world providing him with a unique perspective on this very interesting business sector. Kevin can be reached at kflood@gameinlane.com  and or twitter  at @kflow1776.

Are Social Casino And Fantasy Sports A "Proxy" For "Real" Online Gambling?

There has been much debate  concerning the relationship  between social casino, freemium,  virtual currency and "real" online gambling games over the last several years. It was thought at one time that social and freemium games that involved playing gambling style games could lead to "conversion" of social casino players to "real" online gambling venues.   In fact, this has proven not to be the case. A number of online gambling businesses; most notably, JackPotJoy, 888, Party Gaming/Bwin and PlayTech either created social casino properties or teamed with social casino business to determine if "conversion" up into "real" money online gambling could be achieved by association with social/freemium online game properties.  Their experiments showed that there was, in fact, little or no meaningful conversion of social casino players to "real" money gambling play. In addition, an   extensive independent research study was  conducted by Australian researchers  to determine if social/freemium gaming content and game play acted as a proxy and or ramp to "real" gambling. This study was prompted by real concern on the part of Australian politicians that social casino was a  threat to the population increasing the risk of "problem" gambling. The research showed that there was no meaningful conversion of social casino players to "real" online gambling.

The results from these experiments and research projects decreased the anxiety and public concern about social casino as a "gambling" threat. Over the years the social casino(Facebook) and mobile/social casino have grown and have developed into an independent industry on its own completely divorced from "real" online gambling.  Estimates for "social" casino  are in the billions of USD world wide establishing this industry as a real contender; and possibly a competitor  to; as opposed to a collaborator with online gambling.

The question now arises is social casino a "proxy" for online gaming? Does social casino keep players away from real gambling venues either physical or virtual?  There is certainly plenty of research on the up-sell for social casino into "real" money gambling. However, there is a noticeable absence of any objective research on either the satisficing of the urge to play "real" gambling style games by playing social casino games. The awareness of social casino as an alternative form of gambling became front and center for me when a distraught parent contacted me asking me to intervene on behalf of her teenage son that was racking-up big bills on her credit cards spending money on Facebook casino games. I attempted to contact Facebook to request them to block this individual from further transactions. However, there was no way for a third party, or a parent for that matter, to engage Facebook on this subject.  Clearly, this was an example of a person that was having a "gambling" problem.

No mater what the answer is to this final question of social casino as a true "gambling" activity it is well documented that social casinos are doing very well on their own with absolutely no association with or up-sell into "real" money gambling. In fact, the rather arcane notion that virtual goods and the virtual experience has no "value" is clearly absurd and being leveraged to grow very successful social casino businesses. In truth, social casino is an established business sector on its own with its own "problem" gambling challenges. This phenomena deserves serious organized attention similar to how "real" gambling" has created a problem gambling initiative.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin, has developed, launched and operated Internet gambling sites in Europe.   Kevin and Gameinlane   develop "social and real money" casino games for third parties. Kevin has worked for and with US land based casino operators helping them evaluate social casino and iGaming platforms for the purpose of joint ventures and acquisitions. Kevin can be reached at kflood@gameinlane.com. 

What Does Zynga's Launch Of An Internet Gambling Business Really Mean?

There has been much  commentary in the press and on blogs about Zynga's  anticipated and perhaps rather late entry into the Internet gambling(iGaming) business.  This topic has been discussed for years and it is finally here. Although Zynga is the 600 pound social/freemium game company in the room they are not the first cross over company to have a social/freemium business and an Internet gambling business under one roof. Gamesys' Jackpotjoy was one of the first "true" crossover entries into the combined social and iGaming  realm. However, Gamesys has come from the opposite direction having been in the  UK Internet gambling business for some years. Betable is an example of a hybrid introducing third party freemium game content within their Internet gambling platform.   From all indications Zynga's predecessors have not witnessed a meteoric adoption of gambling by the social/freemium sector. So the question remains why now for Zynga and what are the long and short term goals for the initiative?

 Bwin.Party  Launching A Zynga Branded Internet Gambling Business - The fact that Zynga is using a Bwin.Party gambling platform and not a Zynga gambling platform indicates how tepid Zynga's iGaming launch really is. In press releases Zynga is very open about this acknowledging that their social game platform, development resources, games, marketing acumen, etc. are not iGaming  enabled and not appropriate for Internet gambling. It also appears that Zynga is not actually operating the iGaming business. Essentially, Zynga's overall resource commitment to the  iGaming business sector is relatively insignificant. The details of the business deal between Bwin.Party and Zynga are unclear. However, it is most likely a flat annual fee and a revenue share where Bwin.Party receives most of the proceeds.  

Zynga iGaming Launched In Facebook And Not On Mobile Devices -  The launch of a Zynga iGaming in Facebook and not in a mobile device environment is somewhat counter to Zynga's stated goal of gaining more traction on mobile devices. One of Zynga's biggest strategic business mistakes was not giving more consideration to the growing mobile market.  Their stock and their revenue growth have been negatively impacted by their singular focus within Facebook. So, once again we see Zynga investing in the Facebook platform with their iGaming business. 

This decision could be interpreted in a two different ways. On the positive side Zynga is admitting that Facebook is their home turf. They have a big audience in Facebook and their social poker product and audience  could be used as an up-sell vehicle into their gambling product. The "convergence" approach could be a big win for them if they can prove that a meaningful percentage of their current social poker players can be converted to the iGaming product.  Historically, selling leads to iGaming operators in Europe has not proven to be fruitful for either Zynga or the European iGaming operators. Essentially, Zynga does not know how the profile of a Zynga poker player maps to the iGaming environment. They have never invested any significant effort in sorting this out. Will they invest energy and resources in social/freemium/igaming player profiling going forward?

Cost Of Player Acquisition And The UK Internet Gambling Market - The UK has perhaps the most mature regulated Internet gaming market in the world. This has a positive and negative side to it for Zynga. The positive is that the population is very comfortable with Internet gaming and the government has put into place a number of safeguards to protect the public form abuse and problem gambling. The process of hosting and operating a gambling operation for the UK population is clear and well mapped. The downside is that the iGaming market is highly competitive with player acquisition costs going as high as $600 USD.  Party is quite familiar with this but Zynga is not. So it will be interesting to see how Zynga will react to this market reality. Party and Zynga are certainly hoping that Zynga's social player DB can be leveraged to decrease the average cost of acquisition. Remember that Zynga is not launching an Internet gambling business based on their own platform. Party is launching their platform decoupled from the Zynga social player audience.  

iGaming Revenue And Analyst Expectations - Zynga has wisely down played  any predictions on revenue from iGaming. Despite this business analysts are insisting that the iGaming channel could be a significant revenue stream for Zynga. Zynga has been very clear in their communications and by their rather limited resource investment into iGaming that the Bwin.Party deal is an experiment with the goal of learning what the iGaming world is all about. They have no stated public revenue expectations from iGaming.

US Legal Internet Gambling - Clearly Zynga is most interested in  the US Internet poker gambling market and not in the UK market. This first introduction into the UK market will be an interesting yet limited learning experience for Zynga. The UK launch is essentially a Bwin.Party product with some Zynga branding. If Zynga wants to win in the US iGaming race they will have to be more aggressive and actually invest time money and resources into Internet gambling. The fact that they are not going to get much operating experience in the UK is a bit of a concern. Clearly, Bwin.Party, 888 and others will be much better prepared for the legalization of gambling in the US. 

In conclusion, the Bwin.Party launch of a Zynga branded iGaming platform in the UK is an experiment for both Bwin.Party and Zynga.  Zynga is not going to commit significant resources to this effort unless they see a working business model in the UK.  Zynga will learn something from the UK launch but not nearly enough to build and launch its own Internet gambling poker product for the US market. It may be that they will also concede this gambling market to Bwin.Party as well. 

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.

  

Online Poker: The Impending Perfect Storm

Recent events and announcements surrounding Internet poker give you the feeling that a perfect storm is brewing in the online poker space. It is not just one or two announcements and initiatives but a series of them, when combined, could result in a perfect storm for Internet poker businesses and players.
  

US State and Federal initiatives to legalize online "real" money poker is very old news and acts as a backdrop to many new emerging poker trends that are being fueled by the US government intention to legalize real money Internet poker.  The hope of legalizing online real money poker in the US is significant.  It is obvious that a US Federal or State(s) bill allowing poker to be player across the US would certainly re-energize the online poker industry. However, there are also a number of other announcements leading us to believe that the prospects for poker are even more encouraging and perhaps much bigger then just the US opening up of online poker gambling to US residence. Combining these new new elements with the prospect of legal "real" money US poker gambling certainly does feel like a perfect storm brewing.  

European Union Allowing Intra-Country Poker Liquidity - The European Union and some of the member countries are starting to realize that the country by country licencing of Internet gambling in Europe may, in fact,  not be the best way to legalize  and control Internet gambling in Europe.      

The essential problem with the current EU approach is that it is destroying any Internet gambling game that requires "liquidity" to maximize its popularity. Obviously, poker is highly dependent on large amounts of players participating to keep the poker ecology healthy including enough "fish" for the "sharks" to exploit without depleting the amount of fish to the point where there is no ecology. Also, poker players, fish and sharks alike, want to have as many game and tournament options as possible to engage in multi-table play and to have the opportunity to actually meet and play with new players. Yes, poker is a very social game and the current European approach to Internet gambling is undermining poker.

The current move by Spain, France and Portugal  to consider combining forces to create a larger pool of poker players is a cleaver and wise move on the part of these countries to once again create a large European poker player liquidity pool. The European government entities are beginning to understand how poker works and are wisely considering a more broad based European plan for poker.

The European's are realizing that country by country closed Internet gambling markets are bad for poker. US regulators have been watching Europe's gambling regulatory strategy anticipating that they to will be regulating the industry. If Europe opens up poker liquidity so will the US when poker gambling becomes legal in the US.

Bwin/Party Poker Zynga Partnership - The other notable announcement is the Bwin/Party Poker and Zynga announcement designed to  combine Zynga's large social poker community with Bwin's Europe "real" gambling community.  The first step in this relationship is relatively insignificant with a focus on the UK exclusively. Apparently, Bwin is somehow going to enable Zynga's UK current social poker players to play poker for "real" money in the UK .I suspect this will also extend to Spain, France and Italy at some point.

The importance of this in the long run is much more significant depending on how the Bwin/Zynga relationship evolves. Zynga has been selling leads to the European gambling operators for years with little success of converting their social gaming leads to paying gamblers.  This new relationship with Bwin will begin to result in a more precise way of "profiling" social poker players that will in fact cross over to gambling. If Bwin is really smart they will also allow their gambling community to play in Zynga's  social poker room. We already see pro poker players playing in Zynga. If Zynga can effectively create an eco-system where they monetize players in both environments it will be a closed system resulting in high retention of players and increased revenue per player.

Facebook Platform Supports Internet Poker Gambling - This is also old news, however, the Facebook/Gamesys deal to allow Gamesys to offer real money bingo game wagering in Facebook could have a potential big impact  on poker providing Facebook expands  gambling withing Facebook to current poker gambling game operators and they allow Zynga and other  Facebook poker operators to play real money poker within Facebook. If this happens, and there is very good chance it will, the numbers would be staggering with potentially millions of people concurrently playing real money  poker within Facebook. 

US legalization Of Internet Poker Gambling -  There is much speculation about this subject. With no one really knowing for sure how and or when US Internet gambling will become legal. However, if it does, or if California only  becomes a market where Internet poker gambling is allowed, it will certainly tip the scales into the perfect storm scenario combining US players, European liquidity and real money poker acumen with Zynga/Facebook social poker player volumes. Clearly the US is the home of poker and poker market size will far exceed  Europe's.  The Zynga experience has taught us that even in the absence of any real money poker in the US the game is still extremely popular.

Internet Poker gambling was certainly very big and successful before 2006 and the emergence of Zynga social poker and the development of the European poker market.  Looking forward the new Internet Poker market could be substantially larger. The added fuel provided by the  increased size of the US population, the addition of the current regulated combined European poker audience,  the success of mobile devices as an easy way to access poker, Zynga's population of poker players, the potential viral impact of  Facebook's world market reach and the legalization of US Internet real gambling poker could result in a very interesting poker economy.

  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. 

Making Games Social Outside Of Facebook

 Facebook has demonstrated how important   social elements and mechanics are for the success of a game within Facebook. The benefits are numerous resulting in higher traffic numbers, better retention and  lower cost of acquisition.

 Facebook has been the premiere social platform that most game publishers and developers have exploited to add social mechanics to their games. These mechanics have allowed games to access significant numbers of Facebook players leading to a number of games becoming very successful within the Facebook environment. This has resulted in a number of game publishers and developers becoming dominate within Facebook by exploiting the players they have acquired through Facebook in one game and moving them to other games in their game portfolio. 

However, there is a tax associated with launching and managing a game in Facebook if that game monetizes through virtual currency transactions. The fee is draconian taking 30% of all game transaction revenue and depositing in Facebook's account receivables.

Recently competition within Facebook for Facebook gamers has become so intense that the 30% Facebook tax is making it difficult for game publishers to be profitable within Facebook. Bottom line game revenue has been challenged because marketing costs are rising(Pay Per Click Advertising) and the required sophistication of games has increased resulting in  higher development costs for games.

Game  publishers have responded to this pressure by taking their games outside of Facebook and publishing them on mobile devices and even as web games. Until recently, these environments historically have not had native social mechanics to drive high traffic numbers without extensive advertising, partnerships and affiliate marketing relationships. 

With the introduction of Facebook "Connect" ironically Facebook itself has brought social mechanics to mobile and web games. Certainly it was not the  original intention of  Facebook Connect to enable game applications outside of Facebook to take advantage of its social mechanics without having to be in Facebook. However, game developers have cleverly figured out that they can get most of the social mechanics they need by adding Facebook connect to their games in mobile and web environments.

Game developers and publishers have added notifications, friend awareness, invites, Facebook pages, Facebook community development, etc to their non-Facebook games. There are certainly other less well know social game  platforms such as Gree that actually encourage the use of their social game platform to launch and promote games. However, given the size of the Facebook community Facebook is the obvious place to go to acquire players. I also suspect that Facebook is less then enthusiastic about how game developers and publishers are using Facebook connect to circumvent their virtual currency tax. However, not sure how they can avoid the exodus from Facebook by game publishers without impacting web sites and Facebook members with legitimate Facebook Connect  intentions.

Mobile games riding on top of  Facebook Connect is a powerful combination with more people accessing games from their mobile devices. This combination is actually making mobile games work from a business perspective.

We will have to see how Facebook reacts to increasing numbers of game publishers and developers exploiting Facebook Connect outside of Facebook.  

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.

Disappointing Facebook And Zynga Quarterly Earnings Not Surprising

The continuing disappointment investors are expressing in both Zynga and Facebook's earnings is indicative of how poorly investors understand their  Facebook and Zynga investments.  It is just dawning on analysts now how symbiotic the  relationship between these two companies really is. I see simplistic, almost, child like presentations created for investors in these stocks explaining how Zynga, virtual currency and social media actually works. Sad really with a deserving outcome for the investors that obviously had no idea what they  had invested in.

When Zynga and Facebook were steaming to their IPO's I wrote an analysis of both the Facebook and Zynga S1's showing how close these companies were aligned.. The S1 of Facebook did reveal a 12% dependence on Zynga for virtual currency and virtual goods sales through the Facebook transaction platform. It did not mention the advertising dependence it also has on Zynga. Zynga generates plenty of ads in its games as well. So is the revenue dependence more like 15% or perhaps even higher?

Conversely Zynga is almost 100% dependent on the Facebook community for its revenue. If Facebook  falters in their growth so does Zynga.

So what do both of these companies have to do to continue their expected population growth and revenue per individual?

Mobile - All of the analysts Facebook and Zynga themselves are saying that mobile is the place to be to sustain their growth. However, the mobile environment is very different than the Facebook environment and  not a place either company spend enough time on during the early growth years of mobile platforms.  Jumping in late is not going to be easy. Yes people are accessing their Facebook accounts on their mobile devices. However, the experience in mobile needs to be different from the Facebook web version. Navigation, invites and the very limited time people will spend in a Facebook mobile app will be less then the web version.

Zynga's challenge is that their massive games such as Farmville and Cityville will be hard to convert to a mobile environment. Interface, play time, player navigation through the game environment are all different. Smaller and easier to understand games that clearly and intuitively guide the player through the experience is required. The tablets may be the saving grace for Zynga providing a larger playing surface enabling MMO type game play and a differentiation for Zynga.

So where are these companies headed with a stalling revenue model in the Facebook environment and a very late start into the mobile world for Zynga?

Clearly, in the short run(next 2 quarter)s not likely a pleasant outcome. Sure they both have big cash reserves based on their IPO's and could buy their way into the mobile space. However, in the end they really have to have organizations that understand the mobile universe.  Facebook has to continue to be "interesting" to existing members and they have to somehow continue to add more people to Facebook then are dropping off. We have seen social platform fatigue before with Friendster, MySpace, etc. Are we seeing this in Facebook now? I am not sure myself. I believe the Facebook platform is more flexible then their predecessor platforms and therefore provides Facebook with more options on how to retain and grow its community. Depending primarily on advertising revenue as its main source of revenue is very risky. Their virtual currency move was very clever and has contributed good revenue to the bottom line. However, in mobile there are many other virtual currency options for gamers do they really need Facebook.

In the coming months look for  Facebook to create a "true" mobile platform and see how Zynga games are converted over or if they embark on en entirely new game strategy for  mobile. This will give us all a better picture of what future earning will look like for these companies.

 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. 

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.

How Land Based Casinos Can Leverage Social Networks And Social Games To Improve Their Business

At a panel discussion at GIGSE this year I mentioned the interesting story of MGM's online games for prize site launch in 2001. Many people where not aware that MGM launched a free to play site, with the help of Wagerworks, in preparation for their ultimate goal of launching a real money site in Europe. The free site had a number of free to play slot games that tied game play with prizes at MGM properties. These prizes were free buffet tickets, discounts at casino restaurants, free hotel rooms, etc. With little or no advertising this site was tremendously successful from a traffic, game play and trips to land based casinos to redeem prizes perspective.

MGM's ultimate goal was to launch a pay for cash experience in Europe. The prize site was an early test to see if online MGM games would be popular. They achieved their objective with the prize site. They then decided to redirect Wagerworks ( now IGT) to build the for cash site abandoning the prize site.

The Wagerworks team was a bit surprised at this decision given the success of the prize site. The team tried to convince MGM to keep the prize site going in the US and launch another project to develop the for cash site for European deployment. The team was unable to convince MGM to keep the site going because MGM did not build a link between their land based loyalty program and the online site. Hence, they could not quantify the economic impact of the prize site on their land based business.

Despite this decision the Wagerworks team learned a very valuable lesson. Online free games could have a positive impact on land based operations if executed properly. Developing a strong linkage between a casino's loyalty program and their online properties was key to quantifying the economic impact of the online site on offline operations.

Another, better known, example of the synergy between online and offline gambling is the WSOP phenomena. I worked for Harrahs (now Caesars) during the heyday of WSOP witnessing the symbiotic link between online poker play and qualification for the WSOP land based event. In this case online activity was more then supplemental to the offline experience it was a critical component that created a perfect storm and big profits for Harrahs and online operators.

The 2006 enactment of US Internet Gambling(UIGEA) law changed everything and broke the linkage between  Internet game and the WSOP offline event. WSOP has never been the same.

Fast forward to 2011, the dominance of social games and social networks and the success of the ultimate social game, poker, in attracting online players to gambling style games. Clearly, the advent of the popularity of social networks and the shear number of people using them on a regular basis fundamentally changes the Internet and the way people and gamers interact with it. It is no secret that one of the most popular games in social networks is Zynga poker.  This poker game is so popular because it was originally built to take  advantage of social networking features to attract and retain players. It is not a "ported" game from an Internet gambling site. It is specifically designed to encourage "viral" adoption of the game. Poker also happens to be a "natural" social game making it even more popular within a social network.

Certainly Zynga Poker is an enigma due to its pre-development before any applications where deployed in Facebook (a story in itself). However, it does demonstrate that with the right game design and integration with social networks games can have a profound impact o social network participantion. I suspect that Facebook games are the most popular applications within Facebook.

Casino operators should task notice of this and develop a plan for linking their offline operations with social networks to drive traffic to their land based operations. Most of the existing or potential casino customers have social network accounts and regularly engage other players in a social setting.

There are some basics of Facebook marketing that transcend games and are a requirement for any business marketing their property, brand or business on line.

 The Fan Page - The fan page is similar to a web page or web site with the exception that it is embedded within Facebook. The advantage to the page is that people can "like" the page notifying other friends in their network that they like it. The "liking" results in friends within their social network to become aware of the business and to engage with the business. Essentially, growing a community and impacting the social graph.

A land base casino should add features to the fan page that promote visitation to the land based properties. The fan page should also reward viewers for any of their friends participating in  a promotion that results in a visit to a casino.

Loyalty Program Linkage - The fan page should have a mechanism to identify a Facebook member with a casinos loyalty program. It could be that every Facebook visitor to the fan page is assigned a loyalty ID or anyone that responds to a promotion gets an ID. This will engage a tracking mechanism to determine the intersection on casino visitation.

Facebook Groups - A Facebook group is a collection of people that have  a common interest. In the case of a casino it should be the casino itself that acts as the focal point.  This group can become very influential in promoting the casino or the opposite if they do not like something. Cultivation and growth of the group requires a "community manager" to encourage people to join continually engage participants in a dialogue and to retain members. Groups can and should grow to large numbers (thousands of members in some cases). Communication with the group should be regular and constant encouraging a dialogue and the groups desire to add more members to the group. For instance, notifications should be made to the group for special deals, events, ad promotions at the casino.

Casual/Free Games - Free to play virtual currency games are a good way to introduce new games(especially slot games) to an audience. In an ideal world every new physical slot game would have a social or casual game complement introducing the game to Internet users and encouraging them to come to the casino to play the real game. Providing a virtual currency scheme that would allow people to wager and win virtual currency in the game is advised. Providing there is no consideration to buy virtual currency a casino could offer a player some free  land based casino(hotel rooms, buffet, etc) items using virtual currency to attract them to the "real" property.

Casino  To Virtual World Connection - Promoting a social or casual game in the physical casino is very important. This will establish a closer link to both worlds. An obvious promotion would be an offer of free land based casino items for play  on the Internet site.

Certainly, The above mentioned items are only a few of the many ways a land based casino can leverage an online community and social networks to enhance their land based operations. It should be noted that the online world is distinctly different from a land based operation and requires a staff with a mindset that comprehends the virtual world and can cater to its peculiar marketing and game play characteristics. It is advised that a casino add these skills sets to their operation to ensure the success of their online and social network initiatives.

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.

Monetizing Social Games Conference Summary (London January 2011)

The conference  revealed some interesting surprises even for the more educated social gaming attendees. The conference attendees and speakers represented a good cross section of casual games, online gambling, social gaming, social media and advertising, legal and payment processing representatives. US and European entrepreneurs, business owners, legal experts and investors provided a good mix of opinions providing a global feel to the conference.  The following are some of the more provocative revelations that were uncovered during the conference.

Traditional Online Gambling Companies Are Investing In Social Gaming Companies - 888 and Bwin have decided that social gaming is the place to invest in  for the future. Both Mytopia and United Games have received funding from the big online gambling companies. The interesting thing about this investment is it is not designed to feed gambling leads to the major gambling brands. Instead these social and casual game publishers/developers are looked upon as a separate business unit with the objective of penetrating the social gaming market and growing that part of the online gaming market.

This says something about the emergence of social games as a legitimate "revenue" generating segment of the online gaming market. Not too long ago conventional wisdom considered social gaming as a small and insignificant revenue generator. Most attention was placed on spending big marketing and acquisition numbers on acquiring "real" gamblers. This has obviously changed with the realization that social gaming is a legitimate contender for the wallets of online gamers.

Do Virtual Currency/Goods Transactions Categorize Social Games As "Gambling" ? The speakers and panelists were pressed very hard on this question and would not concede that virtual currency/goods transactions with gambling style social games constituted "real" gambling. The legal experts indicated that virtual transactions were not even on the radar of European regulators. This indicates that it will be clear sailing for social gaming companies using this form of revenue generation to monetize their games.

Virtual Currency Inflation - There was some acknowledgment that the flooding of the  games economy with Facebook credits could be a future problem. However, most social games companies using Facebook credits were more concerned about the 30% of revenue that have to give up to Facebook to use their credits.

Facebook Threat As Payment Processor For All Facebook Transactions - The audience acknowledged that Facebook was moving into PayPal territory by becoming a payment processor for all forms of monetization within Facebook. The representative payment processors also conceded this with the caveat that the current processors would be processing all virtual currencies and not just Facebook credits giving them a competitive edge with publishers and merchants.

Getting Recognized In Facebook Is Getting Harder And Harder - With the Facebook pull back on notification based  virality it is harder to achieve massive player acquisition without resorting to Facebook advertising as a primary source of lead generation.  The days of  exclusively depending on virality are over. It is time to pay up and get the word out through conventional Facebook advertising.

More sophisticated development of Fan pages, cultivation of groups, co-marketing relationships with other Facebook application aggregaters all need to be used in tandem to achieve critical mass for a game promotion and continual player growth.

Does The Little Guy Have A Chance Anymore? - Yes and no. The budgets for game promotion are going stratospheric with big box companies like Zynga spending tens of million on game promotion and game development. Game development and advertising is now taking the same track as Hollywood movie development and promotion leaving the smaller developer and publisher in the shadows.

With this said the little guy can have a successful social/casual game business within social media platforms. A game does not have to be in the top tier to make money or to be popular. In many was this niche market  approach may be the best place to be. Under the radar and making money does not attract competitors and allows a company to sustain a realistic business model.

Portfolio's Of Games Helps To Increase Revenue Per Player - If you have a game that is reasonably successful monetize the players of that game over a wider array of games. Essentially, more game content matters. Having a bunch of games helps raise revenue per player and player retention.

Opportunistic Game Demographic Targeting - Currently the demographic of a frequent casual or social gaming player is female between 32 and 40 years of age.  They are spending the most money. Yes make sure you make games for them. However, this also leaves a big hole in the market. Facebook and big box game publishers ares clearly starting to lose the per-teen. teenage and early 20's segment of the marketplace because the majority of the game content is not geared to them. This may be the biggest opportunity for new game companies or new games.

Big Brands Want In - It is no secret that big consumer brands want in on the social and casual game party. They do not have the game development chops or advertising know how of seasoned game developers and publishers. Look to the big brands as a major source of revenue. This is tricky because you do have to build and promote a popular game no matter the brand. However, if this can be sorted there will certainly be good money in it.

Mobile Casual/Social Games - Mobile games have been a big disappointment primarily because it is difficult if not impossible to get the viral effect going. With this said everyone believes that there is gold to be found in mobile gaming if cost effective virality can be achieved. There were two companies presenting that had abandoned model game development all together and moved to conventional social game platforms because of their frustration with poor revenue generation from mobile gaming. However, they both indicated that they woulds dive back in if virality could be achieved in the mobile gaming environment.

Conclusion - Now that everyone realizes that games are the key to monetizing social network participants the competition amongst game publishers and developers is intensifying. Companies that considered social gaming as a fun yet insignificant segment of the online game space have now decided things have changed and they want part of the action. This means that the competition for social gamers is going to intensify. It also means that success breeds success. If a title goes viral and generates big numbers then revenue will be plowed into yet other big budget titles. There is room for new games developed and promoted with low budgets to succeed in generating enough players and revenue to support a sustainable business model. This may be the best place to fish for success in the casual/social gaming space.

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.