Failure Of US And European Legal Online Gambling Gives Rise To Legal Social Casino Gambling Market of 4 Billion USD AND Illegal Online Gambling

I recently revisited the phenomena of the growth of social casino and the demise of "legal" online gambling around the world. The robust  and mature social casino market, now exceeds 4 billion USD!   The illegal online gambling market is hard to quantify for obvious reasons. However, illegal online gambling transaction estimates are in the billions of dollars.   Conversely the legal online gambling market(New Jersey and Delaware) in the US is 8 million USD and the European market is 23 million USD.

So what is going on here and why has social casino and illegal gambling grown robustly and the legal online gambling market so slowly?

What Is Social Casino?  -  It is important to differentiate social casino from other online gambling environments. Social casino is primarily the creation of the Facebook social network. Early in Facebook's history they began to allow application developers to add apps into the Facebook environment. The apps themselves where accessible by all Facebook members without restriction. Zynga poker  was the first social gaming app introduced into  Facebook.  Zynga's poker app was a phenomenal success because poker is an inherently social game and at the time Facebook did not restricted the extent of social connections(viratlity) generated in their environment.  This allowed each user of Facebook to invite all of their friend connections in Facebook to join the game. Thus the term "virality". The success of gaming in the Facebook environment and the onslaught of other gaming apps entering the Facebook environment.

Social Casino Transcends State And Country Boundaries - Freemium and social casino games ado not require licensing and they do not have to respect country, province, state, etc. demarcations. This means that a social casino business can access players all over the world with the same or similar content. However, it also means that there is less of an opportunity to localize content.    

What is Virality? - Although not an official word in the dictionary virality is a commonly used term in the social network world. An application is "viral" or "goes" viral when participants access the app and begin to invite friends within their social network to access an application within the social network. 

Monetization In Social Casino - Facebook and other social and "freemium" online casino properties get around the definition of gambling (chance, consideration and prize) by altering the definition of prize. In a traditional gambling environment a player purchases chips(consideration) or credits in the Facebook environment  with "real" money and wagers those chips in a game of change. The chips can be redeemed or "cashed-out" for "real" money at the discretion of the player. In a social casino environment the chips/credits can not be converted back into cash/real currency. Essentially all converted chips stay in that state and can only be used during game play.   

Accessibility, Licensing And Illegal Online Gambling - The regulation of online gambling or outlawing of online gambling has had an interesting impact on the cultivation of "illegal" online gambling. Clearly the restrictions on online gambling have favored open environments such as Facebook and other "free" to play sites. However, there is an insidious  side to regulation of gaming as well that has driven players from around the world to "illegal" online gambling sites.  Gambling licensing costs can also be a real barrier  to entry. The state of New Jersey requires a $400,000 permit and a $250,000 responsible gaming fee to operate an online gambling business!!  Clearly the illegal gambling properties are not paying these fees.

It is clear that the combination of laws, fees and perhaps that lack of understanding or concern about the consequences of not providing operators with cost effective ways to enter, launch and maintain legal online gambling operations has lead to the success of Facebook gambling apps and unfortunately to a robust illegal online gambling industry. The Facebook gaming phenomena is a welcome alternative to traditional online gambling. However, the rise of "illegal" online gambling activity is not so great.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin spent time at the Machine/Learning Lab at MIT as a technology transfer fellow engaged in model based reasoning, case based reasoning and rule based systems to enhance diagnostics systems.    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.

What Social And Casual Internet Game Companies Can Learn From Online Gambling

Recently I have published blog items primarily focused on educating online gambling operators on the virtues and threat of social games to  their operations. In point of fact, I have been a bit unfair to the online gambling operators because I have not highlighted their strong points and how social and casual game operators could learn a few lessons from them. Indeed, online gambling operators have a lot to be proud of and social and casual game operators can learn from  online gambling businesses.

The Regulated World - Sooner or later the authorities are going to take social and casual game operators more seriously. The amount of virtual currencies transactions being processed ,  under age issues and social games that mimic real gambling games are a few of the items that are  going to trip a wire in some jurisdiction causing the social game companies to engage in practices that online gambling companies have had to comply with and implement to keep their licensees.

The list of activities and requirements that online gambling operators have to attend to remain legal and safe operators is staggering and non trivial to maintain and implement. To name a few, regulatory legal counsel, auditing regimes, employee background checks, increased charge back management oversight,  auditings of  software platforms,  game outcome monitoring to assure fair and random outcomes, upgrading of  networks and hardware to address denial of service and intrusion attacks,  etc. These activities, systems and safe guards are common practice for online gambling operators existing in  regulated environments. The enforcement of these safeguards does create an expense overhead beyond the thresholds that social gaming companies are comfortable with. However, the time is coming when social game companies will have to pick up their game and comply with external regulations that require processes already used by online gambling operators.

Online Gambling Companies Are Banks - Most online gambling companies have the concept of deposits and accounts to allow for the deposit of funds to game play and for the ability to withdraw funds when needed. Social and casual game companies have not followed this model because they do not have the concept of a cash withdrawal. Virtual currency does accumulate and is referenced as a line item in an accounting system. However, virtual currencies, as of this date, remain in the virtual world. I suspect this is going to change slightly as virtual currencies become exchangeable  amongst themselves and consumers demand the ability to take their currency to another site or game property. Facebook credits are a defacto standard within Facebook and Facebook is not allowing exchanges or transfers between currencies right now. However, I suspect this is going to be challenged as unfair resulting in a potential anti trust or  monopoly claim requiring them to allow for cash out and exchange. This will require social gaming companies  to have exchange rate virtual currency systems,  cash equivalent calculations for  virtual currency and the ability to redeem virtual currency from a virtual currency depository. This all looks very much like the only gambling world.

Code Quality And Speed To Market - Social game companies are notorious for poor quality releases and bugs in their game releases. They do this because their is a higher value placed  on new content releases relative to the quality of  the overall game experience. This is tolerated because of the perceived notion that the games are for fun and not for money. This practice becomes less tolerable as players invest larger amounts of virtual currency into games changing the value proposition for players.

Conversely, Online gambling companies have to be very careful about releasing code that results in incorrect calculations, game outcome flaws, unannounced outages, etc. This is the case because of the amount of money involved and the need to get it right and having a system running all the time.  Their new content releases are less frequent then in the social gaming world not because they have poor developers but because the quality standards are higher based on consumer perception of the value proposition..

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Niche Markets And Profitability - Online gambling companies have the ability to address comparatively tiny markets relative to casual and social gaming companies and still make money.  Social and casual gaming companies struggle with profitability even at the high usage numbers they experience. They do use a number of monetization methods to get to break even. However, their player numbers still have to be very high to achieve profitability. Social gaming competition has already gotten to the point where mass adoption of a single game is very hard( expensive)  requiring social and casual game companies to begin to figure out how to carve out small market segments and make money off of these markets. Gambling companies make games specifically for niche markets that have the potential for generating enough revenue to justify the games development. This goes beyond language localization. Gambling companies also look at cultural differences that impact user interface design and preferences of players. If you can successfully design a game that is truly unique and specialized for a market you can acquire a significant percentage of market share over companies that genericize their games . The social gaming companies might take a look at how the online gambling companies are achieving this and try and copy their techniques.

The online gambling operators are doing many things very well and better then the social game companies. The gambling companies are also very familiar with a regulated world and know how to successfully compete in a regulated environment. Social and casual game companies need to prepare for the day when their world looks very similar to the online gambling world taking some advice from the online gambling world may be a good idea. 

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.

Why Is Social Gaming So Important For Online Gambling Companies?

I had the pleasure of participating in a GIGSE panel discussion this year where I was asked to comment on the role of social gaming in the context of the potential legalization of online gambling in the US.

I indicated that social gaming should be a critical strategic consideration for any company interested in taking advantage of the future prospect of legalized online gambling. I also implied that even if US online gambling is not legalized or takes a long time to happen a serious look at  social networks and social games should be a part of any gaming companies strategy.

I pointed to the success of Zynga as an example of how a social gaming strategy has created perhaps the most successful online gaming company to date.

Despite Zynga's  impressive numbers many of the people in the audience dismissed Zynga or any other social gaming company as irrelevant and inconsequential relative to online gambling. The reaction I received from many attendees was a bit shocking to me.

The argument's they used to support their position are as follows.

1.) The majority of social gamers are under the age of 18.

2.) The social gaming experience is different then "real" online gambling.

3.) There is no money in social gaming. Revenue per player is very low.

4.) There are only a  "few" high virtual currency transactors in social gaming.

5.) Zynga's lead generation to online gambling operators has been very poor.

6.) Social gaming companies do not know how to operate real gambling sites.

Although some of these arguments have merit others do not or are taken out of the context of the intricate online gaming ecosystem.

The following are items online gambling companies should take into consideration before they completely dismiss social gaming.

1.) Average Age Of Facebook Players -Just about everyone has a Facebook ID. The average age of Facebook members is now 35 years old and getting older. The 18 to 25 year old age group is a significant portion of Facebook membership. This is the perfect age group profile for online gambling. If you have every played in Zynga poker you will see (their pictures) that many of these players are the traditional age group for online gamblers.

2.) Social Games Are Different For Online Gambling Games - Yes the social game experience is different from an online gambling experience. Of course it is, because online gambling is not allowed in Facebook. Companies like Zynga have shrewdly decided to offer a game experience that matches the social environment. This is one of the reasons why Zynga has 250 million players and online gambling companies are not even close to these numbers.

3.) Social Games Will Change If Online Gambling Is Legalized - If online gambling becomes legal in the US and Facebook embraces it (which they will in a clever way) online gaming content in Facebook will change making it more gambling like. The gaming companies will not change their current casual offering. Instead they will offer a different game experience and upgrade casual gamers into the gambling operations. Even if the conversion rates is in the single digits the numbers are astounding. Also, Goolge, Apple, Yahoo, Amazon, EA, etc. and other major online companies that have large numbers of online profiled transactors will create online gambling games and seek to convert their current visitors to online gambling.

5.) Making Money In Social Gaming -Many online gambling companies that come to me to help them understand the social gaming world are appalled at the relatively small monetary transactions per player. They become discouraged by these numbers not realizing that if a gaming company can create a gaming application that has a viable social component and a good social network marketing strategy the shear numbers of players will make up for the lower transactions per player. No this is not an easy thing to do. However, if successful, social gaming can begin to pay for itself.

In contrast to online gambling companies, social gaming companies use a variety of game "monetizationr" techniques to make money from social gaming. In gaming advertising, virtual currency, virtual goods, lead generation for other social applications, etc. In aggregate these numbers start to add up. Virtual currency and good sales alone are climbing to rates equal to and exceeding online gambling revenue. It is estimated that the virtual world will be generating 5 billion USD per year in the not too distant future.

6.) Player Profiling And The Online Gaming Ecosystem - Treating  online gambling and social gaming players as distinct and separate individuals is not realistic given the large numbers of players engaged in social gaming. Inevitably there is an intersection between these two groups. In the past two years social gaming companies with the help of third party companies specializing in social network profiling have begun to take a look at all of the Twitter, Facebook, Google search, etc data to decipher the likes and dislikes of people on the web. Evaluating and making sense of this data is not easy. However, some progress is being made to provide hints as to the propensity of an individual to buy a certain product, play a certain game, travel to a specific destination, etc. There is still much work to be done to in this area and privacy issues abound. However, with the increasing amount of information we are all contributing freely to the Internet there will be a time when  profiling will get to a point where we can successfully to move players to and from different environments with a high degree of accuracy and increased moneitization.

7.) Marketing And Player Acquisition On The Social Web - An online gambling company has to learn how to market to players within the social web even if they believe that social gamers are not the target audience. Everyone is in a social network of some kind and online gamblers are no exception. Developing a productive and effective social networking marketing program is non-trivial and requires a very different approach then tradition web, affiliate, e-mail, physical, etc. marketing. Ironically, social games are one of the most effective ways to market products and services because they do have the potential to get close to a truly viral application. This is the holy grail of social marketing and and should be a goal for online gaming companies even if they never launch a social game of their own.

8.) Social Games As A Separate Business Unit - At the ICE conference in London this year I had the opportunity to help organize a special session on social game monetization.  It was revealing because it came to light that traditional gambling companies like 888 and BetWin are creating separate social gaming business units not related to their gambling properties. These companies realize that the future of online gaming is within social networks. This is where the growth and innovation will be. They want to be in it and be just as successful as Zynga and other high profile social gaming companies.

It is clear that  many online gambling companies do not fully understand the importance of  social networks and social games in the context of online gambling and distinct social gaming applications. Some of them do and are taking steps to explore how to be successful within social networks and to launch social games that can stand on their own taking advantage of the social graph. This space is certainly evolving quickly making it more difficult to get into the social space and establishing expertise and brand awareness. Despite this a presence in social networks is becoming mandatory for any company wishing to maintain market share and to grow. The sooner an online gambling companies embraces this reality the better off they will be.

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.

2010 ICE Gaming Conference Review From An American Perspective

I attended the ICE conference in London after a 4 year hiatus to determine what had changed in the online gambling world since my last visit. I was especially interested in how European operators had adjusted to the social gaming and social media phenomena that has taken hold in the US. The following is my assessment of what I believe are the differences, advantages, disadvantages and similarities between the gaming/gambling approaches in the US and Europe.

Social Gaming - Social gaming has taken the US by storm with all kinds of games appearing in Facebook, IPhone apps and other social networks. These games are light weight, easy to access and usually very easy to understand. They have changed the conventional view of what a game is with new approaches to game design, mobility, availability, community integration, social media marketing and content. These games are attracting millions of players on a regular and steadily increasing basis. At the conference I saw very little activity by European game developers or operators to match the social gaming environment. For the most part European gambling/gaming developers are sticking to the classics with some experimentation in "ball" and lotto style gaming. They are starting to build games for a web and mobile audience to facilitate fast download and easy access for online players. The games have improved from a graphics perspective. However, their lack of social media/network integration and "fun" factor still does not allow them to reach the player usage levels of social gaming operators in the US.

Game Monetization - The US and China are aggressively monetizing games through the sale of virtual currency and virtual goods. The popular Zynga poker game in Facebook is generating millions of dollars a month in the sale of virtual poker chips. US online game operators are also using targeted advertising within games to monetize their high number of free players. In some cases European operators do monetize free players through advertising. However, the concept of "micro-transaction" sales of virtual currency and virtual goods was noticeably absent.

European operators continue to monetize their players through wagering, pools, bets, etc. These methods yields a much higher revenue per player then the social gaming sites. However, the number of players participating on these sites is relatively low compared to social gaming numbers. The American gaming companies have still not figured out how to take traditional gambling bets on their properties despite the fact that many of their social gaming players reside in jurisdictions where online gambling is legal.

Age/Location/Identity - Determining age, location and identity is big business in the European gaming community with well established and respected mult-national companies offering services to gambling operators. This form of player "profiling" is noticeably absent in US based "alternative method of entry" (subscription), skill gaming and free play US gaming models.

The age, location and identity vendors are still using government or credit scoring databases as their source of profiling leading to limitations in the depth, breath and refresh rate of player profiles.

To counter these deficiencies companies are looking to promote "net identities" that encourage players to establish their identities for the purpose of facilitating online commerce and for safety purposes. They were also very receptive to new profiling techniques being developed by a cadre of startups in the US. These new companies are using the myriad of social networks combined with some sophisticated information capture and reasoning techniques to develop extremely rich and up to date player profiles.

Social Media Marketing - In the US traditional forms of marketing such as e-mail and advertising are being supplemented or replaced by social media marketing. US businesses are using social network sites such as Facebook, Twitter, Linkedin, MySpace, YouTube, etc. to reach out to consumers and players. It is no longer adequate to only have a Facebook application. All of the social media tools must be used in tandem to maintain constant contact with the ever growing social media audience. New companies such as Involver.com are helping businesses and individuals pull all of these services together to provide instant and viral exposure for individuals and companies.

The European gambling companies seem a bit beguiled and frustrated by this emerging wave of marketing and support products and services. They believe their "gambling" status prohibits them from using these tools. In fact, this is not true providing they understand their place in the gaming ecosystem.

Payment Processing - ICE demonstrated that the European gaming payment processing industry is well developed. They offer a range of products and services for gaming operators and have easy and well understood interfaces into their product offerings. These businesses have matured over time adding mobile payments and pre-paid cards. This is in stark contrast to US payment processors that are confused about the position of perfectly legal online gaming models in the US.

This does open the door for European payment processors to process legal micro-transaction, skill gaming and alternative method of entry (sweepstakes) transactions for legal US gaming operators.

Gaming Law - Ironically, European gaming law is starting to look very much like US gaming law. In the US gaming law is a state's rights issue and not a federal responsibility. The Wire Act is an exception crossing state boundaries. The 2006 federal gambling legislation is in place to support states that consider " online gambling" to be illegal.

The EU appears to be moving in the same direction allowing individual countries to establish their own gambling laws.

The one subtle difference is that the EU and US federal government have different overriding philosophies regarding online gambling. The US government is generally against allowing gambling in the US. The EU overriding mandate to allow free trade amongst member countries inherently supports gambling across country borders.

The Emerging Online Gaming Ecosystem - It appears that an online gaming ecosystem is beginning to take shape. This system combines free play, micro-transactions, traditional gambling transactions, net identity, payment processing, social medial, mobile gaming and social networks in a single interdependent system. Social networks and social media are greatly responsible for breaking down international barriers, creating large numbers of online players and offering a wide array of game and marketing choices. The European, US and Asian(China and Korea) gaming related operators and vendors are all potential very big beneficiaries of this phenomena providing access to large numbers of players leveraging a variety of monetization
options.

The ICE conference demonstrated that the European gaming community has some pieces of this ecosystem figured out but does not have the complete picture or the tools in place to take full advantage of it. In their defense the US operators and vendors do not have all the answers either making collaboration between US and European gaming vendors and operators a likely future direction. It will be interesting to see how much progress has been made when I attend next years conference.