11 Comments

Summary:

Game-maker Zynga is on the ropes and some think online gambling will give it a means to survive. But given that it’s late to the game and the messy laws governing American gambling, Zynga may have to fold its cards instead.

Poker
photo: Beto Chagas via Shutterstock

Zynga is screwed and its share price shows it.  The game maker’s shtick of selling virtual hay for virtual horses is looking more like an internet fad rather than a viable business model. Meanwhile, Zynga’s recent games have been a flop and its longtime ally, Facebook, is looking for new partners.

This sorry situation means that Zynga has been looking to gambling as a lifeline. Reports this week say Zynga spent around $75,000 on lobbyists last quarter in efforts to bring online gambling to California and its CEO, Mark Pincus, recently told investors that the company hoped to enter international gambling markets by the first half of next year.

For Zynga, gambling could be a way to replace revenue lost from the virtual sheep people are no longer buying. The problem, though, is that the company is late to the online poker table.

According to Chris Griffin, CEO of gambling hub Betable, the winners and losers in the internet gambling market are being determined very quickly and Zynga will be hard-pressed to catch up. Griffin points to the mobile launch this week of Big Fish Casino — a game that lets people gamble on their iPhone in places like the U.K. The presence of these rivals mean there could be little left for Zynga.

“Big Fish has a six to nine month head start on Zynga … It’s a false notion that gambling will save them because the valuable players are already locked up and there is loyalty there,” says Griffin, who adds that the current population of Zynga users are unlikely to become overnight gambling fiends.

Griffin has skin in the gambling game so his words should be taken with a grain of salt. Betable, which received a large seed-round of investment this summer (see disclosure below), provides back-end services like payment clearing and legal permits that allow developers like Big Fish to offer gambling in the first place. But that doesn’t mean Griffin is wrong about Zynga.

Even if the game-maker can get gambling up and running, possibly with the help of casino giant Wynn Resorts, it will still need customers. And for now those customers are in the hands of established gambling brands like Poker Stars or the upstarts like Big Fish. To compete in Europe and the U.K., Zynga will have to outspend the incumbents on marketing (impossible) or else offer cheaper rates — leading to the prospect of more revenue but minuscule profit. Meanwhile, Facebook is going its own way with gambling in Europe.

But what about America? Online gambling was illegal until last December when the feds said it could take place in states that pass a law to allow it. This could give Zynga a fresh playing field on home turf.

The problem is that the state by state approval process is a muddle. While bills are inching forward in places like New Jersey, the process is still tied in politics and red tape, meaning it could be years before online gambling is up and running. And even if some states do allow it, only a handful of them have large enough populations to ensure a reliable supply of players at an online poker table. Finally, will American gamblers gravitate to Zynga or, more likely, will they seek out familiar gambling brands like Pokers Stars?

The bottom line is that gambling may be a huge potential revenue stream but that doesn’t mean any of it will go to Zynga.

Disclosure: True Ventures is an investor in Betable and also in the parent company of this blog, Giga Omni Media. Om Malik, founder of Giga Omni Media, is also a venture partner at True. Story and opinions are my own.

(Image by Beto Chagas via Shutterstock)

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  1. There is one big mistake you are making: You are assuming Zynga needs rival traditional online gambling companies that simply supply only traditional online gambling games. Zynga is amazingly strong at four things other game companies are not: making their games social, making them lighthearted and fun to play, making the game’s mobile experience amazing, and quickly getting a huge user base for a specific game.

    Now let’s not focus on traditional online gambling just yet. If Zynga could allow real money betting on their hit titles like words with friends, draw something, …ville and the like, that could be a massive revenue stream. The mass market gamers out there like playing fun lighthearted games and if Zynga could allow real money stakes to some of these games Zynga could really start turning back around.

    1. Jeff John Roberts ryanoff Friday, August 17, 2012

      Thanks for your comment, ryanoff. I agree that Zynga is very good at some things — but I don’t think running a casino is one of them. The company does have a devoted fan base — but are fans of draw something or Farmville also gamblers? As someone who doesn’t gamble but like games, I just don’t think that user base will cross over.

  2. Biased article with very little justification of the points made apart from the fact that CEO of a sister company of the website said so … If only we could hold online ‘journalists’ to higher standards…

    1. Jeff John Roberts Viggy Friday, August 17, 2012

      Viggy, that seems like a bit of a cheap on ‘online journalists’.. As I note in the article, the skeptic is a rival CEO which means he’s hardly impartial.. But I just don’t see how Zynga becomes a gambling success

  3. A 9-month head start by Big Fish means… what exactly? Online gambling has been around for many years, especially in the UK. I have no idea whether Zynga will succeed, but it seems like this is a mature market where quality and good marketing can make a dent, not winner-take-all like social networking.

  4. Jeff – Zynga aint going anywhere. Startups need funding to survive. If states take their time to legalize (and license) gambling, Zynga has a much better position than others.

  5. I’m sorry to say but this article seems like nothing more than a PR puff piece for Betable. After 15 years in the online casino business I can assure you that Zynga has everything it needs to enter the real money gambling business head on. They will learn the thing or two they need to learn to run a successful gambling operation by hiring the best hands in the business, which will not be a problem given their cash on hand. Bottom line they have a huge database that they know how to use and players they know how convert and retain, they just need better games.

  6. Gideon Bierer Sunday, August 19, 2012

    no doubt that gambling could be a large opportunity for zynga — even an affiliate-only strategy could generate meaningful revenue. the ARPUs in online gambling are typically $500-1000 per year,with 30%+ going to affiliates. the US is clearly the largest single potential market opportunity, but timing of market opening is unpredictable beyond Nevada, and zynga’s participation options (licensed operator, licensed supplier, affiliate, JV partner etc) are subject to regulatory uncertainty. Given this reality it would make great sense for zynga to use regulated international online gambling markets (UK, Italy, Canada, France, Spain…) as pilots to refine its strategy and approach to the US. whether their organization and/or technology is able to effectively execute on such an approach remains to be seen…it is rare for major US technology companies to pilot major new strategies, especially those that require meaningful product development, outside the US…ROI calculations will always favor projects that can be monetized in the US as well as ex-US

  7. LOL, “too late”. Was Google too late because Lycos and Altavista had head starts? Was Facebook too late because Friendster and MySpace had head starts. One of the great lessons of the rise of the Internet has been the fallacy of first mover advantage.

  8. Very poor form, Jeff, using one of your own investment companies as a “credible source” and promoting their only customer along the way.

    The reality is that Zynga has a marketing asset that any regulated gaming company would kill to own.

    The flip-side is also true, regulated gambling delivers the reveune per customer that Zynga would kill to own.

    Zynga has pleanty of time to execute a regulated gambling strategy.

  9. “Online gambling was illegal until last December”

    Citation needed.

    FTP was shut down due to business shenanigans, and other gambling sites followed suit.

    Players have never been gone after, AFAIK.

    (BTW, I have never used online poker sites.)

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