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Regulation Will Ruin Social Gaming

Regulation Will Ruin Social Gaming

Attending the World Online Gambling Law Report’s Social Gaming conference in London last month, one of the most striking things that GBGC took from the discussions between lawyers, regulators, and operators was just how exposed the social gaming business model is to any further regulation specific to the sector.

Social gaming – excluding real-money gambling that takes place on social platforms – is characterised as being run on large platforms of mass users such as Facebook and ‘app’ stores; having a low conversion rate to real-money players; and a low revenue per user when compared to online gambling.

A lot of attention is focused on the number of people playing these games and the revenues that the likes of Zynga have earned from social gaming. But the model does not look so strong if the elements that have been applied to e-gaming are imposed upon social games too. Such elements might include: licensing by jurisdiction, independent checks on technical standards, and know your customer verification.

At present Facebook and Apple are acting as quasi-regulators of the social gaming sector, determining the requirements and approving what can be run through their platforms. But if individual jurisdictions begin to look at social gaming and regulate it individually then social gaming will face the same problems that have afflicted e-gaming. There are the increased licensing costs of complying with multiple regulations, different taxes being applied, and possible restrictions on the type of games that can be offered. All of this could restrict the liquidity, as it has done with online poker, and upon which some social games do depend. But any regulation of social gaming need not necessarily be done through the gambling regulator, it could fall within the remit of a country’s existing finance/banking regulators or more general consumer watchdogs.

Allied to regulation could be the requirement to have games independently tested for fairness, logic, and randomness if consumers are spending money to acquire items or upgrades that let them progress in a game. Again this could bring with it extra costs. Most social games have a short life cycle of interest and revenue generation and there is a need to continually launch new games or make extensions to existing ones. If each addition required external testing, the profitability of the model is lessened.

Most social games developers currently rely on information in a user’s Facebook profile to determine their age, gender, location etc. Given that Facebook wants to make it as easy as possible for people to create a profile the checks on a person’s identity are not rigorous compared with e-gaming. In August 2012 Facebook reported it had 83 million “illegitimate” accounts, about 8% of all accounts. This figure includes duplicate profiles (4.8%) and “undesirable” accounts (1.5%) “intended to be used for purposes that violate [Facebook’s] terms of service”. Again, if social games providers are required to independently verify a user’s identity before they can play a social game through Facebook the costs become prohibitive based on what it costs for a KYC check versus the likely revenue they will derive from a customer that converts to spending real money.

Games developers might argue that such regulation will not happen, or even that it does not need to happen because the sector can be self-governing. It is certainly true that gambling regulators are unsure what to do about social gaming at the moment and even whether it is their problem to deal with in the first place. But where there is money there is an interest in having a piece of it, be it from governments, regulators, lawyers, or charities. Online gambling knows this all too well. It was no coincidence that a lot of e-gaming’s current regulatory and operational travails started after PartyGaming’s IPO in 2005 which revealed publicly the full extent of the money being made.

The social gaming business model is not proven over the long term. Zynga, for example, has recently lowered its forecasts for 2012 based on its Q3 2012 performance. A report from Dystillr (Volatility in Zynga’s Core Genre, October 2012) claims that Zynga’s user engagement has fallen by 53% from its October 2009 highs (Oct 2009: 9.8 interactions per user, per month; Oct 2012: 4.6 interactions) . There is much discussion that Zynga is looking to real-money gambling to reverse its fortunes and a share price that has fallen 75% since its IPO last year. But at the same time e-gaming is looking in the other direction to try and pep up its own performance with social gaming. At present neither side would seem to offer the panacea the other is looking for.

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