At the recent Morgan Stanley conference on Internet gambling in London, Global Betting and Gaming Consultants chaired a panel on the issue of “multi channel gambling” and how new technology is changing the way people can gamble. One topic that garnered a lot of attention was that of social networking and the role that Zynga and Facebook might take in real-money gambling. In particular, how many of the millions of free-play (or games where credits can be purchased but no cash winnings are payable) players would convert into higher-spending real money players?

GBGC has recently read the opinions of behavioural economist Dan Ariely as to how consumers “anchor” the price of certain items and how it influences our decision to make a purchase or not. If Ariely’s reading of our behaviour is correct and can be extrapolated to gambling, it might suggest that the conversion of free-play players to real-money players will be a hard sell.
Ariely gives the example of how we are perfectly prepared to pay US$4 for a daily cup of coffee but balk at paying US$1 for an app for our phone.
He explains the purchasing decision as follows:
“We are anchored by the price of categories, so when we think about lattes, we compare only across beverages. When we think about apps, we only compare across digital downloads. Thus, when we think about buying a $1 app, it doesn’t occur to us to ask ourselves what the pleasure that we are likely to get from this $1 app — or even what is the relative pleasure that we are likely to get from this app compared with a $4 latte. In our minds, those two decisions are separate.” 

How does this purchase pattern translate to free-play gambling? 
Can we assume: 
•    Players of the free-play games via Facebook where there is no prospect of winning cash payouts are presumably gaining enjoyment from this activity. 
•    Winning cash is not their motivation, otherwise they would seek out real-money casinos, bingo rooms etc. 
•    For free-play players (who do not gamble elsewhere) the “price” of gambling in their minds has been “anchored” at zero/free. 
•    In the theory of behavioural economics, these players should, therefore, be resistant to turning their gambling activity into a higher-cost pastime (i.e. having a higher price) because it does not fit with the price anchor they have established for this category of activity. 
No doubt large marketing and incentive campaigns will be run to encourage “casual” free-play customers to switch to real-money play. But if a customer does not perceive gambling as an activity which should cost them money then the conversion rate will be low. Those players that do convert could be the type of player who takes a sign-up bonus and then stakes at such a low level (if at all) that their cost of acquisition is not recouped. There might be a small boost to the “new sign-ups” figure but it won’t be reflected in the profit. 
Early attempts at trying to combine social networking with betting and gambling have not met with huge success: 
•    888 Holdings (2010) paid US$12 million in cash for the Mytopia social games development studio in June 2010. In August 2011 it wrote down the full value of this acquisition “due to overall reduced expectation of income growth”. 
•    Betfair’s TaiKai (2008) was a short-lived attempt to integrate challenges and player-to-player competitions into predicting the results of sports events. 
•    Pikum! (2007) secured funding to create “a new kind of betting game created and played between friends online” but was unsuccessful and closed in 2009. 
•    Gottabet (2006) went through various incarnations in an attempt to create a viable means of bringing gambling and social networking together. It closed in 2010. 
Lorien Pilling, GBGC’s Research Director, commented, “International Game Technology has just taken a huge punt on social networking with the US$500 million acquisition of Double Down. Other gambling firms are also looking to “leverage the opportunities of social networking”, as they put it. But, however it is dressed up, it comes down to the fact that people have to spend real money in your casino or on your website to make it worthwhile.” 
Dan Ariely’s original article can be found here:
http://danariely.com/2011/12/25/the-oatmeal-this-is-how-i-feel-about-buying-apps/