By Warwick Bartlett, GBGC Chief Executive
This article first appeared in the July 2012 edition of the World Online Gambling Law Report
The full edition of the latest WOGLR can be found here.
Following the IPO of facebook and the previous listing of Zynga gambling companies have seen the market capitalisation of both and are wanting to capitalise themselves on this extraordinary phenomenon.

Zynga at the time of writing has a market cap of US$4.4 billion and Facebook an unbelievable US$ 57.8 billion making Facebook about half the size of Shell oil. Zynga claims to have 292 million monthly active users in 175 countries and Zynga poker serves 38 million players per month.
According to a study published by Parks Associates, 135 million Americans played at least one hour of social games a month in 2011, up from 56 million in 2008. Zynga, derives 70% of its revenue stream from domestic, US Players.
Could it be that those 38 million poker players denied the opportunity to bet legally for real money are turning to Zynga? I think not. They are a different type of player to the real money gambler. 

This vast number of players has become attractive to the egaming industry that is burning billions of dollars on advertising competing in a saturated market. Theoretically it should be relatively easy to convert Zynga players to real money play. I did say theoretically.
GBGC’s Research Director, Lorien Pilling draws analysis from Dan Arley the behavioural economist. Arley came up with a theory on the “anchoring” of prices among consumers and how it affects the prospect of a purchase. He gave an example of how people are completely fine with paying US$4 for a latte, but hesitate to pay US$1 for a smart phone app. In their minds, the US$4 is a price anchored for a similar beverage, however, in the case of apps, it is zero, thus the balking.
Applied to social gaming, a vast majority of casual, social players of free-play casino games on Facebook would likely react the same to the idea of investing higher sums into their activity. 
The reasons behind this are: 
• they derive pleasure simply from engaging in the activity and its intangible rewards (points, levels, prestige, interaction with friends), 
• they are not “in it for the money”, i.e. they do not play expecting a winning cash, 
• their “anchored price” of gambling has been set at zero. 
One may argue that these casual players would not even be the object of conversion attempts. However, it is unlikely that even the paying customers would present a viable source of revenue.
According to the above-mentioned Parks Associates study, players who spend money on Facebook games average about US$29 a month in spending. A sports betting customer will wager on average $65 in a bet. It is questionable if $29 is an amount around which a sustainable business model could be built. With a high enough volume of players, perhaps, but it is unlikely such demand would be generated. 
Social betting games so far have not fared that well: 
• 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. 
• Berlin-based Crowdpark’s Bet Tycoon (2011) was an attempt at social betting for virtual currency using “Dynamic Betting” technology for real-time wagering akin to stock exchange markets. Social gamers failed to catch the bug and the developers later admitted that they failed. 
The attempts to spark gamers’ interest by offering direct betting among friends failed as well: 
• Betfair’s TaiKai (2008) was a short-lived attempt to integrate challenges and player-to-player competitions into predicting the results of sports events. 
• Crowdpark launched another betting game called AnteUp focused only on betting among friends on any topic under the sun in February 2011, but has peaked at only 700 MAU in March before going down to 300 in April 2012.
In spite of this Zynga at the time of writing, said it was about to enter a partnership with Wynn Resorts. 
The media claim that Zynga is putting faith in “significant revenue potential in moving from virtual to real-money wagering”.
What would the conversion rate be for Zynga’s play for free players to real money gamblers? Many say it will be significantly less than one percent and those players will be gambling in small money.
Which leads us to ask the question why are so may gambling companies embracing social gaming?
One type of operator that could perhaps secure footing on Facebook in future are lotteries. 
At the time of writing, the Illinois Lottery had already gone live with its pilot of selling lottery tickets via the Internet, the first such feat in the US. Several states are mulling over the same and state-by-state regulation of online gambling in the US seems to be how things will play out.
This presents a good opportunity for lotteries as they could relatively easily plug in their offerings into Facebook, if Facebook allowed it. People could then easily pick their lottery numbers and scratch virtual instants.
Lotteries would also benefit more from the viral nature of sharing on Facebook. While the casino games are a more private activity, people would be more open about sharing the news of their lottery ticket purchase.
Another feature going for the lotteries is the relatively low spend per player that would translate well in the already low-spend world of social gaming.
The above-mentioned advantages could also apply to bingo and it seems Zynga – knowingly or unknowingly – already tapped into that with the recent launch of Zynga Slingo and the imminent release of Zynga Bingo. 
In this light, the recent acquisition IGT made of Double Down Interactive is not as naive as it seems at first – the machine manufacturer may be trying to cover all the bases. In the event that lotteries and bingo make it to Facebook and other social networks in future, IGT would have the technology and know-how to quickly offer the underlying platform to lottery and bingo operators.
Playtech too finally revealed it is preparing to enter the social gaming arena in April 2012. 
Playtech’s deal is a non-binding agreement for purchase of unrevealed social gaming assets from businesses in which Playtech’s principal shareholder is also invested. The main part of the deal relates to the acquisition of a B2B social media platform for social casino, poker, bingo and rummy with a 20% stake in a B2C social gaming operation attached.
The non-binding nature of the deal proves that Playtech is still awaiting sure-fire telltale signs that the investment into social gaming is justified and is trying to ensure the best possible starting position; so far the large lottery software providers such as GTECH, Intralot or Scientific Games have not made any moves into the social gaming echelon.
Interestingly, the main part of the Playtech deal involves a B2B platform, which perhaps indicates that social gaming is potentially more lucrative for the businesses which offer the underlying technology, software and solutions, rather than the consumer-end providers looking to yet enter the field.
Bwin.party the largest online gambling group announced in May that it is to spend US$50m over the next two years to broaden its reach into social gaming. 
Barak Rabinowitz, head of Bwins social gaming strategy told the Financial Times, “Most players never pay anything to play the games – 98% in a good game. Two percent do pay, and they are paying with real money to buy credits that allow them to accelerate faster through the game, use special features or send gifts to their friends”
However two percent of 38 million (population of Spain) is 760,000 paying customers and even though the amounts are small it is a lot of money as was demonstrated by Infinite Edge Gaming in an article on March 2011.
Their analysis was that Party Gaming earns roughly US$15 million a month in rake revenues. 
To match that Zynga Poker has to squeeze, on average, forty cents out of each session. That’s equal to engaging in a couple of hands of 25/0.5 NL depending how rake is distributed.
The cheapest official Zynga chips purchase was US$2.30 for $150,000 chips. So if every fifth Zynga session leads to a player going broke and reloading, then Party Gaming revenues are matched according to Infinite Edge.
So forget about converting social gaming’s play for free or pay little to real money players when you can run social gaming as it is which is probably why BwinParty are spending $50m over the next few years on social poker, betting and casino.
Converting play for free customers to gamble for money players will not please the anti-fun lobby. The industry would be pilloried for enticing people to lose their money so for the time being it is probably better that the two models run separately.