What happens in CityVille stays in CityVille—or so social game maker Zynga (ZNGA) hopes. The San Francisco company and its rivals have long used social networks to sell virtual goods for real profit. Now Zynga wants to bring Sin City-style wagering to the online masses. "It's a natural fit," Chief Executive Officer Mark Pincus said at a conference in February. Gambling on social media sites "is going to be mind-blowing."
Social gambling, a collision of real-world betting and Internet games, could soon become America's favorite pastime. In December, the U.S. Justice Department said a 1961 federal law that many scholars believed barred all forms of online gambling applies only to Web-based sports betting. (Online casinos, though, still need a license from any state where they want to operate.) Since then, a half-dozen states, including California, Nevada, and New Jersey, have started considering online gambling legislation.
Those new laws could allow Zynga and other game publishers to add wagering and cash prizes to everything from race-car games to shoot-em-ups. Players of Activision Blizzard's (ATVI)World of Warcraft might challenge rival clans to cash-prize tournaments, while moms playing Zynga's FarmVille could place bets on who will be the first to get a tractor upgrade. Researcher H2 Gambling Capital estimates online gambling will be worth $30 billion globally in 2013, with $4.5 billion of that in the U.S. "It's easy to see why everyone's getting so excited about it," says Ken Murphy, a vice president at GameHouse, a Seattle company that creates games such as UNO Boost for Facebook and other sites. Murphy says that while GameHouse has considered betting games, it would be too expensive for his company to deal with the technology and regulatory hurdles.
Pointing to the "fancy watch" he purchased after winning a few rounds at a casino in Las Vegas, a jeans-clad Pincus suggested during the Feb. 29 tech conference that poker and slot machines are just a small part of what video-game companies can do. Pincus hasn't detailed any plans, but Zynga's most popular offering is Texas Hold 'Em poker. In 2009 the company held a tournament in which the top two winners got free trips to Las Vegas (which was legal because participants didn't need to wager their own cash to play). Zynga has "an enviably large database of poker players," says Louis Castle, chief strategy officer at Shuffle Master (SHFL), a Las Vegas company that sells both real-world and online gambling technology. "Presumably some of those people will want to play for some money at some point."
Producers of console games are considering poker and other forms of gambling as a new source of revenue to offset declining sales of games for machines such as the Xbox, Wii, and PlayStation. Electronic Arts (EA), the maker of Madden NFL, Medal of Honor, and dozens of other games, in March announced a two-year deal for rights to the World Series of Poker brand for online and mobile games. The company last year also introduced a technology that it says can be used to handle wagering. Gambling on the Internet is "a blue ocean opportunity. So yeah, we're going fishing," says Frank Gibeau, president for EA Labels. Activision declined to comment, though at least one gambling company says it has discussed a venture with the game maker.
The game companies will face plenty of competition from gambling heavyweights. Casino operator Caesars Entertainment (CZR) last year purchased the maker of Slotomania, a Web slot machine app with 6.7 million monthly visitors, for $80 million. In January, Caesars used the Slotomania development team to launch Caesars Casino slots, roulette, and blackjack on Facebook. International Game Technology (IGT), the world's largest maker of slot machines, in January paid $500 million for Double Down Interactive, which runs a Facebook poker game that has 5.6 million monthly users. "There are a lot of players at the start line, ready for the gun to go off," says Patti Hart, International Game Technology's CEO. She says her company has held talks with Activ-ision, Zynga, and others about partnerships "to bring the two separate universes together."
Though Pincus has suggested he's open to collaborating with casino operators, the buzz at the recent Game Developers Conference in San Francisco in March was that Zynga's social gaming platform, Zynga.com, could be a prelude to the introduction of betting games on the site. Zynga, which makes money by persuading players of its free games to buy add-ons such as imaginary chickens or skyscrapers, would be less reliant on new hits to keep casual gamers interested. Gambling could add $640 million a year to Zynga's revenue, Lazard Capital Markets (LAZ) estimates. The company declined to comment.
While game makers and gambling companies are clearly betting that they'll make big money online, some in the industry fear that the Justice Department decision will result in a patchwork of regulations. At least five states have introduced legislation that would allow Web poker, but only against other residents of the same state. Some states are considering laws that would favor Native American casinos; others do not address offshore gambling operators, critics say. "We believe federal regulation, with states getting the right to opt out of online gambling, is the best solution," says Frank Fahrenkopf Jr., president of casino lobbying group the American Gaming Association.
And as state officials step in, game makers could face unexpected regulatory restraints such as age restrictions or limits on the time a player can spend betting. "They're going to find their creativity hitting a brick wall," says John Acres, founder of gambling industry consultant Acres 4.0. "Regulation does not like creativity."
The bottom line: With the global online gambling market poised to hit $30 billion by 2013, social game makers are preparing to offer betting.
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