Betable’s potential jackpot: Bringing real gambling to social casino games

It’s about time somebody fused the worlds of games and casinos.

Betable hopes to disrupt a hot segment of the game business by breaking down the walls that currently separate real-money online gambling and social casino games. If it works, the San Francisco startup could resuscitate the slumping social game industry and fuse it with real-money online gambling, which has a much larger market.

London-based Betable’s “bet” is to create all of the infrastructure, payment system, licenses, anti-fraud procedures, and verification needed to prove whether a given consumer can legally play an online gambling game in given location. Then it will make that platform available to developers through an applications programming interface (API) so they can embed it in their new or existing social casino games. And presto, Betable’s online gaming system will automatically be integrated into a game.

“We’ve found a way to get the social game companies into the gambling market in a way that is disruptive,” said Christopher Griff (pictured above), the chief executive and founder of Betable, in an interview with GamesBeat. “This is a tectonic shift.”

If you play an online social casino game, for instance, you’re not allowed to win real money in the game if you live in the U.S. You can pay real money for virtual currency, but you can’t win real money because you are physically in a location that does not allow it. The problem for most online casino game companies is that it is hard to verify someone’s location. As a result, most of those companies don’t try to skirt the law and simply avoid real-money online gambling altogether.

But Betable has figured out how to solve this problem. Its chief technology officer is a location expert. So the company can verify a person’s exact location. When that person plays a social casino game on the web or on a mobile phone, Betable asks them if they want to play with real money. If the person says yes, then the company takes over and moves the game session to its servers, which are in territories where gambling is legal, such as the United Kingdom.

In the U.K., Betable has a license to operate online gambling on a worldwide basis. That’s an important detail that we’ll explain in a bit.

Betable has the technology to verify where a user is. It has anti-fraud technology that it can use to overcome someone who “spoofs” their Internet protocol address, or fakes their location. It does so by checking into a variety of records such as credit reports, bank accounts with real addresses, voting records, and other information. If the location is spoofed, it rejects the user for real-money gambling. But if the user passes and it is legal to gamble in their actual location, then Betable allows the gambling to take place.

Here’s one of the clever tricks in dividing the gambling process: The developer creates and builds the front end of the game. Betable’s servers handle the back-end processing. The user sees the front end, such as a slot machine. They bet money and play the slot machine. The game turns over this information to Betable which then calculates the result of the slot machine play. If the user wins, Betable informs the game of that and credits their account. If the user loses, Betable deducts money from the their account. Betable handles the payment processing by itself, Griffin said.

This makes Betable’s platform universal. Any game can be plugged into its applications programming interface (API) and converted into a real-money gambling game. Betable can handle all sorts of games including Bingo, card games, and slots. The game developer simply tells Betable what type of game it has built, and then Betable spits out the right result. Betable also makes it possible to create new kinds of gambling games through custom mechanics. An example: In a horse-racing game, you could pay real money for virtual goods to raise a proper horse. Then you could enter that horse in competitions and bet real money it would win. If it does, you collect real gambling winnings.

The significance of Betable’s system is huge. As of now, no other company has both a license and the technology to help the entire social casino game industry convert its titles from virtual currency games into real-money gambling games. The conversion process is painless, and the game companies can use Betable to stay within the constraints of territorial gambling laws.

Here’s where the economics matter: Typical social game companies make 10 cents to 20 cents on average per paying user in a month. For Zynga, about 2 percent of its users pay real money for virtual goods, and those paying users spend around a couple of bucks a month. That is why Zynga needs a massive number of users to make decent profits. But real-money gambling players spend $99 to $200 a month on poker games, according to market researcher Playtech. The lifetime value of one of these poker players is about $1,800. That’s a huge difference.

If the social casino game companies can convert some of their players to real-money gambling — in the territories where it is legal — then they could make a huge windfall. Zynga is already a billion-dollar company with virtual goods revenue. If it converted to real money gambling, its revenues could shoot upward.

Social games generate around $7.3 billion in annual revenue, Playtech says, while online gambling companies generate $32 billion worldwide, and the casino industry generates $426 billion. By poking holes in the barriers between those industries, Betable enables social game companies to get access to the revenues in the much larger markets.

That’s why Zynga’s stock price rose earlier this year. That’s because there’s a chance the U.S. will legalize real-money online gambling, which has been banned here since 2006. In December, the Justice Department reinterpreted a law to allow skill-based online games, so long as states specifically allowed it. Nevada has passed a law to that effect, and Delaware is on the verge of doing the same. The promise of tax revenues from online gambling will likely spur other states to act. That means that U.S. consumers, who have a lot more money to spend than other consumers around the world, may one day be able to play real-money online gambling.

Even if online gambling is not legalized in the U.S., Betable has a big overseas market since 30 percent to 60 percent of social game players are outside of the United States.

“You could flip a switch and monetize this user base,” Griffin said.

This chance has spurred an investment frenzy in social casino game startups. IGT acquired social casino game maker Double Down Interactive, a firm with just 70 employees, in January for $500 million. Many companies are in a race to create vertically integrated gambling companies, with social casino games, real-money online gambling, and land-based casinos.

Betable itself has raised its own seed round. Today, the company has received an undisclosed amount of money from 25 investors including Greylock Discovery Fund, FF Angel LLC, True Ventures, Dave Morin (ex-Facebook employee and current founder of Path) and Yuri Milner, the Russian investor who took big stakes in Facebook and Zynga. Those are big-name supporters who believe that Betable has a shot at raising the average revenue per user and average customer lifetime value for social games.

Among the other investors are CrunchFund (Michael Arrington’s fund), Marc Abramowitz (first investor in Palantir), Scott Belsky (founder of Behance), Auren Hoffman (founder of Rapleaf), Sean Knapp (founder of Ooyala), Howard Lindzon (founder of Stocktwits), Matt Ocko (angel investor in Zynga), Joshua Schacter (founder of delicious), and Arjun Sethi (former CEO of Lolapps).

Betable is now recruiting developers to use its licensed gambling operation platform. Griffin believes that his company is bringing true innovation to the space and knocking down the barriers between social casino games and real-money online gambling. Griffin believes that the casino industry, while enormously profitable, has been stagnant and is ripe for disruption.

“This gambling industry has not had innovation for a long time,” Griffin said. “They use somebody else’s technology and they regurgitate games that have been around for 200 years. But the industry has multibillion-dollar companies.”

Part of the reason the gambling oligopoly exists is that it is hard to get gambling licenses. Betable has secured a license from the U.K. that is valid on a worldwide basis for online gambling. It took Betable two years to secure that license.

“FF Angel invested in Betable because it substantially reduces friction between businesses and gamers in a poorly structured market while maintaining high levels of compliance and accountability,” said Brian Singerman, a partner at Founders Fund, the firm that manages the FF Angel fund.

“We believe real-money gaming will make the social games industry more successful and has the potential to catapult games that offer it to the top of every app store on the planet,” said Tony Conrad, Partner at True Ventures. “While awaiting the US’ legalization of online gambling, which could take years, the overseas markets represent billions of dollars in opportunity for developers located anywhere in the world. Betable is in a great spot to help those developers participate in this emerging market.”

Betable has partnered with 30 developers in its alpha testing program, and now it will accept a number of new partners in its private beta program. Griffin will participate in a panel on the hot social casino game market at 2:30 p.m. on Tuesday at the GamesBeat 2012 conference. Betable will also hold a hackathon in San Francisco on the weekend of July 27-29. Betable has 15 employees, including a development team in San Francisco.

If Griffin has his way, soon, hundreds of game developers could be offering real-money online gambling on web or mobile platforms to their users in a matter of months.

“We have the opportunity to shake things up,” Griffin said.

GamesBeat 2012 is VentureBeat’s fourth annual conference on disruption in the video game market. This year we’re calling on speakers from the hottest mobile, social, PC, and console companies to debate new ways to stay on pace with changing consumer tastes and platforms. Join 500+ execs, investors, analysts, entrepreneurs, and press as we explore the gaming industry’s latest trends and newest monetization opportunities. The event takes place July 10-11 in San Francisco, and you can get your tickets here.