The DeanBeat: The right strategies for the social casino gaming bubble

How do you operate when you’re inside a speculative bubble?

That’s an important question to consider when you look at all of the companies in the social casino gaming and online gambling business. Those companies are aware that both disruption and some irrational exuberance are happening, but they have to find the right strategy to either ride the bubble out as in inflates or be ready to land on their feet when it pops.

I’m contemplating this question while flying over the Atlantic Ocean as I make my way to the Social Gambling Conference in London. I’ll be giving a talk there about who is being clever in this emerging gaming market, and this is an amended and abbreviated version of that talk.

Social casino games have been hot, and they’re poised to disrupt both gaming and gambling. There are more than 100 such games on Facebook now. The biggest of them is Zynga Poker, a 5-year-old game that is still a cash cow for the company. In this game, you can buy virtual poker chips and play poker with your friends, but you can’t cash your winnings out. If you could cash out, that would amount to online gambling, and that’s illegal in most U.S. states. But that could change, and that possibility has fueled the bubble.

A year ago, the U.S. Justice Department ruled that online gambling wasn’t illegal after all, provided that states approved laws that expressly permitted it. By January, slot machine maker IGT bought DoubleDown Interactive, a 70-employee social casino gaming firm on Facebook, for $500 million. That seemed crazy, but IGT and other gambling companies see social casino games as the “top of the funnel,” according to Playsino chief executive Brock Pierce.

In the spring, more than 700 people attended in the iGaming Summit in San Francisco, and we saw a big crowd at the GamesBeat 2012 conference’s social casino gaming panel.

Facebook games are free to play, allowing users to play for free and pay real money for virtual goods. That model draws a lot of people into social casino games at a very low cost, at least compared to the high cost of acquiring new real-money online gamblers. If social casino games draw in new players at a very low cost, some of those players will become online gamblers. And some of those players may visit land-based casinos. And some may become high rollers.

That’s the benefit to the casino companies, and it’s why companies such as MGM have teamed up with social casino gaming startup Playstudios. According to a survey by analytics firm Kontagent, about 82 percent of online gambling executives believe there is still room for them to play in social casino games.

But those casino companies and online gaming firms have been slow to create good social games. Zynga has disrupted them, with 33 million monthly active users for Zynga Poker on Facebook. DoubleDown Casino, by contrast, has just 4.8 million monthly active users on Facebook. On its own, without real-money online gambling, social casino games are already a $1.6 billion worldwide business, according to market analyst SuperData. And the percentage of people playing social casino games is on the rise.

Zynga is expanding in the other direction, launching social casino games that have given it a very large percentage of the social casino gaming market. It hired a seasoned real-money gambling chief, and it is preparing for the day when online gambling will be legalized again. In the spring, it will launch real-money gambling games in a partnership with real-money online gambling firm Bwin.party, which has a license for legal gambling in the United Kingdom.

The only drawback is that, to get to the market quickly and avoid lengthy regulatory reviews of its own games, Zynga may have to relabel Bwin.party games with its own Zynga brand.

Why is Zynga in such a rush? The company’s stock price is hurting, and it needs do something ambitious — because it makes a few dollars per user per month with social casino games, with a lifetime value for a paying customer of just a few dollars. By comparison, online gambling companies can make $300 per user per month. If Zynga can knock down the barriers between online gambling and social casino games and then wait for legalization to happen in the U.S., it can start collecting pennies in the Gold Rush.

But making games is not the only way to make money in the Gold Rush. Betable is selling picks and shovels to the gold miners. It is doing so by enabling social casino game companies to offer a real-money betting option when they play a casino game on their mobile phones. Betable has built all of the infrastructure and obtained the necessary licenses (currently in the United Kingdom) to authenticate players and check whether it’s legal for them to play a real-money gambling game on their phone based on their actual location. If the user passes all of the tests, then Betable will allow that player to play a real-money version of the social casino game. In contrast to many social casino gaming startups, Betable has a business-to-business platform that could very well succeed regardless of the pace of legalization.

Luckity, a division of Churchill Downs, wants to accelerate the Gold Rush, but it is betting that legalization could happen slowly. In the meantime, it is offering a suite of social casino games where you can bet real money in the U.S. It has done so by capitalizing on the federal laws governing horse racing. Because of a separate federal law, betting real money online in horse races is legal in the U.S. So Luckity has created a random number generator based on the outcomes of horse races that occur around the clock throughout the world. It then uses that random number generator to determine whether a player wins or loses a bet in a social casino game.

That helps Luckity skirt the restrictions of the online gambling laws. The drawback is that when you play a slot machine game and bet real money, you might have to wait minutes for the outcome since there isn’t always a horse race happening every minute of the day. That will introduce delays that may frustrate players. The player thinks he is playing a real-money social casino game, such as a slot game. But in reality, he is betting on a horse race.

Other companies see the risks of the overcrowded casino game market, and they’re moving into the social sports-betting market, hoping to capitalize on the “second screen” trend, where users watch sports games and make bets with their friends on smartphones or tablets. Each of these tactics is a clever way to deal with the fact that there is a solid but melting barrier between gaming and gambling.

There are plenty of hurdles that could pop the bubble. Legalization may not happen in the U.S., given the concern that many people have about how addictive games are. Game developers may not want to design games that promote the “sinful” entertainment such as online gambling. And users might very well decide that playing social casino games for fun is more attractive than playing for real money.

Those factors could put practical limits on the business that social casino game companies can undertake. Whatever happens, whether the bubble pops or not, the companies with the right strategy and flexibility will win.

Disclosure: The Social Gambling Conference paid my way to London in exchange for a speech. Our coverage of the issue remains objective.