As Zynga Eyes Gambling, Betable Offers Small Devs Some Action

7/25/12Follow @curtwoodward

Could those addictive crop-farming and city-building games on Facebook dispense real money someday? It’s coming, and sooner than you might think.

On Wednesday afternoon, amid a poor quarterly earnings report, social game leader Zynga said it plans to incorporate real-money gambling for players outside the U.S. next year. And, although the regulations are still not sorted out, the federal Justice Department has recently dropped its opposition to online gambling in the states, opening the door for even more expansion.

For small game developers, that means two things: There’s money to be made, but without some help, it will be hard to compete with big public companies like San Francisco-based Zynga (NASDAQ: ZNGA).

That’s the pitch, anyway, from Christopher Griffin, the founder and CEO of a company called Betable. Betable is positioning itself as the go-to middleman for online and mobile game developers who want to add real-money gambling features to their games, but don’t have the expertise to begin sorting out the legal thicket surrounding the issue.

Based in London, with an office in San Francisco, the startup says it can remove that roadblock by allowing game developers to simply plug their creations into the Betable system. All of the security, transactions, identity verification, and legal liability is handled by Betable, for an undisclosed share of the revenue. That control over the gambling engine is key—since Betable is the licensed one handling the gambling in the U.K., it doesn’t matter if the game itself is developed by a company in the U.S. The players, on the other hand, have to be from outside the states.

Griffin spoke Wednesday at the Casual Connect conference in Seattle, a huge gathering of casual game developers from around the world. The room was packed for his presentation, which came just after Zynga’s announcement that it was officially getting into online gambling next year.

You could sense some trepidation from developers in the room, with a few questions about how Betable would handle criminal behavior or even the seediness often associated with gambling enterprises. But there was also excitement.

The reason is pretty clear: Big money. Even without U.S. gambling opened up to online bettors just yet, the sector is getting some attention from major players in the industry. At the end of last year, casino operator Caesar’s bought out Israeli social game developer Playtika, reportedly for around $90 million. A month later, slot-machine company IGT had purchased Seattle’s Double Down Interactive for a whopping $500 million.

Mobile and social games can already be moneymakers, but they face big challenges in growing to a substantial size. That’s because the most typical business model sweeping the industry is a freemium setup that gives away the basic game and sells special character upgrades or other goodies. The idea is that, with a large enough free user base, the small slice of paying customers can add up in a hurry. Zynga, the maker of FarmVille, is just one example of a company prospering on such a model.

That makes it a game of scale, something that’s hard to do in the crowded environment. Griffin said the two biggest hurdles mentioned by the developers his company has talked with were distribution and monetization—topics that were in heavy discussion at the Casual Connect conference this week.

Online gambling, however, can help blunt those worries because it’s so much more lucrative than selling digital goods in a game. Griffin said that Betable’s research showed that the average monthly revenue per user of a typical casual game was $1, with an average lifetime customer value of just $2. All of that comes from a conversion rate of just 2 percent, which shows why game developers are going after “whales” who make up a big chunk of revenue.

Developers can carve out niches in that kind of environment, but it’s hard to get truly large, Griffin says. “It becomes pretty clear that if you’re not already a very big player in the space that the economics will never work for you,” he says “You will never be able to beat a Zynga or a Gree, because they have economies of scale.” (Gree is Japan’s largest social networking service, and a huge platform for games.)

Adding online gambling with real money at stake makes that average revenue number jump to $100 per user or more, Griffin says.

“Real money is an inevitability in the gaming space, period. Full stop,” he says. “If your competitors are doing real money and you’re not, they can outspend you 900 to one on user acquisition.”

Betable’s offer of legal, secure online gambling mechanics rests on its U.K.-based license, which also covers the company in other countries that offer legal online gambling. Griffin said it took two years and several million dollars to get the first license, and plenty of lawyers. “We have, unfortunately, more lawyers than we do employees at this point,” he says with a smile.

For developers, that means that Betable actually has to operate all of the backend services—it’s the legally designated gambling provider. Developers build what amounts to the shell of the slot machine, giving players something to interact with, he says.

But the possibilities go far beyond your standard-issue casino simulations. Developers could start baking bets and games of chance into all kinds of actions performed by players, which opens up the number of ways that Betable and its partners could collect cash.

“One could imagine a game like FarmVille, which is effectively a giant slot machine with levers all over the place,” Griffin says. “That’s where we would like to see things get to really quickly.”

There are all sorts of questions that come up with this approach. Will all game developers some day have a casino game that pays for other projects? How do you handle people who are problem gamblers? Will a player sue if their crappy cell-phone service costs them a big payout of some kind?

We’ll have to see how it plays out. If Griffin and company are right, that could be happening very soon. “This is a tectonic shift,” he says. “It can completely transform he competitive landscape of the space.”

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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