Kevin's Corner

How Will The Facebook IPO Impact Zynga's Stock Price?

2012-02-13T07:51:00.000-08:00

Zynga's stock price has had a less than stellar performance post IPO late last year. However, since the announcement of Facebook's IPO and the publication of the Facebook S-1, Zynga stock has steadily risen from about $8 per share to a high of $13 and change. This is interesting and does make sense. Prior to the Facebook S-1 publication many investors did not even know who Zynga was or what they where all about. A social game company? Also, in looking at Zynga's S-1 it is filled with more doubt about the future than hopeful optimism. It also spelled out that Zynga was heavily dependent on Facebook for their future growth. Without the benefit of seeing the Facebook S-1 Zynga was a relatively hard sell even to savvy institutional investors.

Per my analysis of the Facebook S-1, which I recommend you read if you really want a good understanding of the relationship of these two companies, 20% of Facebook's revenue is coming from Zynga's virtual currency sales. Facebook clearly states, without Zynga Facebook will be significantly challenged to keep its projected revenue growth rate. These companies are in a symbiotic relationship if they like it or not. The question is how deep does this co-dependency go and who benefits most or gets hurt the most if this relationship thrives or deteriorates?

"According to AppData, we have more monthly active users on Facebook than the next 15 social game developers combined. Our players are also more engaged, with our games being played by more than 60 million average DAUs worldwide. According to AppData, we have more daily active users than the next 30 social game developers combined. "

This Zynga S-1 statement reveals that no other social game company comes close to contributing the amount of revenue Zynga is contributing to Facebook.

"In July 2010, we began migrating to Facebook Credits as the primary payment method for our games played through Facebook, and by April 2011, we had completed this migration. Facebook remits to us an amount equal to 70% of the face value of Facebook Credits purchased by our players for use in our games played through Facebook. We record bookings and recognize revenue net of the amounts retained by Facebook.

Facebook is the primary distribution, marketing, promotion and payment platform for our games. We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future. Any deterioration in our relationship with Facebook would harm our business and adversely affect the value of our Class A common stock."

This statement indicates that Zynga is giving 30% of its revenue to Facebook for the privilege to publish its games within Facebook. This is a serious amount of money for using a payment platform. If Facebook increases this percentage it will hurt Zynga. If Facebook is forced to reduce this percentage for all E-commerce applications within the Facebook environment it will help Zynga. This is a real possibility if Facebook really wants to expand its payment processing to other no-social game companies.

Zynga) have benefited from Facebook's strong brand recognition and large user base. If Facebook loses its market position or otherwise falls out of favor with Internet users, we would need to identify alternative channels for marketing, promoting and distributing our games, which would consume substantial resources and may not be effective."

The Zynga brand is not the important brand the Facebook brand is. Zynga can call itself anything it wants. Essentially, Zynga is Facebook's social gaming company.

Reading the Facebook and Zynga S-1's reveals that at this time these companies are heavily dependent on each other. With Zynga being the most vulnerable and most co-dependent. The Facebook stock price will and should impact the Zynga stock price.This may explain why Zynga has not been particularly aggressive with adding games to Google+. I suspect they do not want to rock the Facebook boat. Facebook also has to be careful about how it treat Zynga. Having 20% of your revenue coming from a single source is non-trivial. A breakdown of this relationship will put a dent in the Facebook stock price. This also means that their fortunes and stock price will rise and fall with Facebook's performance. This also begs the question should Facebook buy Zynga with its new found IPO cash. You also wonder if Facebook can do any deals with big international social game companies like Tencent in China? Will this force Zynga out of Facebook? Google is also in play here. It is no surprise that Google's stock is slipping as the Facebook IPO becomes imminent.Google needs a boost to counter Facebook's impending big IPO cash trove. Should they buy Zynga?

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

What Facebook's S-1 Filing Reveals About Social Gaming

2012-02-06T04:00:00.000-08:00

Many analysts have dissected Facebook's Security and Exchange Commissions S-1 filing. For the most part the goal of this evaluation has been to determine the risk/reward ratio of investing in the Facebook IPO. My interest in looking into the S-1 was to focus on the role of social games in Facebook's business model and how that impacts their future projections. The following are key portions of the S-1 relevant to that subject and my own opinion on how to interpret Facebook's social game commentary.

Facebook's introduction of its own virtual currency payment system was clearly the result of research conducted on the virtual gaming/currency bonanza initially developed in China, Korea and Japan. The projections for a 15 billion dollar industry in 2014 is astounding and speaks to the shift away from the importance of physical goods and "traditional (Dollars, Euros, Yuan") currency. Clearly Facebook wants to establish itself as the issuer and manager of a universal currency to attract and retain social gamers and virtual currency transactions around the world. It also wants to draw social gamers and publishers in Asia that have already accepted virtual currency as a viable transaction model. Should Facebook use its IPO money to buy Tencent in China?

" The substantial majority of our revenue is currently generated from third parties advertising on Facebook. In 2009, 2010, and 2011, advertising accounted for 98%, 95%, and 85%, respectively, of our revenue."

Why is advertising revenue dropping as a percentage of total revenue? It is dropping because social games are beginning to generate more and more revenue based on virtual currency and virtual goods transactions. Essentially, game related revenue is growing faster than advertising revenue.

"Apps built by developers of social games, particularly Zynga, are currently responsible for substantially all of our revenue derived from Payments"

Social games are the only application(s) currently generating revenue from virtual currency and virtual goods transactions. This is likely to change as "gamification" begins to take hold and other types of Facebook applications begin to integrate virtual goods and currency into their models. The concept of loyalty points traditionally issued by airlines, credit card companies, etc would be a great target market for Facebook. Facebook also needs to leverage its virtual currency outside of the US and especially in Asia if it expects to support aggressive growth projections.

"If Facebook-integrated websites draw users away from our website, it may reduce or slow the growth of our user activity that generates advertising opportunities, which could negatively affect our advertising revenue.

Although we believe that there are significant long-term benefits to Facebook resulting from increased engagement on Facebook-integrated websites, these benefits may not offset the possible loss of advertising revenue, in which case our business could be harmed."

So what is Facebook talking about here? Recently web sites and game sites have decided they do not want to go through the effort of building Facebook specific applications. Instead, they are redirecting people from Facebook to their web applications by embedding a redirect in Facebook. Facebook realizes this and worries that this will result in Facebook users realizing that there is a world outside of Facebook. Facebook wants to keep you in Facebook. They have already taken steps to shut down the ability to move Facebook users out of Facebook via the fake Facebook application strategy.

"We currently generate significant revenue as a result of our relationship with Zynga, and, if we are unable to successfully maintain this relationship, our financial results could be harmed." In 2011, Zynga accounted for approximately 12% of our revenue, which amount was comprised of revenue derived from payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga’s apps generate a significant number of pages on which we display ads from other advertisers. If the use of Zynga games on our Platform declines, if Zynga launches games on or migrates games to competing platforms, or if we fail to maintain good relations with Zynga, we may lose Zynga as a significant Platform developer and our financial results may be adversely affected. "

Clearly Zynga's influence on Facebook is enormous. It also indicates that social gaming has an impact on advertising revenue as well. Not sure if the 12% takes into account the advertising revenue that Zynga generates and how much of the total revenue Zynga contributes to Facebook. We will have to dig into Zynga's own S-1 to sort that out. Also, Facebook does not mention the total revenue influence of all social games in Facebook from a virtual currency and advertising perspective. I suspect Wall Street was not wise enough to ask this question. If you are going to invest in Facebook you should find out the answer to this questions. There are several large game publishers in Facebook and I suspect the aggregate has a big influence on Facebook's bottom line.

So what is the total revenue contribution of social games to Facebook's bottomline? I suspect far greater then the 12% that they are reporting from Zynga. If you add up the other social game publishers and the advertising revenue they generate for Facebook the story is very different than the one pitched in the S-1.

"Our users can use the Facebook Platform to purchase virtual and digital goods from our Platform developers using our Payments infrastructure. Depending on how our Payments product evolves, we may be subject to a variety of laws and regulations in the United States, Europe, and elsewhere, including those governing money transmission, gift cards and other prepaid access instruments, electronic funds transfers, anti-money laundering, counter-terrorist financing, gambling, banking and lending, and import and export restrictions. In some jurisdictions, the application or interpretation of these laws and regulations is not clear. To increase flexibility in how our use of Payments may evolve and to mitigate regulatory uncertainty, we have applied for certain money transmitter licenses and expect to apply for additional money transmitter licenses in the United States, which will generally require us to demonstrate compliance with many domestic laws in these areas. Our efforts to comply with these laws and regulations could be costly and result in diversion of management time and effort and may still not guarantee compliance. In the event that we are found to be in violation of any such legal or regulatory requirements, we may be subject to monetary fines or other penalties such as a cease and desist order, or we may be required to make product changes, any of which could have an adverse effect on our business and financial results."

There are a number of things we can derive from this statement. Clearly government regulators are beginning to look more deeply into Facebook's virtual currency payment platform and social game transactions that allow or require players to "buy" virtual currency with traditional currency. There are all kinds of issues that could arise from drawing so much attention and revenue from these transactions. First and foremost is the age of people transacting with virtual currency and especially in games like poker and other gambling style games. If people under the age of 18 are buying currency to enter gambling games and losing is this legal? If it is should the authorize do something about it? Even if they are not gambling games should these people be allowed to buy unlimited amounts of virtual currency and goods?

With the opening up of US legalized gambling and the history of legal Internet gambling in Europe Facebook is rumored to be interested in allowing gambling games in its environment to serve these markets. How will Facebook make money on this and how will they safely implement gambling within Facebook? Regulators will be watching.

"Twelve percent of our total revenue in 2011, and less than 10% in 2010 and 2009, came from a single customer, Zynga. This revenue consisted of payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. In May 2010, we entered into an addendum to our standard terms and conditions with Zynga pursuant to which it agreed to use Facebook Payments as the primary means of payment within Zynga games played on the Facebook Platform. Under this addendum, we retain a fee of up to 30% of the face value of user purchases in Zynga’s games on the Facebook Platform. This addendum expires in May 2015."

Zynga begrudgingly entered into this agreement with Facebook. They even threatened to pull out of Facebook all together. Zynga did cut a deal with Google to put games into Google+ to offset their dependence on Facebook. 2015 is certainly light years away in social networking time. However, if the Zynga/Google partnership can make a dent in Facebook's social gaming dominance Zynga will have more negotiating power to reduce the 30% haircut.

"When users purchase virtual and digital goods from our Platform developers using our Payments infrastructure, we receive fees that represent a portion of the transaction value. Currently, substantially all of the Payments transactions between our users and Platform developers are for virtual goods used in social games, for example virtual tractors in the social game FarmVille. According to an industry source, the worldwide revenue generated from the sale of virtual goods increased from $2 billion in 2007 to $7 billion in 2010, and is forecasted to increase to $15 billion by 2014. Payments integration is currently required in apps on Facebook that are categorized as games, and we may seek to extend the use of Payments to other types of apps in the future. Our future revenue from Payments will depend on many factors, including our success in enabling Platform developers to build experiences that engage users and create user demand for their products, and the fee arrangements we are able to negotiate in the future."

Facebook is clearly thinking about how it can encourage "force" all e-commerce transactions though its payment system. Not a bad idea really if they can pull it off. Facebook's current dependence on social games to generate all of its virtual currency revenue is certainly dangerous, especially if Zynga threatens to withdraw from Facebook unless the fees are reduced. The more Facebook dominates the E-commerce world requiring all business to have a presence in Facebook the more likely this will occur.

In conclusion the Facebook S-1 does not reveal much more than most followers of Facebook already know. The dependence on social games for Facebook's long term growth is obvious. Add the advertising revenue generated in social games with their virtual currency and goods sales will expose a much higher dependence on games then the S-1 has revealed. From an investor perspective impeding legislation to regulate virtual currency transactions may have a significant impact on Facebook's revenue if many of the social gamers are under the age of 18. The introduction of gambling in Facebook could be paradoxical adding an additional revenue stream and at the same time resulting in regulation of existing virtual currency transactions. Although Zynga has made a fortune off of Facebook they have also become a prisoner of this relationship. They have to be thinking about how they can diversify outside of Facebook to reduce their own risk and to increase revenue outside of Facebook. This means that Facebook should, and is going to decrease, its revenue dependence on Zynga by expanding virtual currency beyond games and to attempt to gain market share with Asian game publishers.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

Australian Senator Is Stunned To Find That Facebook Virtual Currency Gambling Is Not Regulated

2012-01-23T07:11:00.000-08:00

Well, I never thought that the first political and legal challenge to Facebook gambling virtual goods and currency games would come from down under. I have written several blogs about the loop hole in gambling law that considers cash payout as the only form of "consideration" and not other forms of payout such as virtual goods or virtual currency.

Apparently, Senator Nick Xenophon sees things differently after spending money on a social casino game site in Facebook and not being able to get his conventional money equivalent for the chips he won and obviously lost. I suspect with Zynga's (ZNGA) public debut on NASDAQ, the soon to be listed Facebook IPO, the onslaught of gambling companies putting their "cash" gambling propositions into Facebook taking advantage of US legal Internet gambling are events that will put the virtual currency legal loophole into question.

The European gambling sites are just now realizing that they may be able to make more money using virtual currency as a transaction currency instead of conventional currency. There is no age restriction on buying virtual currency and using it to play Facebook "credits" gambling games creating a much bigger market for them and less regulation to deal with. Anyone can buy these credits, wager on a gambling site and never see a single dollar, pound or euro as a result of their play. It all stays with the gambling operator minus the 30% that Facebook takes on these transactions.

Certainly the legalization of gambling in the US is a big deal and gambling sites are all over this building, buying and launching their own Facebook conventional gambling games with the hope of capturing Facebook gambling market share.

These same gambling operators may be the ones that challenge the off the books gambling revenue being scooped up by virtual currency and goods gambling sites once they realize that a significant portion of there expected revenue and players are still tied up in playing virtual currency/goods gambling games.

I would make a wager that a US state or federal politician is going to float a bill in the next year that makes virtual currency gambling sites to play by the same rules as the "real" gambling sites.

Internet Games Driving "Big Data" Requirements

2012-01-19T10:18:00.000-08:00

Venture capitalists are all over the "Big Data(BD)" category investing heavily in a sector they feel is the next big tech sector that will grow quickly and consolidate into few big winners over the next two years.

The Internet gaming space is one of the verticals that ran up against the deficiencies of the traditional DB and BI(data analytics) providers early on requiring them to look for alternatives and to create their own solutions and to take risks with newly minted BD solution providers. Given the early adopter status of Internet gaming as it relates to BD we can speculate about products and services that BD vendors will have to provide based on the Internet gaming experience.

The challenges that BD will have to solve boils down to solving the standard challenges that have faced computing and especially data solution providers from the beginning of computing. Latency and storage are the two areas that all data solution providers must have an answer for.

Latency - Latency comes down to response for a game. In gaming it is very important for a game to keep up with a player's expected pace of a game. If it does not, players will become frustrated and in some cases the game will become inoperable because the game requires a certain cadence to be considered functional. In mulitplayer games high volumes of players trying to play or compete in a game can put a heavy strain on infrastructure if all parts of the infrastructure are not capable of handling high concurrent usage volumes. This means that "latency" caused by an portion of the game stack or the infrastructure supporting the game could be disastrous for a game. In social games that depend on their success in the first 48 hours of game launch, any issue that causes the game to be unappealing could sink the game.

Data Storage- Games that have high volumes of players or associated players can generate extremely large amounts of data in short periods of time because there are many transaction events that occur within a game. We use the term terabytes as a measure of data storage. However, we are getting to a point where terabytes squared or to the power of x could be a reality if games and especially social games, continue to grow in sophistication and popularity.

The latency and storage challenges associated with games set the gaming sector apart from other verticals such as banking operations, web applications and mobile apps that are not gaming related. This is not to say that applications in these categories are not also driving BD requirements. The "gamification" of conventional applications are beginning to transform applications into games. With this transformation comes consumer game play expectations and potentially bigger data storage requirements for other verticals..

BD is not a new challenge. Social game providers experienced the DB storage and retrieval issue very early after they began to launch games in Facebook. With the domination of Facebook as the leading social game platform the issue has become exacerbated because of the K or virality effect that can result in a very quick ramp of game usage and in short period of time. This means that a game publisher/developer has to have an out of the box answer to large data requirements.

NoSQL Data Depositories - The social game companies were early adopters of NoSQL data storage providers such as Cassandra, Membase, Hadoop, etc. because they experienced the "how do I handle all of this data problem" in the early days of game deployment in Facebook. NoSQL DB's as the name implies do not use a table structure to organize and store data. Instead the NoSQL data depositories use a key value combination to store and identify data. Because there is no "sophisticated" organization of the data and no immediate need to retrieve it or even report on it (we will get back to this point later) these DB's can handle transaction rates with less overhead and more efficient data storage relative to conventional data base products.

Analysis - Gaming companies and especially Internet gambling companies have historically conducted sophisticated data analysis on game play, player acquisition, player retention, etc. to maintain a competitive advantage and to keep their businesses growing. Cost of acquisition is extremely high for gambling companies requiring them to be especially careful about retaining existing players. In many cases the success of an online gambling site rests with only a few players that contribute high amounts of revenue. Finding and keeping those players is a very high priority which requires just in time data analysis mining a relatively large data, slicing and dicing the data in a number of different dimensions.

Social gaming companies have a different challenge. Social game companies have a low revenue per player number relative to Internet gambling or even e-commerce companies. This requires them to drive high numbers of players, which causes the data storage issues previously mentioned, and the need to fully understand how and if players are inviting and associating with other social gamers that are or could drive revenue. Social gamers do have their "wales" just like gambling companies. However, the ratio of total social game players to "high rollers" is significantly different then gambling companies. Social game publishers need data analysis to keep this all in balance.

Both Internet gambling companies and social game companies need almost instantaneous data analysis to react quickly to changing traffic patterns, take advantage of successful marketing programs, retain "high rollers" and to control player drop off.

Unfortunately the current crop of NoSQL data storage solutions does not easily allow someone to analyze that data leaving an entire depository of data off limits to BI. In a perfect work you would like to be able to combine NoSQL and SQL depositories in a BI roll up to give you the complete picture your business. There are BI vendors attempting to do this as this blog is being written.

The opportunity and the challenge for BD investors, infrastructure providers, DB vendors, DB analytic engines is to address data capacity and latency issues created by larger data storage requirements and data formats that do not fit conventional SQL structured data . More importantly, creating an analytic feedback loop that farms NoSQL and SQL data, satisfies standard marketing funnel analysis, game mechanics optimization and social interaction optimization needs to be in place to get real value out of BD. Getting this right will create the wealth effect investors, stockholders and entrepreneurs are looking for. If the BD vendors can solve the Internet gaming companies challenge they will most likely be successful in other verticals.

Impact Of US Justice Department's Decision To Legalize Internet Gambling

2011-12-29T09:45:00.000-08:00

The politics of US Internet gambling law are certainly intriguing. In 2006 it became illegal (UIGEA) to gamble online resulting in the collapse of an entire industry. Six years later it is all of a sudden legal again! The bad economy, high debt loads for individual states and the rise of social gambling using virtual currency as a cover for real gambling have all contributed to pulling us back to 2006. The justice department has capitulated to the tremendous pressure it has been getting from bankrupt state governments and land based casinos that are feeling the heat from Internet gambling alternatives. So what does this news really mean for US consumers and for businesses involved in the gambling industry?

There are certainly major differences between the old days of US Internet gambling and where we will be in 2012.

The Big Poker Rooms Are Gone - Back in the day Party Poker, Doles Room, Full Tilt and others dominated the Internet poker space. These business are all gone or merged with other businesses. Essentially there is no obvious online poker room that is ready to fill the void.

State By State Gambling Legislation - The way I read the new Justice Department ruling is that it gives states the right to run Internet gambling operations. I do not see an interstate component. If this is true the actual size of the opportunity and market is significantly less then (minus the growth in population) the 2006 market. Prior to UIGEA the US Internet gambling business was federal in the sense that Internet gambling providers target marketed the entire US market not individual states.

Learning For Europe - Gambling has been legal in most countries in Europe since the inception of Internet gambling. So what can we learn from the European experience? Historically, Europe has had an odd relationship with Internet gambling. Its citizens were able to gamble online. However, the Internet gambling businesses were not allowed to operate in most European countries. This evolved into a bizarre situation where British protectorates such as Gibraltar , Isle Of Man and Alderney were allowed to host the gambling operations and not pay taxes.

Europe has since taken about face on this position with countries like Italy and France creating their own in country gambling legislation. The early assessment of this change indicates that a country by country Internet gambling is not nearly as lucrative as regional or international gambling operations. Social games like poker and bingo are the hardest hit by this change because they cannot command the "liquidity" necessary to drive and support a vibrant business. The new European law is also resulting in a business consolidation forcing many Internet gambling operations out of the business or into the "illegal" gambling category.

Social Networks And Social Gaming - Ironically Zynga runs the largest and most successful poker room in the world. Fueled by virtual currency and virtual goods(poker chips) it has steamed ahead to an IPO. Many of the main stream European gambling business are now fully represented on Facebook and launching social gambling games. Facebook has indicated that it will allow gambling operators the ability to offer Internet gambling to Facebook users. Facebook was at its infancy in 2006 and did not even support applications like Zynga poker until 2007. Will social networks be the key to the success and perhaps the consolidation of the US Internet gambling business within Facebook or Google+?

US Land Based Casino's - The big US casinos have been flirting with traditional European gambling companies recently in the hopes of partnering with companies that have Internet operational gambling experience. The fact that casino's realize that they do not have the experience to operate an online gambling property is a wise assessment. However, what are land based casinos expecting from these relationships? The big problem with land based casinos is that they have little or no Internet brand. This begs the question: What company will most benefit from the joint ventures. Will it be the European gambling Internet gambling operators or will it be the US casinos?

Indian Casino Operators - Will Indian casinos get any benefit from legalized Internet gambling or will they be hurt by it? Most of the Indian casinos are relatively small regional casinos. They thrive on addressing the needs and gambling interests of local communities. In many cases the tribes are not united and frequently compete with each other. In the Internet world consolidation and size matters. Regulation aside the US Internet gambling space could consolidate very quickly with a few players in each state owning the market. How will Indian casinos respond to this business dynamic?

We are certainly at the beginning of a new era for US Internet gambling with many hopes, dreams and aspirations for the industry. Overall, it is a positive step that the US has decided it cannot control the Internet and must give US citizens the chance to decide for themselves if they want to gamble online. The big question is what business or businesses will be the winners of the Internet gambling game.

Facebook Opening Facebook Platform to Support Internet Gambling?

2011-12-09T06:00:00.000-08:00

Recently, I returned to San Francisco from a four week trip abroad(Nepal). Within several hours of my return I was confronted by a colleague telling me that Facebook was going to allow "real" gambling on its platform. I found this interesting but not surprising. Further investigation has revealed that Facebook has been in discussions with legal online gambling companies that have successfully acquired large numbers of social gamers and Facebook gambling enthusiasts in Facebook. 888 and Gamsys are a few of the names explicitly mentioned in the context of the Facebook gambling initiative.

I am not surprised by this because Facebook has been considering online gambling as a revenue stream for longer then people realize.

In 2005 I returned from the UK after having spent 3 years launching and running online gambling sites for US based casino operators. One of the first people to approach me about European Internet gambling was a representative form Facebook. This meeting was very hush hush with the representative from one of Facebook's VC investors leading the charge on questions about revenue per player, cost of acquisition, age and identity checking, the regulatory process, etc. relative to Internet gambling.

I never heard from or saw this investor again. However, it was clear then as it is now that Facebook continues to view Internet gambling as a potential source of revenue.

Fast forward to the introduction of applications on the Facebook platform in 2007 with Mark Pincus' poker application being one of the first applications launched in Facebook(this is a story in and of itself) and the eventual domination of Facebook social gaming by Mark and Zynga. Zynga eventually began to sell leads/players to traditional Internet gambling companies to generate revenue. It is no accident that the first really successful application in Facebook was a social gambling application.

Zynga and other social gamers adopted virtual currency and goods(poker chips) in early 2010 as a means of generating revenue from games in Facebook. By the way they actually copied this model from the Chinese casual game companies that proved this model could work. This step was a big one with the leap from advertising as the primary Facebook application revenue source to a transaction model leveraging game virtual currency as the primary source of revenue. This move also conditioned players to pay for play in Facebook.

Later in 2010 Facebook's counters the social gamers virtual goods and currency initiative by creating their own virtual currency in the form of Facebook credits and forces all of the social game companies to use this currency and pay Facebook 30% of the proceeds! Virtual currency and goods revenue is now 60% of Facebook's revenue exceeding advertising revenue. Facebook realizes at this point that its fate and success are directly linked to games and social game revenue.

In 2009 I started to talk to the Internet gambling companies about the importance of social games as a means of acquiring potential real gamblers. I was not taken very seriously until late 2010 when traditional gambling companies began to realize that social gaming itself was a market they wanted to explore. In 2011 the entire Internet gambling industry is all in in regards to social games with most of them launching Facebook games and Facebook Fan pages. The Internet gambling companies are experimenting with up sell from their social games into traditional gambling venues. They are also using social gaming as a holding area for fatigued gamblers.

The 2011 IPO filing with the SEC has also driven Facebook closer to flirting with allowing Internet gambling because Facebook needs that revenue if it wants to have post IPO(float) revenue to support its stock price. Facebook does not want to be another Groupon with a falling post IPO stock price due to disappointing earnings. Facebook realizes that its overall growth wil began to taper off after its current growth markets in Asia begin to cool off. In a world of slow or slower growth Facebook needs to get more revenue per Facebook member. Gambling is an additional source of revenue they can exploit.

So will Facebook officially allow sanctioned Euro zone licensed gambling operators to take wagers within the Facebook environement from Facebook members in 2011?

I suspect Facebook will explore this if the SEC, US and EU authorities give them the nod. I would be surprised if it happens before the IPO. Expect this sometime in 2011 after the IPO.

Cloud Computing And Online Gaming

2011-11-30T12:34:00.000-08:00

Social game companies have been some of the early adopters of the cloud realizing that the cloud can offer them just in time server and DB storage to address spikes that online games normally experience. Also, a number of social games can go viral, or something like it, early on in the introduction of a game which makes the cloud a perfect answer for the social game world. In addition, social games can a have a very short half life growing quickly and then fading into the history books in only a few months. Why buy a bunch of servers if you are only going to use them for six months?

The realization that social games are driving the adoption of the cloud and in some cases challenging traditional cloud providers such as Amazon(AWS) and Rackspace has spawned a new crop of companies that are focused on the social gaming space either exclusively or as a special sales vertical.

RightScale, Fusion Storm, and Joyant are traditional hosting companies that have setup special game cloud operations with social gaming as the primary target market. For the most part their offerings are not necessarily unique even with the social game focus. However, an interesting service some of them are providing is the ability to deploy to a number of clouds in addition to their own distributing traffic and load across facilities. I suppose the reason for this is to avoid any one cloud provider from failing causing a complete shut down of an application and perhaps a cost control mechanism.

XingCloud This company is is a bit different from the other game focused cloud provider. They are a Chinese company exclusively cloud gaming focused. They are leveraging the company's experience hosting Chinese games sites and integrating games into social networks. Their service is definitely exclusively focused on game developers providing cloud hosting services and quick integration of games into a number of social networks. They are actively looking to get into the US and European markets.

Clearly social game companies are taking the lead in the adoption of the cloud and in some cases resulting in new cloud services for this space.

How about the other game providers such as casual games, console games and online gambling?

These groups have largely ignored cloud computing. The console game and downloadable providers are essentially offloading game processing to the console or the PC resulting in a diminished server processing load. Therefore the cloud is not a big deal for them.

The casual game and online gambling companies that host web based games are server centric and in some cases taking on some serious volume so why are they lagging?

The primary reason they are not quickly adopting the cloud model is a legacy of traditional hosting. Many of these game companies have built large server farms and IT staffs around a self hosting environment. Despite the obvious cost benefit to switching there is usually a strong push back from the IT staff to maintain the status quo. Also, I doubt if management in these companies are cloud aware. They are using Vmware to virtualize their hardware creating pseudo private clouds. However, this is likely an unsustainable position as their current hardware becomes obsolete and they have to upgrade or expand hardware to handle traffic or to keep up with the increasing effciency of hardware.

Overall the gaming world is pushing the envelope of cloud computing because of the extreme volume and peaks and valleys of game usage. Cloud vendors are addressing this space with new and interesting offerings. The next interesting challenge is what do you do with all of this data that is being accumulated and how do you analyze it. This is ultimately more important then all of the hardware and network plumbing combined.

Asia Pacific Lottery Association (APLA) 2011 Conference Summary

2011-10-18T14:21:00.000-07:00

I had the pleasure of speaking and attending the Asia Pacific Lottery Association (APLA) conference in Malaysia this year(2011). The main topics addressed at the conference where Social Media/Social Network Integration, Green Initiatives and Responsible Gaming. My primary focus was on Social Media/Social Networks and Social Games. My presentation covered the popularity or social games in the context of the social web with special emphasis on the volume of play that is occurring and the use of virtual currency and virtual goods as a means of monetizing games in social networks. I also emphasized marketing, community building and CS using social media. My presentation can be found online at: http:/bit.lyKevinFloodAPLA2011.

Overall the audience was surprised by the shear number of players, transactions and growth rate of social network adoption around the world. Of special interest to them was the use of virtual currency and goods to monetize social games.

The growth of social network adoption in Asia is much higher relative to other parts of the world driving increasing interest in this sector by organizations like APLA. This is most likely attributed to increased access to the Internet, the proliferation of web enabled devices such as smart phones and the demographics of Asian communities which is skewed heavily to 18 to 24 year old.

The adoption of the social web as the primary form of interaction is a challenge that all businesses face and especially lottery operators constrained by regulation and a history of slow technical innovation in their sector. In Asia it is even more of a challenge and opportunity because social networks may be the only place lotteries can interact with their potential audience and the audiences are split over a number different social networks.

The lottery companies have an added challenge and benefit given their "regulated" status and the need to address under age gambling. However, European gambling companies have been using social networks for years to market their products to social network participants indicating that regulated environments do not prohibit a company from engaging consumers in social networks.

Many of the Asian lottery companies do not have a social network or social media strategy. This was a bit surprising given the statistics previously mentioned. Why have Asian lotteries largely ignoring the most important and potentially lucrative form of online communication currently available to them?

I do not want to paint all Asian lotteries as having ignored this sector. The Hong Kong Jokey Club for one has been aggressive in this area and witnessing benefits. I am sure there are others as well. However, the majority of them are just beginning to understand the significance of this market channel.

So what is it about the lottery world that is holding them back from adopting social networks as a lucrative sales lead and monetization source? What are the opportunities for the lotteries if they decide to engage social networks and social media?

Dependency On Retail Outlets: The lotteries have a long tradition of peddling their products through retail channels. This is their "bread and butter" as we say in the US and they view the world from this perspective. The lotteries have not seen social networks as a big threat to their business. However, things are changing as witnessed by the topic selection for the conference.

Granted the lotteries should not ignore this retail channel. However, if this focus is resulting in them ignoring the social web as a channel the decision could be dangerous and may result in the lotteries losing market share to more aggressive online, social media and social network marketing efforts.

Monopoly and Regulatory Protection: Essentially lotteries operate in a monopolistic environment supported by government regulation. This certainly does explain why a lottery would not aggressively exploit new marketing channels because there is no one to challenge them. Also, regulators themselves may construct bureaucratic obstacles that make it difficult and expensive to initiate new marketing efforts.

I would caution lotteries from relying too heavily on this perceived protective fence. Social game companies and legal online gambling companies are aggressively building games that look and feel like lottery games. This is certainly a threat to the future growth and well being of regulated lotteries.

Illegal Operators: There is evidence that illegal lottery operators are alive and well in Asia with many of them closely allied with government agencies. If these illegal operators decide to aggressively exploit social media and social networks to attract players the illegal operators will take market share away from legal operators. It is very likely that they either are or will exploit social media and networks to grow their market share.

Mobile Devices Challenge Lottery Outlets: One of the speakers from the Malaysian police department spoke about the reasons why illegal operators are so successful competing against legal lotteries. One of the reason he gave was service and availability. Illegal operators go directly to a persons house to sell tickets and they also deliver winnings to punters that have won lotteries. Essentially, a person does not have to go to a retail lottery outlet to play a lottery.

If you think through this further it is not hard to image a time when the majority of lottery transactions are done through mobile devices. Asia is becoming more connected and connected through mobile devices. What a better way to buy a ticket and redeem your prize? Why do you need a retail outlet??? Yes, the bread and butter of the industry could be challenged if mobile Internet enabled devices proliferate.

Attracting the 18 to 25 Year Old Market: It is very interesting that the lotteries want to attract younger age players, realize that these potential players are all interacting in the social web and have not aggressively taken action to address this age group within social networks? I am not exactly sure why there is a disconnect between the realization and execution. However, it is clear that the disassociation will dissolve as lotteries grasp the fact that all of these potential players are alive and well in social networks.

Virtual Currency/Virtual Goods - I did get a number of direct inquires from lottery operators on this topic. This interest is well founded given the special place lotteries find themselves in their communities. Many virtual currency systems are designed for social causes and to stimulate interaction among various groups in society. They are also used as a legal means to monetize social games. People can legally transact in Facebook using virtual currency and virtual goods. These are many ways that lotteries can use the virtual world to increase sales, revenue per consumer and to promote brand identity.

Social Responsibility - Lotteries engage in social programs to assist and enrich their communities. In some cases the history of lotteries has emerged from lotteries that where created specifically to raise funds for social causes. Given this historic emphasis lotteries should explore the numerous web related socially responsible focused organizations. They are too numerous to mention all of them. With some of them focusing on micro-funding, corporate sponsorship, organization building, donations, etc. I have direct experience with a few that the lotteries should consider as models or potential partners. SocialVibe.com is very interesting because it merges corporate sponsorship and advertising with socially responsible investing. I became aware of this because of the clever way they use rich media to monetize their visitors. Taproot.org is an organization that works with non-profits to help them staff and execute on projects. Taproot engages a pool of pro bono consultants that they attract from well established companies and place them into projects for non-profit organizations. I have worked with them to integrate their service into social networks.

Social Games And Lotteries - Many social game companies offer a number of social games and monetize players over the full range or their game portfolio. The concept is simple and effective. If you spend the time and money acquiring a player why not monetize them across a range of games to increase revenue per player. Lotteries should consider this strategy for obvious reasons.

Generate More Revenue Per Player

Engage In The Social Web

Offer More Content To Attract More Players

Social Media - If a business does not have a Facebook fan page, is not developing a community within a relevant social network and does not use a tool like Twitter to communicate and interact with its target market market then the business is really missing out on relatively inexpensive ways to engage its customer base. Also, social networks and social media will evolve. Lotteries need to engage in these social tools if they want to keep pace with the march of the social media phenomena.

Overall the APLA members get the importance of the social web for their world, businesses and consumers. The challenge going forward for them is where to start and how do they keep pace with the rate of change in this sector. This is a good question. My recommendation is that the more you work with these social tools the more you will understand how they work and how best to exploit them.

EiG 2011 Milan Gaming Conference: What A Difference A Year Makes!

2011-09-27T10:53:00.000-07:00

I attended and chaired a two day session on game development at the 2011 European Internet Gambling (EiG) conference and was surprised at how the European online gambling business community had changed its positions and attitudes on a number of different topics from the year before.

So what was the catalyst for this change and what changes are occurring ?

Social Networks - For years the I-gaming industry has dismissed or only partially entertained a relationship with social networks seeing the networks as at best, distantly related to their business and not a significant source of gaming revenue or player acquisition. The argument being that "gambling" was not allowed in Facebook, the potential players were to young, the players would not transact for "real" money, etc.

Well that has changed evidenced by the opening CEO panel direct acknowledgment that they see social networks as one of the most important initiatives over the next year. More importantly they are actually executing on this plan now by launching exclusive social games and closer integration of their gambling games with their social game offerings.

Despite all the attempts by gambling operators to dismiss Zynga and other successful social network game companies as low revenue, not real gambling, and not a source of quality gambling leads the numbers are so overwhelming that gambling operators have to take notice. Zynga has a predicted 2011 revenue on the low end of 600 million USD. Social games in aggregate are now producing more revenue then advertising for Facebook. It is estimated that 1 billion USD and 60% of Facebook's revenue is coming from social games. If you are a CEO of a gambling company and especially a public company you have to have an answer for the social gaming phenomena. To give the gambling business credit they are actually doing more then talking about their position relative to social networks and games they are actively engaged in a number of social network and game initiatives.

US Online Gambling - The potential that the US market might open up to online gambling is also driving more awareness of the role of social networks and social games in the US market. The fact that the US market has banned online gambling has resulted in US players seeking a proxy for gambling within social networks and casual games. Zynga poker is the obvious corollary and the most visible one. However, fantasy sports is big in the US with a number of sites launched in Facebook and in standalone web sites. These gambling models may actually remain popular even after online gambling is legalized in the US. The gambling companies will have to launch similar sites or engage in business deals to up sell players to traditional gambling propositions.

Social Networks As A Player Acquisition And Retention Tool - With so many people active in social networks many of them playing games in social networks the operators are realizing that there is a potential up sell opportunity. Also, the appetite for gambling style social games has been proven (Zynga). If you can publish a game in Facebook that is like a gambling game and you have good profiling business intelligence to profile players you are going to get conversion.

Retention is also very much an issue with gambling operators. There focus on acquiring, monetizing and not retaining players with alternative lower cost or alternate game play results in very high fall off of players. Social games could be an answer to this problem.

Virtual Currency/Goods - The social games that European gambling companies are building are taking advantage of virtual currency/goods transactions. Virtual currency is a proxy for traditional gaming money transactions and is legal because the prize payout is in a virtual format and not a "cash" payout. The gambling companies are starting to realize that this is a better business model then their cash business because players do not get paid for their winnings and their is no concept of a traditional wallet. All of the money stays with the operator. A previous barrier to gambling companies taking virtual currency transactions seriously was the low individual transaction amounts. The gambling operators, based on the Zynga model, realize that if a game becomes truly social the amount of transactions can be very high resulting in good revenue per game. The other phenomena that gambling operators may be aware of is the social game "whale" phenomena. At the GDC conference in San Francisco this year a speaker identified a class of social gamers as whales (sound familiar). These social gamers are transacting up to $150,00 USD a year in virtual currency/goods transactions! Granted the number of players in this classification are small relative to the overall social gamer numbers. However, their profiles and gaming behavior is very similar to the high rollers at land based casinos. These players are getting VIP treatment from the social game operators for obvious reasons.

Social Gambling Games - The majority of the games being developed by the gambling operators are social games that mimic real gambling games or could potentially have up sell potential into traditional gambling games. Bingo or bingo derivations are the obvious choice because they are inherently social games and they have gambling cross over potential.

Social Game Mechanics In Gambling Games - More interesting is the development of traditional casino games injected into a social network context. Clearly standalone casino games have very little chance of being successful in the context of the social web. Games have to have social components to encourage communication, rivalries, status among peers, etc. to grow a large enough communities to make the economics of social games work. The components being added to traditional casino games are leader boards, competitions around the leader boards to encourage players to invite others to the competitions and to provide visibility and status recognition of players. Essentially, gambling operators are learning how to create communities of gamers. According to one operator the addition of "game mechanics" have proven to be very successful.

Branding/Monetization/Upsell - In the game development sessions I chaired participants where keen on making money in social games that deviated from gambling transaction revenue. In the ICE Game Monetization sessions this year this topic was discussed with little enthusiasm from the traditional gambling community. That positioned has changed. I am not sure exactly why. This new position could be influenced by the developers study of social games where branding is one of the most lucrative ways to monetize games. Branding is such a good revenue source for social games because of the "engagement" time of social games. Real gambling games have the same engagement characteristics.

Game Development And Mobile Game Influence - The rise of multi platform game deployment and the increased importance of mobile gaming has changing the way gambling game operators are approaching game development. Traditionally games have been developed for the native platform(PC, Web, Phone, etc) to extract as much functionality from the platform to create an optimal game experience. This approach has been challenged by two developments. The market requirement to launch games simultaneously on Android, Apple, Facebook and web is making this approach expensive and increasing the amount of time it takes to realize the full potential for a game. HTML5 is now seriously being considered as the game development environment of choice to allow for cross platform near simultaneous game deployment. It is also being employed to decrease the cost of development. In the CEO panel one of the CEO's specifically stated that their future games would be developed in HTML5.

Sophistication Of Games - The area of game development that really impressed me at the conference was the level of sophistication of casino style games. The multi-level and multi-dimensional games being developed are fascinating and speaks to the study of player behaviour invested in these games. The sophistication is not necessarily expressed by increasing complexity. In some cases the game itself is very simple with added emphasis on key aspect of the game that increase game play time and of course revenue.

.Com Versus .Country - Europe has decided it is going to create a country by country regulatory regime forcing gambling operators to offer games only to their residence and excluding gambling operators that do not have licenses within a particular country. The motivation for this is well understood as each country struggles though the current economic environment looking for revenue anywhere a government can find it. However, the impact on Internet gambling in Europe will be profound. Essentially, the cost of doing business will go up, innovation will be constrained and over all gambling revenue will decrease especially for social games that require large communities to keep the games interesting. This model may also break down and not be viable in countries with smaller populations. What will be the options and approach in this situation?

This trend may also be one of the reasons why European gambling operators are going social. They realize that they have to find other less costly. accessible and lucrative markets to survive and to grow.

Overall, this conference was the first European Internet Gambling conference where I got the sense that the European gambling community understands that it is part of a much larger online gaming community. This realization has given new life to an industry that traditionally defined itself as an isolated online gaming island. The conference was refreshing, with high energy exhibited by the people actually building the games. They where excited about the social gaming opportunity, mobile game development, cross platform development, etc.

The new and emerging European gambling regulatory model will be challenging resulting in a consolidation in the industry and fewer competitors. US legislators will no doubt be looking at the new European regulatory model and decide if the would work in the US(.state versus .com).

Making Money With Online Games

2011-09-08T04:00:00.000-07:00

It is no secret that online games of all kinds are generating a tremendous amount of revenue for businesses. Although hard to confirm, it could be that games are the second highest source of revenue(Facebook credits) behind advertising within the Facebook environment and the highest source of revenue for individual application providers within Facebook. Online gambling has consistently posted 3 to 4 billion dollar revenue numbers per year with the numbers continuing to increase. We also see a big push to "gamify" traditional e-commerce applications to increase e-commerce revenues.

So what is this all about and why are games such an attractive way to make money on the web and in social networks?

There are a number of reasons for this phenomena with no single reason being the most important. A number of game elements come together to create an optimal environment for game revenue generation. It is also a myth that once you launch a social game or a gambling style game the money flows in. This is far from the truth with many social and gambling games missing the mark and being taken off of the market. Also, one size does not fit all. Some game elements work better then others in specific environments. A game launched in a social network has to have a social component to really make it work well. Conversely, I have seen single online slot games with no manufactured social elements generating great revenue while other slots generated very little revenue.

With this said, there are game elements that are common to most successful high revenue generating games.

Engagement - Games are differentiated from other Internet applications because they frequently engage the player in an engagement that lasts more then a few minutes. Essentially, the consumer of the experience stays within the application longer then they normally would in other applications. This engagement is achieved by exposing the player to a number of game mechanics. The exact mix of game mechanics differs from game to game. However, the mechanics always have to add up to longer engagement within the game.

Community - Even in solitary play style games like slots and casino games a sense of belonging to a community is required to encourage a player to frequently return to a gaming property and to feel comfortable with contributing time and money to an online gaming operation. This sense of community instills "trust" in the gaming operation, a common activity that can stimulate conversation among like minded players and a competitive element that encourages players to achieve recognizable milestones. Even in social games community must be cultivated to encourage players to connect with other players in the gaming community thus growing the overall community. In many ways customer support operations play a big role in maintaining and growing communities. Addressing system problems, billing issues and game play disputes quickly and effectively is essential to maintain trust in the game platform and an indirect way to attract other players to the community.

Multiple Monetization Methods - Really profitable games have more then one source of revenue. In social networks the two primary sources of revenue are virtual currency and advertising. In some cases games have small games included within them or on a side bar that generate revenue. When the player of the primary game becomes fatigued they have the option to play a short easy to play game. Some game operators use a referral system to refer or up sell their players into other gaming venues. This multiple choice of revenue generating opportunities helps to increase revenue per play, decrease the risk of receiving no revenue per player and helps the game publisher understand which revenue methods work best for classes of players. This later reason also helps game companies profile players into categories of less to most likely to contribute revenue for certain types of revenue generation offerings

Placement Of Monetization In Game - Where a monetization element is placed in game, when it appears to the player and the method of taking the transactions are critical considerations when designing a game. The opportunity for a player to contribute funds in a game should not distract the player from the game play itself. On the other hand the financial transaction should be presented in places where it is obvious that more fund contribution will enhance game play, allow a player to move to a higher levels in a game or avoid the termination of the game. Monetization encouragement should be presented at critical places in a game where more contribution to a game will increase the likelihood for an improved prospect of winning or winning larger prizes.

The Value Of Free Play And Ad Revenue - Many online game companies do not fully understand the value of free play in the context of game monetization. The ultimate goal of a free play option is to upgrade a player to a pay for play level, to allow players that have pay for play fatigue an option to stay in the game community even if they are out of funds. Free play is used to keep players within the game community and defecting to another game site. Ultimately, this strategy should lead to more players transacting because the overall player pool is always increasing.

Advertising can and should be a monetization method in free play. However, it needs to be presented in such a way that the player does not find the advertising annoying. In this case the player will not be monetized to the full extent. Unfortunately many gaming sites bombard free players with excessive advertising resulting in high drop out rates. In some cases games sites do this to make the free play option so unpleasant that the player either leaves or upgrades to an advertising free pay to play level. This strategy is flawed because there is a high likelihood that the business will lose the player entirely.

Reasons to Return To The Game - Inevitably gamers have to leave a game for a number of reasons. A good game will always have a reason for the player to return. The reasons to return to a game are varied and depend on the type of game. In a role playing game(RPG) a player always has the opportunity to reach another level. Games like Cityville or Farmville use this technique to continually draw players back to a game. Essentially the game becomes addictive. In a gambling game the reason to return is the hope that there may be a big payout or increased play will increase the likelihood of winning. In many cases the game creates a community of players. Many players return to a game to rejoin the game community.

Measuring Progress - Players enjoy comparing (competing) themselves to others and having a means of sharing a status with others. This is just human nature and needs to be an essential part of any successful game. A game should have leader boards, notification of players achievements, point accumulations, levels of play achieved, etc. visible to all players of the game.

Monetizing Across Multiple Games - In an ideal world a game operator will have multiple game offerings. Many of the big game publishers in Facebook run multiple games. They constantly cross sell players to other games in their portfolio. The added games will help monetization in a number of ways. The obvious one is that once a player is acquired you can generate revenue from a number of games. The less obvious reason is that a player can become bored with a game and needs to be constantly stimulate by new games. If additional games are not added then the player will leave and perhaps not return.

Games Advertising/Branding - I can not think of a better place to advertise or obtain brand awareness for your product or company then in online games. The simple reason is that the players spend so much time in a game environments. Brands will pay a tremendous amount of money for this exposure. I am surprised that gambling operators do not take more advantage of this form of revenue generation in their games. Some of the larger social game publishers are heavily sought after by big brands because the brands understand that some games give them sustained exposure to large number of players.

Hierarchical Pricing Structures - Having different pricing packages based on a game, type of game, access to games, etc, is a good way to extract a higher revenue per player. You see this often with an entry level fee and a premium offering. Game publishers could easily increase the number of levels in games beyond 2 and increase their revenue because players frequently do not have binary coin in decision points.

Player Profiling - Player profiling has become a critical part of many gaming operations. Sophisticated business intelligence systems are being used to determine when players are likely to transact, how often they will transact and how much they will contribute to a gaming operation. Essentially, knowing the customers has been raised to a new level because players are inadvertently giving game platform providers information about their game play behavior and themselves. Combining this information with player profile information volunteered by the player and the players social networking connections results in targeted acquisition and up-sell programs that increase the spend per player.

Clearly, online games have become a good source of revenue for game publishers. However, not all game publishers are fully optimizing their games sites to take advantage of the revenue opportunities. E-Commerce sites will continue to be intrigued by the value of game mechanics in their applications for good reasons. The continued popularity of games will drive companies wishing to brand themselves and their products to spend money on games as a way to get there products and services recognized resulting in additional revenue sources for game publishers. Given the creative nature of games there are still many opportunities to launch successful games. We may see the addition of more ways to monetize games given their popularity opening the door to new game development, new venues and higher revenue.

Interplay of games on mobile devices, on the web and within social networks still has a long way to go offering creative opportunities for new entrants in the space and even more opportunity to generate revenue.

Just having a game in Facebook does not guarantee high revenues. Games have to be interesting enough to support all of the mentioned features and they have to be engaging enough to attract high numbers of players. In the Facebook environment we are talking about millions of concurrent players if only single monetization methods are employed. If more monetization methods are used fewer players are required.. In gambling style games the total amount of players can be smaller becomes of higher transaction amounts. However, retention features are critical to maintain adequate income to support a game.

In all game environments a steady flow of new games should and will be introduced as businesses and governments realize the value proposition of games. This means that competition will intensify and player expectations will be higher resulting in the demand for more interesting games, more variety and better ways to entice players to part with funds to play games.

Is It Time For An Internet Gambling Social Network?

2011-08-24T01:00:00.000-07:00

We have seen the meteoric rise of social games taking over the Internet gaming space. They have leveraged social networks using notifications, friend connections, social advertising and virtual currency transactions growing large game communities. They are generating billions of dollars a year and growing rapidly.

Conversely, the Internet gambling space has become marginalized and fractured. Gambling is not allowed in social networks prohibiting Internet gambling from growing large and vibrant gaming communities within social networks. Ironically, this prohibition is not a legal issue. Facebook has decided it does not want gambling in its community. It is interesting to not that Zynga has now lost interest in getting involved in the Internet gambling space even if it becomes legal in the US. They do not have to they are already running a highly profitable social gambling operation in Facebook using virtual currency transactions.

Without a strong presence in social networks other factors that contribute to fractured and bifurcated Internet gambling markets get magnified. The continuing trend for regions such as Europe and potentially the US, if Internet gambling becomes legal, to view the Internet world on a state to state or country to country basis makes it very hard for Internet gambling to be a viable business model. This notion that each country and each state will have its own Internet gambling laws, legal requirements and tax structures has a decidedly negative impact on Internet gambling. If the same thing was occurring in Internet E-commerce their would barely be an industry. This is why Amazon is so opposed to state and country regulation and tax regimes.

What should the Internet gambling industry do to remain relevant is a social cross border and country Internet world? Should the Internet gambling industry pull together its own social network? I would argue that it should and has to if this business sector is to grow and thrive.

There are certainly many obstacles to this approach primarily because the industry has been so conservative in its business practices. Much if this conservatism is dictated by external legal and political structures that have attempted to create fictional closed networks in the Internet space to control and tax Internet gambling. Of course none of these structures work very well and are almost impossible to monitor and to control despite the best intentions of government agencies and legitimate Internet gambling businesses. Ironically, Facebook can do a better job of controlling content in its world because it only allows certified applications in its environment. Essentially, Facebook is a "closed" Internet environment. This is a topic in and of itself. However, this is the world as we know it and the Internet gambling industry should react and respond to this brave new world.

A gambling social network will not only improve the overall health of the Internet gambling industry it could be a real life saver for governments trying to figure out how to control the Internet gambling industry. If the Internet gambling industry copied Facebook's model government could at least go to one environment to extract their tariff.

It is clearly time to stop fighting the inevitable dominance of the Internet gaming world by social networks. The Internet gambling world will soon have to make a decision if the are going to join in on the social gaming party, remain marginalized or get creative and start to think about what an Internet gambling social network would look like.

How The Weakening Of The European Union Negatively Impacts Internet Gambling Businesses

2011-08-05T01:40:00.000-07:00

We hear a lot about European unemployment, challenges faced by the European banks, individual countries in the Euro zone struggling with their budgets, etc. There is even the questioning of the Euro currency and the viability of the Union as a governing body. In the case of online gambling businesses the weakening of the European Union and a return to each country in the Union deciding how and who does business in their country has had a distinctly negative impact on European focused Internet gambling companies.

The current trend for individual countries to ignore the European Union's mandate to allow free trade within the Euro zone has a peculiar impact on online gambling operators that depend on cross border commerce to sustain healthy businesses. I have first hand knowledge of this having worked with a number of European operators during this difficult economic crisis.

Currently, many of the countries are requiring special licences to operate and run gambling operations within their borders. The goal of this legislative approach is to increase tax revenue for the individual countries through gambling licences and potentially to tax player transaction volume.

The obvious impact on the gambling operators is that more licences per country means more money is taken from the bottom line of their businesses. Complying with these licences also becomes an economic challenge because some countries have extreme compliance rules that require online gambling companies to make substantial investment in infrastructure to comply with the new rules.

A more insidious and damaging government practice is to prohibit online gambling operators from operating in a country because the country itself is in the land based or online gambling business. We see this in Italy, German, etc. This battle has been waged for a number of years. However, the current economic crisis has intensified the efforts of individual countries to block IP addresses and in some cases to go directly after an operator that is hosting its services outside a particular country.

A less well understood consequence of limiting access to players across country boundaries is the impact on games that require high volumes of players to make a game interesting, fun and profitable. These games are typically social games such as poker and bingo. However, sports wagering also requires a large pool of players competing to make the wagering interesting and to provide the statistical leveraging required to decrease the risk for online sportsbooks operators and to increase the ability for the operator to properly manage the punter community for the benefit of the punters and the operator.

There are two ironic outcomes of each country controlling the gambling operators within their own borders and the players that play either government operated or licenced online gambling businesses.

Some countries simply do not have enough players to make the regulatory overhead worth the effort of maintaining or complying with the regulations.

The other less well understood consequence is the emergence of social gaming, especially social games like poker, bingo, fantasy sports, etc. that have become proxies for online gambling games. There are no restrictions on these games, no taxes and no regulation, no age restrictions, etc. Social game operators have the ability to create large worldwide communities of gamers buying and wagering purchased virtual currency. Although the individual transaction amount is relatively low for social gaming the shear numbers of players make up the difference between conventional online gambling and social gambling. Essentially, social game operators are directly benefiting from the the emergence of individual country gambling law.

Clearly, the survival instinct reaction of individual Euro countries struggling with budget and revenue shortfalls naturally makes them want to find revenue wherever they can. However, regulations that exclude players from participating and raise the cost of doing business to a point where operators have to walk away from a country, does a disservice to the countries and the online gambling operators, defeating the original purpose of the regulatory practice.

What Social And Casual Internet Game Companies Can Learn From Online Gambling

2011-07-28T06:09:00.000-07:00

Recently I have published blog items primarily focused on educating online gambling operators on the virtues and threat of social games to their operations. In point of fact, I have been a bit unfair to the online gambling operators because I have not highlighted their strong points and how social and casual game operators could learn a few lessons from them. Indeed, online gambling operators have a lot to be proud of and social and casual game operators can learn from online gambling businesses.

The Regulated World - Sooner or later the authorities are going to take social and casual game operators more seriously. The amount of virtual currencies transactions being processed , under age issues and social games that mimic real gambling games are a few of the items that are going to trip a wire in some jurisdiction causing the social game companies to engage in practices that online gambling companies have had to comply with and implement to keep their licensees.

The list of activities and requirements that online gambling operators have to attend to remain legal and safe operators is staggering and non trivial to maintain and implement. To name a few, regulatory legal counsel, auditing regimes, employee background checks, increased charge back management oversight, auditings of software platforms, game outcome monitoring to assure fair and random outcomes, upgrading of networks and hardware to address denial of service and intrusion attacks, etc. These activities, systems and safe guards are common practice for online gambling operators existing in regulated environments. The enforcement of these safeguards does create an expense overhead beyond the thresholds that social gaming companies are comfortable with. However, the time is coming when social game companies will have to pick up their game and comply with external regulations that require processes already used by online gambling operators.

Online Gambling Companies Are Banks - Most online gambling companies have the concept of deposits and accounts to allow for the deposit of funds to game play and for the ability to withdraw funds when needed. Social and casual game companies have not followed this model because they do not have the concept of a cash withdrawal. Virtual currency does accumulate and is referenced as a line item in an accounting system. However, virtual currencies, as of this date, remain in the virtual world. I suspect this is going to change slightly as virtual currencies become exchangeable amongst themselves and consumers demand the ability to take their currency to another site or game property. Facebook credits are a defacto standard within Facebook and Facebook is not allowing exchanges or transfers between currencies right now. However, I suspect this is going to be challenged as unfair resulting in a potential anti trust or monopoly claim requiring them to allow for cash out and exchange. This will require social gaming companies to have exchange rate virtual currency systems, cash equivalent calculations for virtual currency and the ability to redeem virtual currency from a virtual currency depository. This all looks very much like the only gambling world.

Code Quality And Speed To Market - Social game companies are notorious for poor quality releases and bugs in their game releases. They do this because their is a higher value placed on new content releases relative to the quality of the overall game experience. This is tolerated because of the perceived notion that the games are for fun and not for money. This practice becomes less tolerable as players invest larger amounts of virtual currency into games changing the value proposition for players.

Conversely, Online gambling companies have to be very careful about releasing code that results in incorrect calculations, game outcome flaws, unannounced outages, etc. This is the case because of the amount of money involved and the need to get it right and having a system running all the time. Their new content releases are less frequent then in the social gaming world not because they have poor developers but because the quality standards are higher based on consumer perception of the value proposition..

Niche Markets And Profitability - Online gambling companies have the ability to address comparatively tiny markets relative to casual and social gaming companies and still make money. Social and casual gaming companies struggle with profitability even at the high usage numbers they experience. They do use a number of monetization methods to get to break even. However, their player numbers still have to be very high to achieve profitability. Social gaming competition has already gotten to the point where mass adoption of a single game is very hard( expensive) requiring social and casual game companies to begin to figure out how to carve out small market segments and make money off of these markets. Gambling companies make games specifically for niche markets that have the potential for generating enough revenue to justify the games development. This goes beyond language localization. Gambling companies also look at cultural differences that impact user interface design and preferences of players. If you can successfully design a game that is truly unique and specialized for a market you can acquire a significant percentage of market share over companies that genericize their games . The social gaming companies might take a look at how the online gambling companies are achieving this and try and copy their techniques.

The online gambling operators are doing many things very well and better then the social game companies. The gambling companies are also very familiar with a regulated world and know how to successfully compete in a regulated environment. Social and casual game companies need to prepare for the day when their world looks very similar to the online gambling world taking some advice from the online gambling world may be a good idea.

Making Internet Gambling Social

2011-07-13T06:34:00.000-07:00

I recently read an article indicating that Zynga was responsible for generating 500,000 USD for Facebook in the last year. $400,000 of this revenue was from the 30% cut Facebook is taking on virtual currency transactions with 100,000 coming from advertising. This means that the social game company generated about 1.5 billion USD from its social games activity. This is a very nice number indeed and indicates how social games can rival and in many cases exceed traditional online gambling game revenue.

These revenue numbers have not gone unnoticed by online gambling companies or other social game companies. However, the assumption that by just having a game in the Facebook social network equals millions of dollars in revenue is not the magic answer. There are many games hosted in Facebook that get little traffic and little revenue. So what is the magic behind the big social game leaders like Kabam and Zynga, what can the online gambling companies learn from them and what do gambling companies have to do to become successful social gambling companies?

Part of the answer to this question can be found in games that have natural social components outside of social networks. Poker is an obvious example and coincidentally the first game Zynga launched in Facebook that led to their dominance in the social gaming space.

The social elements that social games like poker naturally have are the following:

1.) The Game Requires Players To Engage With Each Other - This may seem obvious, however, many games that are released into the Facebook environment do not require anyone else to play the games. Many online casinos believe that they can launch a traditional slot machine into a social network and experience instant success. This is clearly not the case and a false assumption that may cost them dearly if they do not understand the social dynamics underlying the success of social games. Essentially, a social game is just that "a game that requires others to participate in the same game allowing gamers to experience a social dynamic inherent in the game".

2.) Increasing Levels Of Achievement - MMOG and role playing games such as Everquest and World of Warcraft demonstrated ealry that in addition to the requirement to engage others in play their needs to be a way to differentiate oneself from the pack by continuously reaching higher levels. In addition to the personal goal to get better achievement is a way to differentiate oneself from others and brag about ones achievements in the gaming community.

3.) Recognition - This is an important feature in Fantasy Sports where many players are as interested in recognition as they are in winning. In addition to engaging others in play a good social game has to have a mechanism to identify key important players providing them with status and recognition. There is no point in playing with other players unless you can measure each other to determine who is best at any given point. This feature creates a dialogue between players and can result in a player inviting others to play to increase awareness of their achievements.

4.) Winning And Gifting - This is an area that is growing in popularity amongst social e-commerce and social game applications and should be a natural for online gambling companies. This adds another social component to a game that encourages a player to engage another player in the game. Gifting points or buying a virtual good with point and gifting it to another player are common ways to draw players into games and to retain them with the hope of obtaining more gifts. Also, there is a tendancy to re-gift the person that gifted a player forming a bond between players and the currency used in a game.

5.) Social Communication - This is a hotly debated topic in the gambling realm because of the risk of collusion. This is a legitimate concern especially with a game like poker. However, the risks might out weight the dangers if a system can be put in place to closely monitor the interaction. In poker the chat capability is a very simple and powerful tool to encourage dialogue amongst players. In some cases social circles are started in chat rooms and move into the physical world. Adding a skype like function with added video capability could be a very power tool to grow a gaming community.

6.) Private Tournaments, Teams and Invitationals - Players like to play with people they know. Invitations and private tournaments are a great way to encourage others to play with people they know and trust. Each player will have a tendency to invite other players in their network to group privately organized events resulting in new bonds being created and new players added to the gaming platform communtiy.

7.) Number Of Associations(friends) As Status - One of the keys to the Facebook game(yes Facebook and Ebay are games in and of themselves) is the recognition that more associations mean a higher status in the community. This encourages more invites and a growth in the community. A player is compelled to add more friends and associates to to a gaming communtiy to increase their own comfort level, gain support for their choice to participate in the game community and share their experience with other people they know and respect. This should natrually happen in a gambling social network.

8.) Notifications, Invitations and Virality - Facebook and other social networks have shown that exponential growth in Facebook application adoption is fueled by notification and invitation systems. This is the key to the success of Facebook and a system that has to be part of any social game. If Facebook is not the environment you will launch in your then a notification system should be added to mimic traditional social game notification systems.

9.) More Games Means More Players - Zynga and Kabam are always releasing new games within the Facebook environment for a number of reasons. 1.) People get bored and 2.) More content means more players and potentially different demographics and 3.) More revenue. All three of these things have to happen to keep a game community fresh and to continue to increase revenue. MMOG games achieve this new experience by adding increasing complexity to their games and new features essentially resulting in new sub games emerging in the same game environment.

10.) First Mover Popular Social Games Lead To Market Dominance - Sad but true market share dominance can happen very quickly in a social gaming environment. We are all 6 degrees apart and a social game can take over a community of like mined people very quickly. This means that the first online gambling operator that succesfully launches and manages an online gambling social network will be the big winner.

11.) Community Managers And Groups - In order for a social game to work the community surrounding it has to be managed. Although some social interaction happens organically much of it has to produced, managed and stimulated based on player feedback, trends and tendencies. This is a 24 by 7 activity requiring a community leader to address issues the community is having, make suggestions to the community to determine how certain game levels may be received and to draw out special interests of the community that may lead to more social interaction. Group dynamics dictate that a communtiy manager has to be on top of the groups activites to assure that positive trends are supported and negative ones are stifulled.

12.) Multiple Monetization Methods - This may not be as much of an issue with traditional gambling. However, social game sites go a long way to introduce a multitude of monetization methods to increase overall revenue and to experiment with better ways to monetize players. In some cases a monetization method can have a a negative impact on the community. This may be a very important factor in the success(or not) of social gambling in the US. If the price point is too high for a player to get involved or to pay for prolonged periods in an online gambling activity the monetization will most certainly impact the growth of the community. Lower price points as represented by virtual currency transactions in social games have proven that smaller transactions, lead to more play which leads to more overall revenue.

13.) The Power Of Free Play - Having a competitive, low stress and fun environment to learn a game, relax and play is important for the development of new players and for maintaining players that temporarily are out of funds or want to play casually. With the exception of Party Poker, I am not sure that the exisitng gambling companies really understand how to cultivate the free to play community to their advantage. This mindset has to change if online gambling companies want to grow social gaming communites.

14.) Positioning Within Social Networks - Facebook currently does not allow for real gambling within Facebook even though it is legal in many countries. They may do the same in the US when Internet gambling becomes legal. If this is the case it is very important for online gambling companies to learn how to cultivate and communicate within social networks without hosting an online gambling operation within the Facebook environment. The reasoning is that the online gambling companies will still have to market within social networks even if their gambling operation is not allowed to operate within that environment.

15.) Player Profiling - Competition for online gamblers is and will become more intense as online gambling law becomes clearer and the US begins to open up gambling to help pay for state and federal budget deficits. This means that you will have to know your existing and potential future players very well to remain competitive. The good news is that people are providing more and more information about themselves online in the form of Twitter, Linkedin, Facebook, Google searches, mobile app downloads, etc. Leveraging this mountain of information to understand the likes and dislikes of players will be necessary to focus marketing efforts and to acquire consumers most likely to join an online gambling community. This is certainly not easy and requires special search and analysis processing to make sense out of the mountain of information collected on individuals everyday. However, competencey in this area will be key to success on social online gambling.

Clearly the need to understand the social web in the context of online gambling will be critical for the success of any Internet gambling operation. The tendency for the social graph to create monopolies quickly conceding victory to the online operator that pushes all the right social network buttons should not go unnoticed. The first mover advantage is greater now then it ever has been because of the power of the social web to communicatete and consolidate quickly. Online gambling companies should act and think like social game companies if they have an interest in being successful social Internet game operators.

HTML5 Versus Flash, Objective C(Apple) , And Java App(Google) Game Development Debate

2011-06-30T06:00:00.000-07:00

Many game developers have decided to build their games in HTML 5 moving away from native platform development on Android, Apple O/S and in Flash(Microsoft native app.) development. I have been encouraging my clients and game developers to do the same. My advice has generated a fair amount of controversy and in some cases outright hostility or all out endorsement. The variability of the responses indicates that not everyone sees HTML5 game development from the same perspective.

Reasons For Endorsing HTML5 Game Development

Build Once For Deployment On Multiple Platforms(Web, IPhone, IPad, Android, Facebook, etc.) - The world is no longer one dimensional allowing developers to only deploy a game in Facebook, on mobile devices or on the web. A game should be manifest in all of these environments and in many cases tied together to encourage people to play against each other on different devices and environments. HTML5 gives you some leverage to achieve this goal by decoupling game development form the operating system (OS).

Keep The Cost Of Development Down - Clearly developing the same game on many devices can be costly from a variety of viewpoints. Development platform expertise, unique user interface design, connection to server methods, moneitzation mechanics, payment processing. etc. HTML5 does not solve all of these issues but it will solve many of them. Developers and web designers have become very efficient and cleaver developing a game first for a mobile device using HTML and then moving the game to other platforms. This allows the interface to undergo few changes as it moves up the user interface ladder.

Get To Market Faster - From a marketing perspective its makes sense to get your game on as many platforms as possible as soon as possible to capture market share in all of the environments and to build brand awareness for the game across platforms. There is a very short period of time to get a game recognized and growing. The more places it appears simultaneously the more likely that a referral buzz will be created to propel the game up to the charts in the mobile and Facebook environments.

Get On Multiple Platforms Faster - I have yet to find a game development organization that has not been asked to get the game on mobile, on MS, Apple, Facebook, etc. as soon as possible. To a large degree the developers are the ones pushing the HTML5 button to relieve development load on their organizations and to get the game to market.

Game Download Speed - It still amazes me that client side games exists and are still being developed. The download for these things is obnoxious if you do not have any of the game assets per-loaded even with broadband connects. They are also error prone given the constant updates that MS and Apple drop on your device. HTML5 goes a long way in eliminating this issue.

Objections For Developing HTML5 Games

The Games Do Not Look As Good - A product manager came up to me one day waving his Apple laptop at me with mock ups for the user interface of a new game on the screen. He asked me if I could make an HTML5 game with the rich graphic content of the example he showed me. I indicated probably not. First of all the quality of the graphic content spelled heavy download to me. Sure caching would help after the initial download. However, the game mechanics in a browser with all of these graphics moving in and out of the game did not encourage me to be positive. I told him we could build the game in HTML5 with some UI compromises to make the game more accessible and easier to access. He walked away fuming insisting that we have the rich graphic content and he wanted the game interface on mobile and the Facebook platform. I said sure but you might regret that decision. I am sure this interchange occurs often and requires a producer or product manager to make some very difficult decisions about appearance versus user experience.

The Game Mechanics Are Not Sophisticated Enough On HTML5 - Well certainly native application development will give you a richer library of functions to make more sophisticated games. In certain cases there may be good reason for this and HTML5 is not the answer. However, the question should always be asked are these functions really necessary and where else do you intend to post or display the game.

HTML5 Is Immature And Not Ready For "Serious" Game Development - I am not entirely sure what "immature" means in all cases. However, HTML5 is new, it is designed to be generic addressing a number of web development interests. This mean that there will be things that can not be done with HTML5 at this time. However, abandoning HTML5 because it does not support a function today may not be the best decision. HTML5 will evolve based on input from the user community. I suspect that if enough developers speak-up about a missing feature in HTML5 it will eventually show up in the specification. The last thing you want to do is to stay on a fading platform and miss a wave. If you do you it will be very hard to get back on the wave as it gets stronger and starts to move faster.

Game Development Expertise - Some game development shops are heavy staffed with with C, C++, Java and less with "web development" resources like Python, PHP, etc. talent. Certainly this does have an impact on a shops ability to build web based games and may require a team to start thinking about other resources to complement their teams to produce HTML5 games. I would suggest that a game development team start investing in resources that can develop HTML5 games to build the skill set and expertise in their organization.

In conclusion, many game developers are now building games in HTML5 for the reason I have identified. Yes, HTML5 has it limitations. However, the multi-platform deployment ability should be taken into consideration when deciding on the game development platform. There are certainly times when HTML5 is not the answer. Certain sophisticated games in terms of animation, game logic, taking advantage of low level O/S functions and connection speed may discount the benefits of HTML5 and require a different approach. However HTML5 will evolve quickly for the simple reason that game developers would prefer to build once and deploy on multiple platforms. Socket connections are an obvious area that HTML5 and browsers will begin to do a better job at to allow for better communication between server and web client. I am sure their will be many more on the pure graphic creation and rendering side.

How Land Based Casinos Can Leverage Social Networks And Social Games To Improve Their Business

2011-06-08T10:20:00.000-07:00

At a panel discussion at GIGSE this year I mentioned the interesting story of MGM's online games for prize site launch in 2001. Many people where not aware that MGM launched a free to play site, with the help of Wagerworks, in preparation for their ultimate goal of launching a real money site in Europe. The free site had a number of free to play slot games that tied game play with prizes at MGM properties. These prizes were free buffet tickets, discounts at casino restaurants, free hotel rooms, etc. With little or no advertising this site was tremendously successful from a traffic, game play and trips to land based casinos to redeem prizes perspective.

MGM's ultimate goal was to launch a pay for cash experience in Europe. The prize site was an early test to see if online MGM games would be popular. They achieved their objective with the prize site. They then decided to redirect Wagerworks ( now IGT) to build the for cash site abandoning the prize site.

The Wagerworks team was a bit surprised at this decision given the success of the prize site. The team tried to convince MGM to keep the prize site going in the US and launch another project to develop the for cash site for European deployment. The team was unable to convince MGM to keep the site going because MGM did not build a link between their land based loyalty program and the online site. Hence, they could not quantify the economic impact of the prize site on their land based business.

Despite this decision the Wagerworks team learned a very valuable lesson. Online free games could have a positive impact on land based operations if executed properly. Developing a strong linkage between a casino's loyalty program and their online properties was key to quantifying the economic impact of the online site on offline operations.

Another, better known, example of the synergy between online and offline gambling is the WSOP phenomena. I worked for Harrahs (now Caesars) during the heyday of WSOP witnessing the symbiotic link between online poker play and qualification for the WSOP land based event. In this case online activity was more then supplemental to the offline experience it was a critical component that created a perfect storm and big profits for Harrahs and online operators.

The 2006 enactment of US Internet Gambling(UIGEA) law changed everything and broke the linkage between Internet game and the WSOP offline event. WSOP has never been the same.

Fast forward to 2011, the dominance of social games and social networks and the success of the ultimate social game, poker, in attracting online players to gambling style games. Clearly, the advent of the popularity of social networks and the shear number of people using them on a regular basis fundamentally changes the Internet and the way people and gamers interact with it. It is no secret that one of the most popular games in social networks is Zynga poker. This poker game is so popular because it was originally built to take advantage of social networking features to attract and retain players. It is not a "ported" game from an Internet gambling site. It is specifically designed to encourage "viral" adoption of the game. Poker also happens to be a "natural" social game making it even more popular within a social network.

Certainly Zynga Poker is an enigma due to its pre-development before any applications where deployed in Facebook (a story in itself). However, it does demonstrate that with the right game design and integration with social networks games can have a profound impact o social network participantion. I suspect that Facebook games are the most popular applications within Facebook.

Casino operators should task notice of this and develop a plan for linking their offline operations with social networks to drive traffic to their land based operations. Most of the existing or potential casino customers have social network accounts and regularly engage other players in a social setting.

There are some basics of Facebook marketing that transcend games and are a requirement for any business marketing their property, brand or business on line.

The Fan Page - The fan page is similar to a web page or web site with the exception that it is embedded within Facebook. The advantage to the page is that people can "like" the page notifying other friends in their network that they like it. The "liking" results in friends within their social network to become aware of the business and to engage with the business. Essentially, growing a community and impacting the social graph.

A land base casino should add features to the fan page that promote visitation to the land based properties. The fan page should also reward viewers for any of their friends participating in a promotion that results in a visit to a casino.

Loyalty Program Linkage - The fan page should have a mechanism to identify a Facebook member with a casinos loyalty program. It could be that every Facebook visitor to the fan page is assigned a loyalty ID or anyone that responds to a promotion gets an ID. This will engage a tracking mechanism to determine the intersection on casino visitation.

Facebook Groups - A Facebook group is a collection of people that have a common interest. In the case of a casino it should be the casino itself that acts as the focal point. This group can become very influential in promoting the casino or the opposite if they do not like something. Cultivation and growth of the group requires a "community manager" to encourage people to join continually engage participants in a dialogue and to retain members. Groups can and should grow to large numbers (thousands of members in some cases). Communication with the group should be regular and constant encouraging a dialogue and the groups desire to add more members to the group. For instance, notifications should be made to the group for special deals, events, ad promotions at the casino.

Casual/Free Games - Free to play virtual currency games are a good way to introduce new games(especially slot games) to an audience. In an ideal world every new physical slot game would have a social or casual game complement introducing the game to Internet users and encouraging them to come to the casino to play the real game. Providing a virtual currency scheme that would allow people to wager and win virtual currency in the game is advised. Providing there is no consideration to buy virtual currency a casino could offer a player some free land based casino(hotel rooms, buffet, etc) items using virtual currency to attract them to the "real" property.

Casino To Virtual World Connection - Promoting a social or casual game in the physical casino is very important. This will establish a closer link to both worlds. An obvious promotion would be an offer of free land based casino items for play on the Internet site.

Certainly, The above mentioned items are only a few of the many ways a land based casino can leverage an online community and social networks to enhance their land based operations. It should be noted that the online world is distinctly different from a land based operation and requires a staff with a mindset that comprehends the virtual world and can cater to its peculiar marketing and game play characteristics. It is advised that a casino add these skills sets to their operation to ensure the success of their online and social network initiatives.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

Why Is Social Gaming So Important For Online Gambling Companies?

2011-06-01T06:31:00.000-07:00

I had the pleasure of participating in a GIGSE panel discussion this year where I was asked to comment on the role of social gaming in the context of the potential legalization of online gambling in the US.

I indicated that social gaming should be a critical strategic consideration for any company interested in taking advantage of the future prospect of legalized online gambling. I also implied that even if US online gambling is not legalized or takes a long time to happen a serious look at social networks and social games should be a part of any gaming companies strategy.

I pointed to the success of Zynga as an example of how a social gaming strategy has created perhaps the most successful online gaming company to date.

Despite Zynga's impressive numbers many of the people in the audience dismissed Zynga or any other social gaming company as irrelevant and inconsequential relative to online gambling. The reaction I received from many attendees was a bit shocking to me.

The argument's they used to support their position are as follows.

1.) The majority of social gamers are under the age of 18.

2.) The social gaming experience is different then "real" online gambling.

3.) There is no money in social gaming. Revenue per player is very low.

4.) There are only a "few" high virtual currency transactors in social gaming.

5.) Zynga's lead generation to online gambling operators has been very poor.

6.) Social gaming companies do not know how to operate real gambling sites.

Although some of these arguments have merit others do not or are taken out of the context of the intricate online gaming ecosystem.

The following are items online gambling companies should take into consideration before they completely dismiss social gaming.

1.) Average Age Of Facebook Players -Just about everyone has a Facebook ID. The average age of Facebook members is now 35 years old and getting older. The 18 to 25 year old age group is a significant portion of Facebook membership. This is the perfect age group profile for online gambling. If you have every played in Zynga poker you will see (their pictures) that many of these players are the traditional age group for online gamblers.

2.) Social Games Are Different For Online Gambling Games - Yes the social game experience is different from an online gambling experience. Of course it is, because online gambling is not allowed in Facebook. Companies like Zynga have shrewdly decided to offer a game experience that matches the social environment. This is one of the reasons why Zynga has 250 million players and online gambling companies are not even close to these numbers.

3.) Social Games Will Change If Online Gambling Is Legalized - If online gambling becomes legal in the US and Facebook embraces it (which they will in a clever way) online gaming content in Facebook will change making it more gambling like. The gaming companies will not change their current casual offering. Instead they will offer a different game experience and upgrade casual gamers into the gambling operations. Even if the conversion rates is in the single digits the numbers are astounding. Also, Goolge, Apple, Yahoo, Amazon, EA, etc. and other major online companies that have large numbers of online profiled transactors will create online gambling games and seek to convert their current visitors to online gambling.

5.) Making Money In Social Gaming -Many online gambling companies that come to me to help them understand the social gaming world are appalled at the relatively small monetary transactions per player. They become discouraged by these numbers not realizing that if a gaming company can create a gaming application that has a viable social component and a good social network marketing strategy the shear numbers of players will make up for the lower transactions per player. No this is not an easy thing to do. However, if successful, social gaming can begin to pay for itself.

In contrast to online gambling companies, social gaming companies use a variety of game "monetizationr" techniques to make money from social gaming. In gaming advertising, virtual currency, virtual goods, lead generation for other social applications, etc. In aggregate these numbers start to add up. Virtual currency and good sales alone are climbing to rates equal to and exceeding online gambling revenue. It is estimated that the virtual world will be generating 5 billion USD per year in the not too distant future.

6.) Player Profiling And The Online Gaming Ecosystem - Treating online gambling and social gaming players as distinct and separate individuals is not realistic given the large numbers of players engaged in social gaming. Inevitably there is an intersection between these two groups. In the past two years social gaming companies with the help of third party companies specializing in social network profiling have begun to take a look at all of the Twitter, Facebook, Google search, etc data to decipher the likes and dislikes of people on the web. Evaluating and making sense of this data is not easy. However, some progress is being made to provide hints as to the propensity of an individual to buy a certain product, play a certain game, travel to a specific destination, etc. There is still much work to be done to in this area and privacy issues abound. However, with the increasing amount of information we are all contributing freely to the Internet there will be a time when profiling will get to a point where we can successfully to move players to and from different environments with a high degree of accuracy and increased moneitization.

7.) Marketing And Player Acquisition On The Social Web - An online gambling company has to learn how to market to players within the social web even if they believe that social gamers are not the target audience. Everyone is in a social network of some kind and online gamblers are no exception. Developing a productive and effective social networking marketing program is non-trivial and requires a very different approach then tradition web, affiliate, e-mail, physical, etc. marketing. Ironically, social games are one of the most effective ways to market products and services because they do have the potential to get close to a truly viral application. This is the holy grail of social marketing and and should be a goal for online gaming companies even if they never launch a social game of their own.

8.) Social Games As A Separate Business Unit - At the ICE conference in London this year I had the opportunity to help organize a special session on social game monetization. It was revealing because it came to light that traditional gambling companies like 888 and BetWin are creating separate social gaming business units not related to their gambling properties. These companies realize that the future of online gaming is within social networks. This is where the growth and innovation will be. They want to be in it and be just as successful as Zynga and other high profile social gaming companies.

It is clear that many online gambling companies do not fully understand the importance of social networks and social games in the context of online gambling and distinct social gaming applications. Some of them do and are taking steps to explore how to be successful within social networks and to launch social games that can stand on their own taking advantage of the social graph. This space is certainly evolving quickly making it more difficult to get into the social space and establishing expertise and brand awareness. Despite this a presence in social networks is becoming mandatory for any company wishing to maintain market share and to grow. The sooner an online gambling companies embraces this reality the better off they will be.

Significance Of Harrah's Playtika Purchase For 90 Million USD

2011-05-24T10:09:00.000-07:00

The iGaming world is a buzz with the news that Harrahs has purchased the Israeli social and casual game development company Playtika. This transaction is quite significant from a strategic and industry perspective.

The subtle significance of this transaction indicates that Harrahs is taking the online social and casual game very seriously. This is important because Harrahs is considered a "gambling" operation and not an Internet social gaming company. Playtika's games are clearly modeled after casino games. However, they are free to play with "virtual currency" transaction options.

This transaction is important because of the size of the payout for Playtika coming close to 90 million USD. It indicates that Harrahs envisages some serious revenue and branding coming from these games.

More importantly Harrahs has decided it is not going to wait for US gambling law to change before it goes online. Harrahs wants to build an online brand now, obtain expertise in managing an online gaming property and establish a close linkage between its off line properties and its new online brand.

Harrahs wants to acquire online players now through social gaming and understand how the social gaming business works. Most of the iGaming industry is still in denial about the importance of social and casual gaming for the purpose of profiling and up selling into Internet gambling offerings. Harrahs gets it and knows that with 1/2 billion people in Facebook, the average age over 35 and most of them playing Facebook like games there is definitely some serious cross over.

Gary Loveman has always been an innovator in the US land based market and he has been working hard over the years to bring his company into the digital age. Gary is building the business and operational acumen to make this happen. He is moving far ahead of his rivals at this point. Can they catch him?

How Will the US Justice Department's Arrest of PokerStars, Absolute Poker and Full Tilt Employees Impact The Impending New US Internet Gambling BIll?

2011-04-18T06:00:00.000-07:00

Many people in and around the online gambling space are pondering how the recent US Department of Justice allegations and arrest of PokerStars, Full Tilt and Absolute Poker associated individuals will impact the new US online gambling legislation being drafted and debated in congress.

You have to step back a bit and consider how close Senator Kyle and Senator Reid came to tacking on an online gambling amendment to an existing bill in the fall of 2010 and the debate that transpired preceding the drafting of a proposed online gambling bill to understand the timing of this move.

One of the hotly debated issues during the deliberations was the inclusion of existing online poker sites that where taking US wagers in the legislation. This would have allowed the PokerStars of the world to turn their large trove of existing US gamblers into legitimate online gamblers when the legislation was enacted. Many of the existing US casino operators have no online gaming players and no expertise in running online gambling operations. Obviously, Full Tilt, PokerStars and Absolute Pokers have players and expertise providing for a good partnership.

This lead the normally conservative casino operators to change their lobbying position relative to the acceptance of apparent violators of UIGEA to reenter the US market under US casino brands. Some of the US casino brands lobbied hard for this and brought attention to the fact that for years companies like PokerStars had being taking US wagers despite UIGEA.

This added attention was a blessing and a curse for companies like PokerStars because people started to ask questions about UIGEA and why it was not being enforced. Rumor has it that the Justice Department did not go after these companies because the law was essentially unenforceable and the Justice Department was concerned that if they did try to prosecute and lost a case then everyone would realize that there was really no US online gambling law.

I have no idea if this is true or not. However, apparently, people in a position of power started to ask questions and challenged the Justice Department to either enforce the law or admit that it was unenforceable.

It appears that the Justice Department has decided to go forward taking on Pokerstars, Full Tilt and Absolute Poker in a court of law to determine once and for all if the UIGEA is viable.

Is this a good or bad thing for the current gambling legislation being debated in congress?

Oddly one could argue that the Justice Department move could improve the likelihood of a new bill being enacted that would open up online gambling in the US providing all operators and systems providers licenced to do so have no prior history of taking US wagers after UIGEA was enacted. In fact, this may be the real reason for the Justice Department 's swift move to identify which operators could and could not run online gambling operations in the US.

Of course, one could make the argument that all bets are off for new legislation in the short run. The dust may have to settle for a bit before anyone ventures forward. If this is the case Zynga once again becomes the big winner. They are making a fortune selling virtual poker chips in their poker room. No there is no cash out so no legal issue for them.

UK Courts Challenge the Premise That Winning Virtual Currency In Social Games Is Not Gambling

2011-03-25T10:42:00.000-07:00

Facebook and casual online game properties that offer casino style games of chance have used the no cash out for "real" money argument to protect these properties from adhering to traditional gambling laws.

A recent case argued in UK courts involving stolen virtual currency used in Zynga poker and then sold to a third party for real cash forced the judge in the case to further explore the notion that virtual currency has no "real" value if it is not exchanged for traditional currency. The court concluded, that the action taken by the seller and buyer in the case, combined with the common practice of using virtual currency to buy virtual good's in many online gaming sites, does imply that the participants in these games do ascribe a real "value" to virtual currency and goods even if there is no "cash-out".

Marcus Charif, from the London law firm Harris and Hagan, has dissected this ruling in a recent publication entitled "Show Me The Money; Social Games, Virtual Currency and Gambling". Although it is obvious to people that play gambling style games in Facebook or on casual games sites using purchased virtual currency there is a real gambling element involved in game play, businesses have dodged the "gambling" label sighting the no traditional currency cash out rule.

I can not say that I blame the businesses for this practice. If that is what the law states then let the games begin. However, with mounting evidence that virtual currency transactions within games are beginning to eclipse traditional online gambling revenues you have to believe that the establishment of "value" in the virtual world is there even without a cash out to dollars of euros.

This salient yet obvious point was driven home at the GDC conference this year when one of the speakers at the conference indicated that high rollers were contributing $50,000 to $100,000 a year to virtual currency fueled social games. Certainly not all of these whales were buying this currency in casino style games. However, the behavior does make it clear that virtual currency and virtual currency have "value".

It is difficult to say how bold and brave the courts will be in taking on the virtual world value issue. Ironically, the online gambling business community may be the ones that call the courts bluff based on the industries loss of players and revenue to the virtual world. If I was running a legal online gambling operation in Europe and dealing with all of the tax issues, government harassment and anti-competitive restrictions associated with online gambling I would call into question what is happening in the virtual world. Certainly if online gambling becomes legal in the US the big guys are going to resent what is happening in Facebook and want it stopped.

2011 GDC Takeaway

2011-03-09T07:14:00.000-08:00

I was pleasantly surprised to see the end of the video console game focus of GDC this year. The game world has moved well passed xBox, PlayStation and the Nintendo Wii to bigger audiences, better revenue and a more diverse array of game content in casual, social, mobile mediums.

I attended a number of seminars and presentation on a verity of subjects and was impressed by the quality of the presentations. The following are some highlights.

Zynga In A Buying Mood - Apparently Zynga has decided to start buying up game companies in domains that they are not familiar with. I sat in on two seminars with speakers from companies that had recently been purchased by Zynga. Area Code now Zynga New Youk is a company that focuses on community style games in the conventional sense. These games are not standard Facebook social games. They are truly games that address the needs of physical communities. The presentation was on a game they created for the city of Macon, Georgia that encouraged community connections between different area codes using a community virtual currency. Not sure exactly what Zynga plans to do with this kind of company. Area Code is clearly not a Farmville or Poker oriented company. It will be curious to see how the Zynga Area Code relationship evolves.

New Toy Inc, now Zynga With Friends is the recent mobile game company that Zynga purchased. This makes a bit more sense to me then the Area Code purchase. Zynga needs a mobile strategy and Zynga With Friends helps to bootstrap Zynga into the mobile space. Zynga seems to be taking a hands off approach to this Texas company at the moment letting them create their own versions of games. However, I suspect that things will change over the coming months bringing this group into the Zynga fold resulting in games that are more closely allied with the current Zynga brand.

Sociology Meets Virtual Social Networks - There were a couple of fascinating presentations by academics from the social science and psychology domains. Their presentations brought to light that there is still much that can be done within virtual social networks(Facebook) to add richness and intrigue to our virtual networking world. It appears we have just scratched the surface of mimicking social interaction on the Web. The presenters worked for Playdom so these were not disconnected academics. Clearly, we are about to see more interesting social interaction generated by social games that will grow social networks even larger then they are today.

iPad As "The" Game Platform - Graeme Devine and old timer in the game development community and current Apple employee made it perfectly clear that the iPad is the ultimate game platform. He also made it clear that developers do not know how to develop games specifically for the ergonomics and capabilities of the iPad. Most of the iPad games to date are ports from the web or iPhone making them sub pair and even annoying on the iPad. Given the real estate and the ability to turn the iPad in an direction plus the touch, voice and video capability of the device it is predicted to excel in the delivery of unique and interesting game content. It could be argued that the iPad may become the replacement for the console providing a mobile alternative to console gaming.

Social Game Monetization - There were a host of seminars on social game marketing and the ability to slice and dice a game audience based on age, location and behavior. Much of this is well known with data being actively used to target game content and advertisers. However, the biggest revelation to me was the amount of money being spent by single individuals on virtual currency and virtual goods. One of the presenters posted a slide/graph representing a very step curve for a small segment of the social gaming community contributing a very large amount of the total revenue in games. These players were identified as "whales" a common term used in the gambling industry for individuals that spend a lot of money in casinos and in online gambling properties. In fact they are the ones that result in high profits for casinos. Some one in the audience asked how much per player these players were wagering or spending in social games. The answer was between $50,000 to $100,000 per player per year. I found this fascinating and a bit shocking. Apparently the game publishers were catering to these players in a similar way that casino's cater to their high roller customers. This is significant because the conventional wisdom is that social games and gamers do not really generate that much cash. It appears this perception is wrong. When you consider the total amount of social gamers even a small percentage of "whales" in this community actually results in relatively high numbers of players buying significant amounts of virtual goods and currency.

Analytics Are Everywhere - The degree to which social game play data can be sliced and diced is becoming an art form/science. The social web provides all kinds of data on individuals, groups, advertisements, activities, interests, behavior, etc. We appear to still be in the early phases of the use of this data for targeting, monetization, acquisition and retention. A game developer has to add features/api's into there games to extract this data if they want to have successful game. Publishers need to have data miners and systems to leverage this data to make a case for their publishing platform. These features could make or break a successful game. Where we cross the line on data mining and privacy is still uncertain. It look's like companies are pushing the limits (within Facebook policy) as far as they can to micro segment the social networking gaming population.

Gameification - Is it a game or a business application? I have written about this before and I am personally involved in the gamification of several applications. This topic was full on with the distinction between a game and an application becoming hard to detect. Check out Mod Cloth a company that has some clever ways to engage their community to further their business goals.

Clearly, GDC has gone all in and has focused on casual and social games as the wave of the future. The amount of side activity in separate meetings, parties and VC hosted events indicate that all the usual suspects are hot to get into the casual and social gaming space.

In a certain way this is a bit scary because expectations and decibel levels are really high. I could hardly move in some of the VC hosted cocktail parties and of course I could barely hear anyone. Despite this the conference was actually valuable from a practical perspective. I decided on a couple of new game development and publishing strategies based on information I received at the conference.

Monetizing Social Games Conference Summary (London January 2011)

2011-02-04T06:57:00.000-08:00

The conference revealed some interesting surprises even for the more educated social gaming attendees. The conference attendees and speakers represented a good cross section of casual games, online gambling, social gaming, social media and advertising, legal and payment processing representatives. US and European entrepreneurs, business owners, legal experts and investors provided a good mix of opinions providing a global feel to the conference. The following are some of the more provocative revelations that were uncovered during the conference.

Traditional Online Gambling Companies Are Investing In Social Gaming Companies - 888 and Bwin have decided that social gaming is the place to invest in for the future. Both Mytopia and United Games have received funding from the big online gambling companies. The interesting thing about this investment is it is not designed to feed gambling leads to the major gambling brands. Instead these social and casual game publishers/developers are looked upon as a separate business unit with the objective of penetrating the social gaming market and growing that part of the online gaming market.

This says something about the emergence of social games as a legitimate "revenue" generating segment of the online gaming market. Not too long ago conventional wisdom considered social gaming as a small and insignificant revenue generator. Most attention was placed on spending big marketing and acquisition numbers on acquiring "real" gamblers. This has obviously changed with the realization that social gaming is a legitimate contender for the wallets of online gamers.

Do Virtual Currency/Goods Transactions Categorize Social Games As "Gambling" ? The speakers and panelists were pressed very hard on this question and would not concede that virtual currency/goods transactions with gambling style social games constituted "real" gambling. The legal experts indicated that virtual transactions were not even on the radar of European regulators. This indicates that it will be clear sailing for social gaming companies using this form of revenue generation to monetize their games.

Virtual Currency Inflation - There was some acknowledgment that the flooding of the games economy with Facebook credits could be a future problem. However, most social games companies using Facebook credits were more concerned about the 30% of revenue that have to give up to Facebook to use their credits.

Facebook Threat As Payment Processor For All Facebook Transactions - The audience acknowledged that Facebook was moving into PayPal territory by becoming a payment processor for all forms of monetization within Facebook. The representative payment processors also conceded this with the caveat that the current processors would be processing all virtual currencies and not just Facebook credits giving them a competitive edge with publishers and merchants.

Getting Recognized In Facebook Is Getting Harder And Harder - With the Facebook pull back on notification based virality it is harder to achieve massive player acquisition without resorting to Facebook advertising as a primary source of lead generation. The days of exclusively depending on virality are over. It is time to pay up and get the word out through conventional Facebook advertising.

More sophisticated development of Fan pages, cultivation of groups, co-marketing relationships with other Facebook application aggregaters all need to be used in tandem to achieve critical mass for a game promotion and continual player growth.

Does The Little Guy Have A Chance Anymore? - Yes and no. The budgets for game promotion are going stratospheric with big box companies like Zynga spending tens of million on game promotion and game development. Game development and advertising is now taking the same track as Hollywood movie development and promotion leaving the smaller developer and publisher in the shadows.

With this said the little guy can have a successful social/casual game business within social media platforms. A game does not have to be in the top tier to make money or to be popular. In many was this niche market approach may be the best place to be. Under the radar and making money does not attract competitors and allows a company to sustain a realistic business model.

Portfolio's Of Games Helps To Increase Revenue Per Player - If you have a game that is reasonably successful monetize the players of that game over a wider array of games. Essentially, more game content matters. Having a bunch of games helps raise revenue per player and player retention.

Opportunistic Game Demographic Targeting - Currently the demographic of a frequent casual or social gaming player is female between 32 and 40 years of age. They are spending the most money. Yes make sure you make games for them. However, this also leaves a big hole in the market. Facebook and big box game publishers ares clearly starting to lose the per-teen. teenage and early 20's segment of the marketplace because the majority of the game content is not geared to them. This may be the biggest opportunity for new game companies or new games.

Big Brands Want In - It is no secret that big consumer brands want in on the social and casual game party. They do not have the game development chops or advertising know how of seasoned game developers and publishers. Look to the big brands as a major source of revenue. This is tricky because you do have to build and promote a popular game no matter the brand. However, if this can be sorted there will certainly be good money in it.

Mobile Casual/Social Games - Mobile games have been a big disappointment primarily because it is difficult if not impossible to get the viral effect going. With this said everyone believes that there is gold to be found in mobile gaming if cost effective virality can be achieved. There were two companies presenting that had abandoned model game development all together and moved to conventional social game platforms because of their frustration with poor revenue generation from mobile gaming. However, they both indicated that they woulds dive back in if virality could be achieved in the mobile gaming environment.

Conclusion - Now that everyone realizes that games are the key to monetizing social network participants the competition amongst game publishers and developers is intensifying. Companies that considered social gaming as a fun yet insignificant segment of the online game space have now decided things have changed and they want part of the action. This means that the competition for social gamers is going to intensify. It also means that success breeds success. If a title goes viral and generates big numbers then revenue will be plowed into yet other big budget titles. There is room for new games developed and promoted with low budgets to succeed in generating enough players and revenue to support a sustainable business model. This may be the best place to fish for success in the casual/social gaming space.

Do Facebook and iPhone Usage And Application Adoption Represent The End Of The Original Intent Of The Internet?

2011-01-31T08:19:00.000-08:00

It seems like Facebook and the iPhone have insidiously crept up on us without us really comprehending what they are doing to the original concept of the Internet. I though the original intent of the Internet was for everyone to have access to an open environment putting the responsibility on the individual to decide what content they wanted to view. No one would pay for access to applications and we would decide for ourselves what was good or bad, who our friends are and how we interact with them. Essentially, we would be in control of the content we viewed and the people we interacted with.

If you take a look at what Facebook and Apple are doing it clearly represents a very different concept. Both Facebook and Apple decide what applications you will and will not interact with. All Facebook and Apple iPhone, iPad applications are screened before they appear in the Facebook or iPhone worlds. We see and interact with what they consider to be approved content. Essentially, their acceptance criteria dictates what you and I see on the Internet.

What is surprising and perhaps a bit scary to me is that I have not heard application providers or individuals grumble(a little bit) about the tyranny of Apple and Facebook policies.

The Facebook situation is the more interesting one. The Facebook social network dictates what you do and do not interact with. This control is a bit more insidious then pure application access control. Your profile information is used to encourage you to interact with other people that have similar profiles and use similar applications. For instance, if you went to a certain university you are encouraged to join that University group and interact with that group. If a friend of yours is using an application(which is controlled by Facebook) you are stonlgy encouraged to use that app.

If you step back even further and look at other organizations that are becoming Internet usage aggregaters a picture begins to unfold revealing that only a few organizations are controlling what we see and do on the Internet. Google is an obvious one. They decide what is important and less important when you search for something. Amazon is another. They leverage your buying history to recommend what other products you should buy and what vendors you should buy from. They also host most of the major Web applications on the net with their cloud computing platform.

You may say that certain parts of the world are not as prone to be influenced by Google, Facebook, Amazon, etc. China comes to mind as an argument. However, China in many ways is even more interesting because of the control the Chinese government has over Internet content distribution. In this case RenRen, QQ, TenCent and Baidu are doing the same thing as their complements in the Western world with even greater impact because of the Chinese government's influence or Internet usage.

This observation is not meant to be Orwellian in nature. However, it should make us all start thinking about how much information we are providing these mega aggregaters and how much they are dictating what we see, experience, buy and who we interact with on the net. The next time you drop into Facebook and play Farmville or do a search in Google or buy something from Amazon give the interaction a few seconds of though. Is this what you really want to do or is this something that the aggregaters want you to do?

Will Facebook Virtual Currency Credits Derail Their IPO?

2011-01-14T07:06:00.000-08:00

In an act of desperation or genius ,depending on how you perceive Facebook, the company's adoption of a virtual currency economy may very well propel them to a much sought after IPO. Despite their creation of a "proprietary" Internet world (a topic for another blog) where they control the applications and content that a user sees or participates in they have struggled with how best to monetize their exclusive Facebook community and the applications that serve the community. Generating revenue exclusively from Ad impressions clearly was not an adequate revenue source even for a large community of 500 million plus users. This conundrum has been a head wind that the company has faced since their inception stalling its IPO aspirations. It appears virtual currency and virtual goods are coming to the rescue.

To date Facebook has not revealed any numbers relative to revenue generated by virtual currency transactions. However, if you look at the Facebook credits being issued to companies such as Zynga and RockYou and the 30% haircut they take and give back to Facebook for these transactions the numbers are very good indeed.

Despite this much needed revenue boost there is a significant problem associated with this new found revenue source. Virtual currency inflation is already rampant in the Facebook economy devaluing the virtual currency bought to date and paid for by people playing games in Facebook applications.

The inflation issue is growing for a number of reasons. Facebook is arbitrarily issuing large blocks of currency to Facebook application providers without any consideration for the total amount of currency in the system. Another contributing factor for Facebook credit inflation is the lack of another currency to peg the value of the currency against. With Zynga and RockYou discarding their own currencies and exclusively using Facebook credits Facebook credits lack a reference point to control their valuation. Of course the biggest issue is that there is no exchange or trading with traditional virtual currencies like the Euro, Dollar, Pound Sterling, etc.

So how could this inflation impact the Facebook IPO? Well if purchasers of Facebook credits realize that they bought a bunch of credits and now they want to buy something with them and the purchase price of that item continues to go up relative to the currency the holder of the currency will be less than happy. On the flip side, if the virtual good they did buy with the credits decreases in value over time the desire to transact with Facebook credits will also diminish. Essentially the faith and trust in the currency will wane and cease to have value for consumers.

Certainly demand for a product also impacts the price of a commodity impacting pricing. However, this could create a more serious problem with high demand products going stratospheric making sought after virtual products difficult to buy.

This phenomena could easily result in consumers and application developers abandoning Facebook credits and the transaction medium thus removing Facebook credit as meaningful source of revenue for Facebook.

Regulatory scrutiny by the SEC will also be a problem. They are not going to be keen on floating a company on the NYSE with an unregulated currency exchange system propping up their revenue numbers.

This is all very solvable if Facebook begins to let its currency float in relationship to some other viable currency. Unfortunately, the close association of Facebook game play and Facebook credit accumulations by gamers will squarely put Facebook in the online gambling penalty box if they peg Facebook credits against the Dollar or Euro. This is certainly something Facebook is very aware of.

This situation leaves Facebook in a bit of a jam. They have only two virtual currency management alternatives that could save their virtual currency revenue stream and IPO. They could begin to control virtual currency issuing based on overall valuation of the currency within their system. This would require them to monitor all Facebook credit transactions in their closed economy to determine the true value of the currency at any given time. If they see inflation occurring they could buy back virtual currency from application providers to keep the currency stable. They could also peg their virtual currency against another virtual currency. This is a bit more complex and requires them to create a virtual currency trading system that let's institutions, companies and individuals trade other virtual currencies with Facebook credits.

Clearly the scrutiny associated with IPO preparation will reveal Facebook's weak virtual currency revenue management and cause the company to deal with this issue. If they do not it is unlikely that Facebook will be going public anytime soon.

Virtual World Witnesses Highest Virtual Goods Sale Of $635,000!!!

2011-01-04T06:44:00.000-08:00

The virtual world's goods and virtual transactions continue to challenge the physical world in terms of transaction volume and valuations. Recently, someone sold a virtual property in the Entropia virtual world for $635,000 dollars. Yes, that is correct $635,000 USD for a virtual item. The owner sold the property in one of Entropia's worlds called Planet Calypso.

The interesting aspect of this historic sale is that I was notified by a worldwide real estate developer and builder about the transaction. Clearly, important people in the physical business world are taking notice of the meteoric rise of virtual goods and currency and wanting to find out how they too can take part in this opportunity. I certainly have a large and active contingent of virtual world/currency business owners and entrepreneurs contacting me about trade in virtual items. However, this is the first time a successful conventional physical world business leader has seriously stated an interest in figuring out how to make the cross over from a physical business model to a virtual model.

The Entropia world has been with us for some time and has been a pioneer in virtual goods sales and virtual currency/physical world currency exchanges. They have been a real sleeper from the press perspective since Facebook decided to get into the virtual currency business. We tend to forget about World Of Warcraft. Entropia, WeeWorld, and IMVU to name a few virtual worlds that have been around for some time and actually have significant valuation form an investment perspective. They have great revenue streams, dedicated players, a built in social network and a constantly changing environment that keeps people engaged over time.

Are these worlds the next big investment targets? Well of course, I have already been contacted by a VC about how best to take advantage of these virtual world properties.