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The Digital Skeptic: Don't Bet on Zynga's Gambling Ambitions

"Only casinos in Nevada can have a license to operate an iGaming website, but Zynga can be a supplier," Jennifer Webb, a regulatory and legislative manager for Washington, D.C. gaming analysis firm Gambling Compliance said via email. "So similar to what they are doing in the U.K., Zynga would need to partner with a Nevada company. Zynga would also need to partner in New Jersey, should they be interested in entering the market there."

With global online gaming set to reach $183-some-odd billion by 2015, according to PricewaterhouseCoopers, that all should mean a much-needed, big, fat, winning pot for Zynga.

That is, until you actually do a face-to-face with a tech savvy gambling professional such as Whyte.

"Social gaming might appear to be for-pay gaming," Whyte said. "But at its heart, it's a fundamentally different beast. Going from one to the other will be a serious challenge."

The freemium Web is not gambling
Whyte's flash of critical investor insight is this: The blurry, keep-users-clicking-no-matter-what freemium economics at the heart of social gaming operations such as Zynga runs 180 degrees counter to the strict win-or-lose laws and culture of for-pay gaming.

"To keep you playing free-to-play online games, you can't lose consistently as you might in real gambling," Whyte said. Since social gaming companies get paid only when they upsell customers on advanced products, the no-win economics of the free Web mean they can ill afford to have users surf away upset at losing. That could lead to social games that not only offer dramatically different odds than traditional for-pay gambling, but odds of winning that almost certainly change dynamically as games proceed to keep users hooked.

"Odds that change as you play are completely antithetical to the strict rules of gambling," Whyte said.

If you take a quick wander around the emerging next-gen digital gaming casino, you'll see what he's talking about. First, the online gaming space is a mature, brutally competitive business. Giants such as PokerStars, part of U.K.-based Rational Poker School Limited, have decades of experience running online games, and the company is set to buy the 800-room Atlantic Club in Atlantic City, N.J. And Zynga is far from the only innovator. New York-based investment firm Cantor Fitzgerald has made a long-term bet in sophisticated for-pay gaming with its Cantor Gaming. I demoed its new wireless gaming app in Caesar's Palace on the Vegas strip a few months ago, and it's as compelling as any online game experience I know of.

Zynga will have to play a serious magic card to be competitive here.

Trouble in the fields
"I'll be interested to see what the Zynga product turns out to be," Whyte said. "It might be terrific. But gambling is one of the early innovators of any technology. Social gaming is a relatively late entrant."

That means, friends, that gearing up for for-pay profits in social gaming will almost certainly be trickier than merely buying a FarmVille harvester.

In fact, it might be Zynga's most brutal row to hoe.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
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