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TheStreet Open House

Bitcoin and Poker: Zynga's Best Friends

Stock quotes in this article: ZNGA, FB, V, MA, AXP, JPM, BAC

NEW YORK (TheStreet) -- Bitcoins may help Zynga (ZNGA) reach profitability in 2014, but not for the reasons you may think. Earlier this month, Zynga, the popular maker of many games played on Facebook (FB), announced it would start accepting bitcoins as payment for virtual goods. If you missed it, here's the story on TheStreet in part:

"Zynga (ZNGA) Tests Bitcoin in FarmVille 2 and Other Games."

"The social game developer is using popular Bitcoin service provider Bitpay for its test. The test lets gamers buy in-game currency in games such as FarmVille 2, CastleVilla, ChefVille, CoasterVille, Hidden Chronicles, Hidden Shadows and CityVille using the cryptocurrency."

Will adding the ability to buy virtual seeds to plant in FarmVille 2 create an abundance of crops, resulting in a crash in prices of virtual commodities? Don't count on it, most players with the means and desire to buy Zynga cash are probably content to do so with their credit cards.

Adding a new method of buying what amounts to little more than different colored pixels on a screen won't likely add much revenue or bottom line profits, unless of course, the colored pixels are in the shape of poker chips. Last year Zynga added ZyngaPlusCasino and ZyngaPlusPoker to its lineup of games.

According to Zynga's latest quarterly filing, poker revenue accounted for 21% of online game revenue during the third quarter ended September 30, 2013. FarmVille came in a close second, at 20%, and CityVille brought in 12%. ZyngaPlusCasino wasn't quite as successful as ZyngaPlusPoker, based on the company disclosure that no other games resulted in at least 10% of the total game revenue.

What I find remarkable is how much emphasis is placed on FarmVille, and to a lesser extent the other games, when ZyngaPlusPoker is the dominate game, based on revenue, and the potential for growth is enormous. Keep in mind the succulent fact that ZyngaPlusPoker launched in the second quarter. Poker didn't take a year to develop into a meaningful franchise for Zynga; in only one quarter, ZyngaPlusPoker become the No. 1 game.

Meanwhile, back at the farm (cheesy pun, I know), many analysts and pundits remain focused on declining MAUs (monthly active users). Sure, it's a key metric to be sure, but it appears to me that the free games are, or may soon, become relegated to the dog house while real money poker and casino revenue become the focus. It's certainly not hard to figure out why.

Currently, Zynga is only licensed in the already competitive U.K. market. The company is also the No. 1 play-money poker site in the world,  according to PokerScout.com. Three states, Nevada, New Jersey and Delaware, currently allow some online gambling (more state, if you include lottery sales).

As more states bet that online gambling can help solve their budget woes, the opportunity for Zynga increases. The recent addition of New Jersey could prove to be a tipping point for other states looking to cash in. Don't forget that all Zynga needs is one state to allow regulated world-wide gambling licenses and the majority of the market opens up. New Jersey has some legislative support for a company to locate in Atlantic City and operate. If not there, it won't take long for another state to figure out how much tax revenue is up for grabs.

While its license is currently based in the U.K., the company accepts currencies other than the pound including dollars, euros, yen and Canadian dollars. Accepting different currencies may make funding easier for users, but the real bottleneck comes from credit card companies. Visa (V) and MasterCard (MA) allow online gambling transactions where it's legal, but American Express (AXP) doesn't. Even where online gambling is legal, some card issuers, including J.P. Morgan Chase (JPM) and Bank of America (BAC), won't.

Along comes bitcoin. Bitcoin removes the pesky credit card approval issues for both user and merchant and eliminates credit card fraud and disputed charges. Zynga offers other methods of payment, but bitcoin offers much lower transaction fees (conversion and BitPay fees notwithstanding).

The net result is, Zynga should be viewed more as an attractive online gambling play and no longer as Facebook's outside dog begging for a few table scraps. If you believe online poker is here to stay, the company is uniquely well positioned to hunt for increases in profits.

At the time of publication, Weinstein had no positions in securities mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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