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

NEW YORK ( TheStreet) -- Keith Whyte figures that social gaming giants such as Zynga ( ZNGA) are going to have some, uh ... issues entering the world of traditional for-pay gambling.

"The line between social gaming and online gambling is a big step," Whyte explained to me in one of several long conversations we've had about gambling -- or gaming as it's called in the industry. "It's not what the traditional Zynga user is going to be used to seeing."

Whyte knows a thing or two about the challenges for-pay gaming presents. He is the executive director of the National Council on Problem Gambling, a Washington, D.C., trade and social action group. Sponsored mostly by gaming industry giants, the council conducts outreach, offers gaming addiction support and studies industry trends.

Whyte was doing some serious barnstorming in anticipation of the recent National Problem Gambling Awareness Week. He is the in-demand speaker for industry giants including MGM ( MGM), Caesars ( CZR), Wynn ( WYNN) and others through the challenges posed by the evolution of gaming technology, from our puritan founders' love/hate relationship with risk, to betting telegraph wires that were the foundation of organized crime, to the dawn of online gaming -- legal and illegal.

"This industry is facing this same dramatic shift it saw back with the invention of the live pocket lipstick camera for televised poker tournaments," Whyte said. By showing an audience the players' cards, he said, formerly boring Texas hold 'em tournaments became must-see TV.

The game-changing event that Whyte is talking about is the "Web 2.0-ization" of online gambling. As investors have been buzzing about, social gaming services such as Zynga are expected to move into full-on, for-money online gambling.

A very nice Zynga spokewoman, Kelly Pakula Kunz, declined to comment. But it doesn't take too much digging to see how central so-called real-money gaming -- or RMG -- is to a company like Zynga.When I clicked on its recent SEC filings I found the term RMG 29 times, including a bolded reference as a strategic goal.

The company is expected to begin real-money gambling with a U.K. partner called Bwin.party later this year. That will continue the transition to domestic gaming operator it began in December, when it applied for a Preliminary Finding of Suitability from the Nevada Gaming Control Board.

"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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