Zynga Has to Put Real Money on the Online Poker Table, or Else

Correction: Corrects the third paragraph to say CEO Mark Scheinberg's father Isai, not Mark Scheinberg, is under indictment for allegedly violating U.S. banking laws.

NEW YORK (TheStreet) -- Zynga (ZNGA) is facing a newly well-heeled rival across the online poker table. If it wants to win this game it had better start adding real money to the pot.

Fueled with equity and debt financing from Deutsche Bank (DB), Barclays Plc (BCS), Macquarie Group (MIC) and Blacksone Group (BX), Amaya Gaming Group (AMYGF) announced the acquisition of Oldford Group, the largest real money poker casino. Oldford Group owns Rational Group, the operator of PokerStars and Full Tilt Poker.

The deal values Oldford Group at $4.9 billion, with founder and CEO Mark Scheinberg leaving Oldford Group. Isai Scheinberg, Mark Scheinberg's father, is under U.S. federal indictment for allegedly violating banking laws designed to prohibit online poker sites. Isai Scheinberg denies any wrongdoing and is hopeful for a future settlement. Rational Group's other executives will remain.

The purchase also provides a new and updated metric to value Zynga. According to pokerscount.com, Zynga is the number one play money poker site. PokerStars is number two with about half, and Full Tilt arrives as the fourth largest free money site with one third as many players.

Zynga also offers real money poker but hasn't expanded beyond the U.K. market where it's licensed. Zynga's latest real money poker expansion was to offer a portal through long-term partner Facebook (FB). Last week, Zynga launched play money Zynga Poker Leagues.

Zynga needs to expand its real money poker offering not only because it's leaving a tremendous amount of money on the table (no pun intended), but also, the company doesn't want to risk the window of opportunity closing.

If the company expands its market while converting 15% of the current free money player base into live money players, Zynga real money poker will become the second-most-popular real money poker site. PokerStars has a seven-day average of 15,000 users and 18,500 real money players.

888poker is currently ranked number two in real money poker with 1,900 real money players and only 600 play money users. PartyPoker is number three for play money at 11,000 users and 1700 real money players.

PartyPoker's numbers are especially interesting because Zynga poker utilizes bwin.party's network and software, same as PartyPoker. If Zynga can achieve half the success of PokerStars' 2013 $1.1 billion in revenue and $420 million in non-GAAP earnings, then the poker franchise should be worth about half of PokerStars $4.9 billion price tag.

Even after discounting the valuation because it's not the real money space leader, the shares are double the current $3.10 a share price. By leveraging organic growth through the current user base, Zynga could have an investment competitive advantage because the earnings wouldn't have to support the debt payments Amaya Gaming Group will pay.

Without its play money poker pole position, real money dominance becomes increasingly challenging. The world of online poker won't sit and wait forever for Zynga to capture market share. Once PokerStars can gain licenses within the U.S. market, it will be easier to capture play money users away from Zynga through incentives and critical mass.

The reason eBay (EBAY) can dominate online auctions is because it's the only site with the critical mass of buyers and sellers. It's the same theory for poker sites. Users are attracted to sites with the most players. If a site loses its critical mass, it's almost impossible to regain it. Using auction sites as an example again, Yahoo! (YHOO) was the number two auction site and the only real viable eBay alternative circa 2001.

Yahoo! decided to begin charging for auction listings, and in the process lost its critical mass of sellers in the process. A loss of sellers resulted in fewer buyers and without the buyers, sellers never came back, even after Yahoo reversed its decision. eBay has remained the largest uncontested online auction site since.

Zynga should move quickly to further monetize its free money poker base before users leave to play on other sites.

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

Follow @RobertWeinstein

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

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