Muddled Direction On Legalization Of US Internet Gambling – Despite all of the hand waving and breast beating by legislative representatives and proponents of legal US gambling the timing and characteristics of actual enactment of gambling law are still unclear and subject to speculation. Will the states or federal government move first? If so when will businesses be able to launch online gambling sites? If both state and federal governments move to craft Internet gambling legislation how will these two approaches co-exist? Despite this confused state of how the laws will unfold  businesses are seriously moving forward with plans to address the eventuality of legal gambling in the United States Of America.

Land Based  Casino Operator Strategy (non-Indian) – The big casinos in Vegas and the larger regional casinos are cutting deals with existing European online gambling operators and vendors to be prepared for the day when Internet gambling is legal in the US. Bwin, Playtech, 888, etc are all in play. There was no evidence that the land based operators where in the process of building their own Internet casino platforms. Clearly, the land based casinos  realize that they do not have the expertise to build, run and maintain Internet gambling businesses. However, there is a question in the minds of many people as to whether this strategy will ultimately help launch European brands in the US at the expense of the US casinos? Time to market is a great motivator. However, in the end the casinos  have to learn how to own and operate  online gambling operations to be successful.  

Land Based Approach To Marketing Online Gambling Properties – Despite the fact that land based casino operators will largely be using third parties to operator their online business they do believe that their land based player databases are a potentially good source of leads for their online properties. Some people and even the casinos themselves questioned this assumption. This begs the question. Do land based gamblers play online? If so, what is the percentage? If they do not or the percentages are low how will the casinos build an online marketing team to attract players to their properties? Can land based award systems be integrated with Internet gambling operatations to encourage moving traffic to and from land and Internet gambling properties?

American Indian Nation – The American Indian tribes  represented at the conference  where very honest about the potential opportunity and challenges associated with Internet gambling. Their biggest challenges are their fragmentation and their lack of experience with any online gaming activity. This includes casual, social or Internet gambling games. Their fragmentation is an issue because it will impact liquidity and management of Internet gaming properties. Internet gaming can consolidate quickly around high volume properties. The Indian nation will have to pull together tribes across the country if they want to seriously compete in this space. If California is one of the first states to legalize online poker the California tribes will be forced to host one poker room and hope that they can win this battle. In the end the tribal leaders will have to pull in Internet gaming and general internet application, marketing and hosting expertise very quickly if they expect to be successful in this space.     

The Social Casino – It is no secret that some of the big land based casinos and IGT are all in when it comes to the social casino. They believe, even in the absence of any immediate change in Internet gambling law, they have to position themselves as leaders in the online social casino and gaming space. Other members of the GIGSE audience were not as convinced. It was clear from many of the questions asked at the conference that a large percentage of the land based gambling community does not understand the online social gaming space or its potential relationship with the online gambling market. This is surprising given the wholesale adoption by European online gambling operators of   social gaming. Many of them have launched properties in Facebook. The critical thing for all operators to understand is the relationship between social gamers and Internet gamblers. What is the overlap(if any) and how do you use both environments in tandem to attract, retain, monetize and up sell players.

It should also be noted that Wynn resorts is rumored  to be cutting a deal with Zynga to launch and manage their for money Internet gambling operation. Obviously, the Wynn people get the connection between social and traditional Internet gambling.

Facebook – For the first time in GIGSE history Facebook representatives were at the GIGSE conference. They were very open about it having a cocktail party inviting key individuals from the conference.  It is clear that Facebook is not only interesting in hosting social games. It is also interested in getting involved in hosting gambling games within Facebook. It is difficult to determine how they are going to monetize gambling games in Facebook. They were certainly pushing their advertising model. However, they may decide to take a percentage of the gaming transactions, similar to their 30% fee for virtual currency transactions.

Gaming Startups – The Launch Pad event this year featured  game and gambling startup companies interested in raising capital for their ventures. The contestants gave excellent presentation with Use It Better winning the audience and judges thumbs up. Use It Better is an interesting company because its focus is on game analytics with the goal of optimizing a game to improve player retention and monetization. Clearly game analytics has emerged as one of the more important sectors in the gaming space due to the extreme competition that exists for social and Internet gamers. The other favorite of the judges was a cross over gaming company called Virtual Gaming Worlds. This company embeds gambling content within its virtual world. It allows people to create their own virtual worlds and add gambling slot machines and other simple gambling games in their properties. This allows the person that created the world to generate revenue from their gambling operation.  The idea is clever and fun and very likely to grow large profitable communities.

In conclusion, the light bulb has been turned on as it relates to US Internet gambling. We all know it is coming. We are unsure of what form it will take. Despite the lack of clarity businesses of all kinds need to understand how to run US based Internet gambling operations and either dominate the space or carve out a lucrative segment of the market. First to market will be very important if not the primary factor influencing the success of a US based Internet gambling property.

Eager to marry the popularity of social gaming with real-life betting, Zynga is in talks with casino company Wynn Resorts about a potential online gambling partnership, The Post has learned.

Zynga, which sees huge revenue potential in moving from pretend to real-life wagering, needs to form partnerships with casino operators in a number of states if it is to cash in on an expected boom in Internet gambling.

Neither Zynga nor Wynn Resorts responded to requests for comment.

At least 20 states are considering legalizing online gambling after the Justice Department reinterpreted a decades-old federal law in December and found it only banned sports betting and not other forms of online gambling.

Since the DOJ move, Zynga CEO Mark Pincus has been touting the company’s prospects for parlaying its popular virtual poker game into real-life betting, calling the possibilities “mind-blowing.”

While Pincus is waxing poetic about poker, experts said the odds are stacked against the social media upstart, which will need to partner with more than just Wynn to become a major player.

Among the problems: Most of the proposed state legislation would restrict online licenses to those who already are licensed to run a state gaming operation. Wynn only operates in Nevada.

New Jersey, for instance, has a bill that passed the state Senate and is now in the Assembly that would grant Internet licenses only to those with computer servers based in Atlantic City casinos.

“Our goal is to help existing casino operators. We don’t know anything about Zynga,” state Assembly Regulatory Oversight and Gaming Committee Chair Ruben Ramos Jr. told The Post.

In Connecticut, Native American tribes have reportedly said the state would be violating its agreement giving them exclusive casino gaming rights if it issued an online license to anyone else.

Likewise, Iowa in its pending bill offers online licenses only to those already authorized to operate state gambling boats and racetracks.

US Digital Gaming founder Richard “Skip” Bronson said, in a state-by-state scenario that “the existing gaming interests are most likely the ones who will be getting the licenses for Internet gambling.”

Sources said Zynga may try to move first in the UK, where online betting is already legal, though competition is stiff.

Indeed, Facebook, which does not want to host online gambling on its own site, has held conversations with UK online bookmakers William Hill and Ladbrokes about offering Facebook users access to their sites, a source said.

Reps for Facebook, William Hill and Ladbrokes did not return calls and messages seeking comment.

Stern Agee Managing Director Arvind Bhatia said if Zynga is unable to participate meaningfully in legalized online gaming here, its shares could fall as much as 10 percent because investors have baked into the share price expectations of new gaming revenue.

“I think, given that its core market is slowing, the potential gaming revenue is important.”

If you define virality (K-Factor) as a phenomena that results in the spreading of information pertaining to or involving the self perpetuating spread of information and opinions about a product or service, there has not been a truly viral application in Facebook since 2007. In 2007 when Zynga launched the first social game, poker, in Facebook, Zynga was successful because they launched a game that was naturally social and plugged this game into an environment that facilitated the proliferation of the game throughout the Facebook community. Over the years Facebook has removed the mechanisms that would make it easy for a popular social game to go viral. They have done away with the forced invites to other members and are now eliminating invites all together. Consequently. Facebook has become a cleaner environment where people are less likely to become “exposed” to a game unless they take the initiative to experience it.

Facebook has done this for a couple of reasons. The more benign  and community friendly reason is to reduce the forced exposure of a community to a game. There were certainly many complaints over time as to why a person would be exposed to a game or invited to play a game when they had no real interest in the game. Also, as more games have been pushed in the Facebook environment people become frustrated by the bombardment of notifications they were getting from the game publishers.

A less community friendly reason for removing virality features from Facebook is revenue related. If you look at Facebook’s S-1 filing you will notice that they rely heavily on advertising revenue to fuel their company. In fact 80% of this revenue is coming  from advertising and 20% from virtual currency transactions.  Consequently, they are forcing game and application providers to buy advertising in Facebook to drive traffic to their properties.

Granted the concept of the “Like” button and posting recommendations to your wall are free ways to get an app or game notices. However, this is a really difficult way to get any meaningful exposure to an app if you consider the size of Facebook and the requirement for a Facebook user to find the app or game and take an action. Also, these mechanisms require a conscious effort to endorse a game.

So what does this mean for application and game providers that want to leveraged the social graph. Well if you are in Facebook the social graph becomes significantly muted and the world looks a lot like  standard web marketing through advertising. Essentially, you have to advertise to get noticed in Facebook. Certainly Google+ could take advantage of Facebook’s lack of viral features and add such features to Google+. This would certainly increase the likelihood that more game and application providers would jump into Google+. Right now app and game developers see little reason to invest in developing in Google+ because its community is relatively small and they have not figured out how to properly link applications to their social graph.  Certainly the concept of circles of social connections is an interesting one that Google+ could combine with application invites to stoke the growth of apps and more Google+ members. We will wait and see.

Game developers could start to build truly social games to offset the lack of forced notifications within the social graph. Currently, many game publishers, especially Internet gambling games, are being introduced into Facebook in anticipation of legal US gambling. The problem with these types of games is that they are not social games and have no natural viral tendencies. Make your game social.

The mobile gaming environment has been an alternative and in some cases a must have for game publishers.  Unfortunately there is even less viral components in a mobile environment. Certainly, a game like Angry Bird went viral even without any viral features.

The social game world is becoming harder to be successful in and it is becoming expensive. With the social networking world converging on only one(with the potential for Google+?) not so social social network getting a game or any app recognized in Facebook becomes a standard ad and media world where traditional web marketing skills get pushed to the forefront.

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.

“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. 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. We currently require Payments integration in games on Facebook, and we may seek to extend the use of Payments to other types of apps in the future.”

 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.

Zynga is getting ready to try its hand at online gambling.

The company has confirmed to All Things D that it is actively investigating several opportunities, and is in talks with several partners about gambling on the Internet.

A Zynga spokesperson provided this statement to AllThingsD:

“We build games and experiences that our players want and love. Zynga Poker is the world’s largest online poker game with more than 7 million people playing every day and over 30 million each month. We know from listening to our players that there’s an interest in the real money gambling market. We’re in active conversations with potential partners to better understand and explore this new opportunity.”

As with any new entrant in the space, Zynga will have to fulfill several requirements, meaning any major rollout is still months away.

The San Francisco-based social games maker will have to wade through a maze of state, national and international regulations. It will have to secure the correct licenses, and it also needs the right technology to make betting over the Internet secure.

For either of these last two requirements, a partnership or acquisition of an online gambling organization or other technology would make the most sense, instead of starting from scratch.

However, the effort could easily pay off.

Zynga was one of the first online gaming companies on Facebook, and continues to dominate the platform today. If it is able to get its toe in the door, just as the laws change in the U.S., it could be a leader yet again.

Back in October, Zynga first started showing broad interest in the casino category.

Zynga founder and CEO Mark Pincus announced at a press event that the company was going to launch Zynga Casino, which would serve as a single destination on Facebook to build off its strong brand in poker.

Its first new game, which has not launched yet, will be bingo.

Until now, the company’s efforts have been limited to building social and mobile games that are given away for free and monetized through the sale of virtual goods.

Getting users to make bets and part with real money could prove difficult, even for a company that has so many dedicated fans.

One thing Zynga has going for it is that social games are frequently compared to gambling because of their addictive nature — both lure consumers into spending a few more dollars to continue playing.

The casino genre has also been quietly racking up big numbers on Facebook.

Besides Zynga Poker, which is the most popular poker game on Facebook, and one of the company’s longest standing titles, there are many other sleeping giants. Sean Ryan, Facebook’s director of game partnerships, has even called them “unbelievable monsters.”

Said Ryan: “It turns out that people are completely okay winning virtual currency that they can never cash out.”

If players actually have the chance to win money, who knows the size of the opportunity?

A Facebook spokesperson said the company does not necessarily see a future for gambling on the social network. “We don’t have any plans to get into real-money gambling,” she said.

It’s unclear if that eliminates others from experimenting. In the meantime, it hasn’t stopped game makers from exploring the category or the concept.

Last week, Seattle-based Double Down Interactive, which was named by Facebook as one of the most popular game makers of 2011, was acquired by video poker giant International Game Technology for $500 million. It has 4.7 million monthly active users playing a variety of games, including blackjack, slots, video poker and roulette.

The deal closely followed Caesars Entertainment’s purchase of Playtika, an Israeli game company known for its Facebook title Slotomania. Caesars bought the company in two stages, the first of which was rumored to be purchased for up to $90 million.

Caesars, which filed to go public in November, declined to comment because it is currently in its quiet period.

However, some of its plans were revealed in a document filed with the Securities & Exchange Commission. It said its Caesars and World Series of Poker brands are dedicated to online gaming, and will take advantage of real-money gaming as it becomes legalized. Right now, Caesars Entertainment offers games “for fun” in jurisdictions where online gambling is not yet legal, but has identified the legalization of online poker in the U.S. as “the largest opportunity in online gaming in the near term.”

Still, the biggest hurdle is the law.

Internationally, several countries have permitted gambling for some time, and those areas represent the most immediate opportunities.

But there are signs of the U.S. beginning to open up, too. On the day before Christmas, the Department of Justice gave the online gambling community an early present, according to a blog post written by Nelson Rose, a professor and lawyer.

“President Barack Obama’s administration has just declared, perhaps unintentionally, that almost every form of intra-state Internet gambling is legal under federal law, and so may be games played interstate and even internationally,” Rose wrote.

Essentially, what the Justice Department did was to issue a new interpretation of the Wire Act of 1961. Under the new ruling, it interprets the act as only outlawing bets on sporting events — not all events and contests, according to an article in the San Francisco Chronicle.

With that clarification in place, it will now be up to every state to pass legislation outlining operating procedures. So far, Nevada and the District of Columbia have moved quickly to enact laws. To get other state laws passed could be a lengthy process, especially during an election year.

In the meantime, launching games only in Nevada and D.C. doesn’t represent the big opportunity everyone was hoping for.

To be competitive against Caesars and IGT, Zynga may have to partner or acquire companies that already have the licenses in place or the necessary expertise.

Some of the more obvious candidates include Bwin, which operates PartyGaming.com and is traded on the London Stock Exchange; Betfair, and other operators, like Bodog, Bet365 and 888.com. Many are based in the U.K. and handle a variety of casino games and sporting contests there.

The entrance into a new market, such as gambling, would take substantial resources, and Zynga has them thanks to its public offering. In December, it raised $1 billion, making it the largest Internet IPO since Google.

So, will Zynga be the next “unbelievable monster?” Clearly, it is willing to try.

CNBC first reported the rumor during an afternoon broadcast, but an official announcement is expected after the markets close. A Double Down spokesperson declined to comment.

UPDATE: The two companies have confirmed the transaction. The deal includes $250 million in cash, $85 million in retention payments over the next two years and up to $165 million in cash payable over the next three years subject to Double Down meeting certain targets.

As it turns out, casino games on Facebook have quietly been ringing up a pretty healthy business.

Even though gambling isn’t legal online — yet — players are still finding slots, cards and other casino games addictive. Most of the games are free to play, and of course, players don’t ever get to cash out their winnings.

DoubleDown Casino has 1.3 million daily active users and 4.7 million monthly active users, according to AppData.

While that doesn’t rank it as one of the most-played games, it is frequently mentioned as one of the most popular and could be one of the more profitable.

Facebook named DoubleDown Casino as the fourth-most popular game of 2011, based on user reviews, and in October, I reported that DoubleDown was generating $140,000 a day in revenue, according to sources close to the company.

DDI’s game on Facebook is like visiting the Las Vegas strip.

Over the past year, it has added several casino games to its app, including blackjack, slots, video poker and roulette.

The deal closely follows Caesars’ purchase of Playtika, an Israeli game company known for its Facebook title, Slotomania. Caesars purchased the company in two stages, the first of which was rumored to be sold for up to $90 million.

With both Caesars and IGT putting their hats into the social gaming ring, it’s hard not to wonder if — or when — gambling will become legal on the Internet. Clearly, they are betting that Facebook could be one of the dominant platforms where it takes off first — if not in the U.S., then maybe in one of the more than 30 countries where Double Down operates.

IGT designs, develops and manufactures gaming machines, making it a strong candidate for merging legal gambling with online efforts, especially now with the expertise of Double Down behind it.

DDI was co-founded by Greg Enell and Cooper DuBois. The two founders used the profits from a previous company, Pickjam, to fund the Facebook game start-up.

Enell will continue the company’s operations from its Seattle offices, where it has 70 employees.

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.”

“…Not a lot of groundbreaking news except for the fact that Murren alluded to new social programs or apps that he described as ‘MGM meets Zynga’. Zynga is the popular publisher of Farmville, a Facebook powerhouse. This jives with what we’ve heard about former Wynn exec Andrew Pascal’s new project, IncuBet.

I’ve said it before and I’ll say it again – this is gonna be big time stuff for these gaming companies. My guess as a first foray is something that fits well within existing law – a way to push MGM brands and hmmmMlife through Facebook – some sort of game that lets you either build casinos or pretend to be a high roller. Not all that innovative (it’s been done) but this time it will have real gaming brands behind it, which could make all the difference.”

“…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).

“…For a long time I’ve been saying that younger gamblers are pretty bored by slot machines and features like interactions with Facebook, Twitter, etc… seem overdue. Perhaps this is a move in that direction? I’ve met Pascal a few times but to say I know him would be massively overstating. Still, my impression is that he’s a very smart guy and sees the tech blind spot that a lot of these gaming and hospitality companies have.

Meet incuBET

According to the SEC, Pascal, along with former WagerWorks exec Paul Matthews and a third partner, Humam Saknini have raised $5 million for their new venture.

My original thought was that these guys were adding some social elements to existing slot and video-based games – say maybe coming up with new ideas and partnering with an existing device maker like IGT (WagerWorks was sold to IGT and Matthews went on to work there so relationships likely run deep). The sparse incuBET homepage almost makes it sound like they want to inject wagering into ‘casual gaming’, which is the same code phrase used for games on Facebook, the iPhone and iPad.

Could this be a bigger play than originally thought? Obviously, adding betting to Facebook games wouldn’t be legal in the United States under current law… and changing that sounds like a mighty big job… If I was incuBET, I’d at least be thinking about that possibility for the long term, while working under existing law to make slots more appealing to younger gamblers in jurisdictions that allow them.