Here’s Why Zynga Has Not Actually Abandoned Their U.S. Online Gambling Plans

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Much ado was made last week about Zynga abandoning the American market for real money online gambling.

But I don’t think that’s what actually happened. And I’ll tell you why.

That’s not actually what they said

I think it’s important to first ground the discussion in what was actually said. The primary statement from Zynga on the matter came via a press release covering Q2 earnings (emphasis mine):

Zynga believes its biggest opportunity is to focus on free to play social games. While the Company continues to evaluate its real money gaming products in the United Kingdom test, Zynga is making the focused choice not to pursue a license for real money gaming in the United States. Zynga will continue to evaluate all of its priorities against the growing market opportunity in free, social gaming, including social casino offerings.

The earnings call offered virtually no elaboration on the issue, so the above is the definitive statement on Zynga’s new RMG position.

Now to me, “not pursuing a license for real money gaming” is quite a bit short of declaring a full stop to your real-money online gambling ambitions.

I can see how some might consider that mere semantics.

Fair enough. But it’s not the only reason why Zynga shouldn’t be counted out of the developing market for regulated online gambling in the United States.

Zynga’s optimal role in the U.S. RMG market

Before I can get to that, let’s have a quick discussion of the niche Zynga would likely fill in the regulated U.S. market.

There’s been some popular confusion on this point. Some have assumed Zynga would be a full-fledged operator, but that was never a serious scenario. Nor was the idea that Zynga would just hand over their brand or database to an operator.

So what role would Zynga play in a U.S. market for real-money online gambling?

Adam Krejcik, Managing Director of Digital & Interactive Gaming for Eilers Research, summed it up well in his post-earnings Zynga analysis:

“In our opinion, the more prudent question to ask going forward is whether or not Zynga plans to pursue a B2B strategy (i.e. license its technology and content to third party operators),” wrote Krejcik, adding that “a B2B strategy makes much more sense for Zynga and while the revenue opportunity is significantly smaller, we believe this would be a much more viable and realistic solution.”

Fixing Zynga Poker protects Zynga’s RMG potential

Zynga Poker is in trouble.

Revenue is shrinking. The software shows the wear of a product taken for granted. New competitors – like PokerStars and the WSOP – pose unique and potentially existential threats. And with social gambling heating up, more competition from more corners (with potentially deep pockets) is on the way.

That’s not just a problem for Zynga Poker. It’s also a massive problem for Zynga’s real-money potential.

Without a dominant position in the social poker market, both in terms of traffic and technology, Zynga loses much of their pricing leverage as a B2B provider. They become just one of several near-fungible commodities available for the choosing.

Zynga now sounds like they’re committed to fixing poker.

David Ko promised investors that Zynga is “deploying top talent to get this franchise back on track, and we’ll do more in the coming months to improve the experience for our players as well as the performance of the game.”

Meet the new plan, same as the old plan

So, here we are. Zynga is planning to focus on Zynga Poker, the cornerstone of any successful B2B strategy for the U.S. real-money market. Meanwhile, they’re not pursuing any license to participate in that market, but they are continuing their UK-facing “test” of real-money gambling.

How is that any different from the world before Zynga’s recent announcement?

It’s not. Zynga had already decided to pass on Delaware and New Jersey. Their application in Nevada was a general one, a potential (but not necessary) precursor to a license related to online gambling. Their 2012 lobbying spend on the federal level was paltry. And, tellingly, their spend in home state California was even smaller.

In fact, the most substantial difference between Zynga pre and post-announcement is their stated recommitment to Zynga Poker – which is a net gain for their potential in the American real-money market.

Don’t they need a license?

Zynga isn’t actively pursuing a license, but the level of license they would require in the B2B scenario described above generally isn’t as difficult to acquire as an operator’s license. Think about New Jersey, where regulators seemed confident that they could vett the potential online partners of multiple casinos in the space of a few weeks.

And don’t forget: Zynga already completed an application in Nevada. So they’re already well-versed in the process.

The point: Yes, Zynga will need a license to take part in the market. But their lead time to acquire one should be relatively minor. And the rollout of online gambling in the United States isn’t exactly moving at a zippy pace.

But they’re not focusing on RMG

They don’t have to. Zynga’s ideal near-term strategy for the American real-money online gambling market is:

  • Re-assert the dominance of Zynga Poker.
  • Pursue the technological lead on mobile gaming.
  • Release compelling social casino titles.

All three items also appear on Zynga’s near-term strategy for improving the performance of the company at large.

To put it another way: Mattrick’s plan for refocusing Zynga should naturally produce the byproduct of positioning the company as an attractive, premium-commanding B2B supplier for operators in the regulated U.S. market.

So why the dramatic announcement?

Was the real-money gambling question becoming a distracting one internally for management and development teams? Possibly.

Did new CEO Don Mattrick want to lop off what some considered an illusory RMG premium from the stock to define a watershed market for his turnaround effort? Could be.

It’s an interesting question, and I’m curious to hear others’ answers, as none of mine are really developed or satisfactory.

- Chris is the publisher of Grove also serves as a consultant to various stakeholders in the regulated market for online gambling in the United States.
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