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In Social Gaming Boom, Lawyers Hold the CardsThe "gamblification" of online gaming is drawing scrutiny from regulators and spurring a lobbying push from Silicon Valley.
2013-07-19 04:16:36 PM
SACRAMENTO — Think of it as Vegas minus the seafood buffets, the Celine Dion shows and the clanking cash-out din.
Millions worldwide are flocking to online casino-style gaming sites that feature all the interactive flash that Silicon Valley designers can conjure. They can spin the wheels on virtual slot machines, play Texas Hold 'em at a table of high-rolling avatars or double down on a hot blackjack hand.
The only thing they can't do is cash out their winnings.
Internet gambling is still illegal in California and most other states, so online gamers play instead for virtual chips, points, tokens or just the pride of seeing their names on a leader board. Meanwhile, site operators and developers like Zynga Inc., Electronic Arts Inc. and International Gaming Technology are reaping, or at least dreaming of, the big payouts.
Some see the realistic casino-style sites as an entrée into the online gambling world that is already available overseas and that may be California's future. Others are grinding out revenue with free-to-play gaming that entices users to pay real money for extra chips or more turns — even though they can never redeem a cent of winnings.
Either way, corporate players are making big bets in this as-yet unregulated market. They're lobbying at the state and federal levels to expand online social games into real-money gambling. And all that action has given rise to a niche legal practice aimed at keeping fast-moving entrepreneurs from unwittingly crossing the line into the highly scrutinized arena of gambling.
"The lack of sophistication about gambling is what can get these startup-mentality developers into trouble," said Mitchell Kamin, a partner at Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg in Los Angeles.
And then there's the still-developing legal thicket that gaming site operators can face even if they never intend to become online gambling moguls. Who owns and controls players' online possessions? What about virtual currency? Are kids' privacy rights being adequately protected? Should the odds of winning a game be posted?
"We're going to be confronting these seemingly crazy issues," Kamin said.
Think social gaming and Zynga's "FarmVille" probably comes to mind. The iconic, free-to-play game allows users to plant virtual corn and hunt for cowbells while posting their accomplishments on Facebook.
But the genre has exploded since "FarmVille" launched in 2009. Users can now pick from any number of sites that offer games of chance like bingo, blackjack and baccarat under the same "freemium" model. There's no cost to play although users can use real money to buy things like extra chips and faster access to higher game levels.
The percentage of players who pay freemiums is small, but their financial impact is huge. A November 2012 report by Morgan Stanley Research pegged annual revenues from casino-style online gaming at $1.7 billion — which includes some advertising dollars and projected that the number could grow to $2.5 billion by 2015.
Gamblification, a controversial industry term that refers to the convergence of traditional gambling and social gaming, troubles I. Nelson Rose, a Whittier Law School professor and gaming law expert.
"The thing that worries me most about social games is the ones designed to look like real casino games," Rose said.
Operators can set the odds as they like. And they can change them during a game, Rose said, to keep the interest of a player who's losing or to chill someone who's winning too easily.
"You can set these for 101 percent or 120 percent payouts," when a land-based game may only average an 85 percent return on investment, Rose said. "Kids in particular could be playing on this site and say, 'Wow, now I can win on the real thing.'"
Self-regulation is a hot topic in the online gaming industry. Some have suggested that site operators should voluntary disclose that they offer better odds than casinos or do more to discourage children from playing casino-style games.
For now, there doesn't seem to be much interest from state or federal gambling regulators to treat online social gaming as anything more than entertainment. A spokeswoman for the attorney general's office, which houses the state's Bureau of Gambling Control, said the agency has not reviewed online social gaming and is primarily focused on working with local agencies on traditional gambling sources like card rooms.
Other countries, however, have begun to scrutinize online games. The United Kingdom's Gambling Commission launched a review of casino-style gaming with a particular eye on potential "consumer exploitation." Industry trade groups have said they will cooperate. Some Australian legislators, too, have proposed expanding gambling regulations to cover free-to-play games.
Rose said that, given the growing international scrutiny, it's only a matter of time before U.S. regulators follow suit.
"I think there's some potential here for a real crackdown," Rose said. Critics are "not happy that the gambling industry is trying to pretend [casino-style games] are the same as 'FarmVille' or 'Angry Birds.'"
While the industry has, so far, escaped regulatory scrutiny in the United States, the growth in online gaming has generated significant legal work. The Federal Trade Commission last year announced a settlement with social game operator RockYou over alleged violations of the Children's Online Privacy Protection Act. The FTC said RockYou, which offers the game "Zoo World" as well as bingo and poker for older users, collected 179,000 children's email addresses and passwords without their parents' consent. RockYou agreed to stop making deceptive claims, to beef up its data security and to pay a $250,000 penalty.
There have also been legal battles over virtual currency possession and unauthorized secondary markets, not to mention the more traditional work of trademark lawsuits and acquisitions in the fast-growing industry. Bird Marella's Kamin added social gaming to his IP and business litigation portfolio two years ago. Pillsbury Winthrop Shaw Pittman has a social media and games team.
The field "is just something totally different and new and yet it has the historical look and feel of gambling, and that can confuse people," Kamin said.
Zynga executives have already made clear in regulatory filings that they believe a transition to real money games is the company's path to financial redemption. In April the San Francisco-based company partnered with bwin.party, a Gibraltar-incorporated online gaming operator, to launch pay-to-play poker and casino game websites in the U.K.
Zynga has also applied for a gaming license in Nevada. If approved, only Silver State residents would be allowed to gamble on Zynga's sites. But some say completing Nevada's rigorous licensing process would allow the company to eventually offer online gambling to the 38 million residents of California.
For years, California legislators have toyed with the idea of authorizing intrastate online poker games. Zynga, International Gaming Technology and Caesars have all retained Sacramento lobbyists to help push the expansion.
But advocates have never been able to navigate through the politically connected minefield of potential opponents that includes Indian gaming tribes, card clubs and horse track operators. Another bill has surfaced this year, yet with just three months left in the legislative season it has yet to come up for a vote.
But with so much money at stake — including significant potential tax revenue for the state — Gambling Control Commission member Richard Schuetz told a conference of gaming interests in April that online gambling is inevitable.
Big-name Nevada companies see the online-gaming potential in California and elsewhere. Caesars Interactive Entertainment acquired "Slotomania" creator Playtika in 2011 and "Bingo Blitz" developer Buffalo Studios last year. International Gaming Technology picked up DoubleDown Interactive for $500 million in 2012.
Caesar's surpassed Zynga in social casino gaming market share in the second quarter this year, according to a report by Eilers Research.
"I absolutely guarantee you there will be i-gaming in California at some point in time," Schuetz said. "Now that may be 30 years or that may be this year. I'm not very good at predicting."
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