Online Gambling Could Mean Huge Gains for Facebook
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A lot of unkind things have been said about Facebook (NASDAQ: FB) since its IPO, and most of those critiques have solid arguments. The social network has gone public at an excessive valuation, without much of a proven business model and its management team seems disconnected from investors' interest. On the other hand, if Facebook finds a solid strategy to monetize its business, the stock has a tremendous upside potential. Online gambling may just be the answer.
The Financial Times reports that Facebook is venturing into online gaming in the UK -- the company will start offering online bingo to users aged 18 and older, and slot machine games are expected to be available in the short term.
“Gambling is very popular and well regulated in the UK . . . for millions of bingo users it’s already a social experience [so] it makes sense [for us] to offer that as well,” said Julien Codorniou, Facebook’s head of gaming for Europe, Middle East and Africa.
Gambling is a very profitable business, and Facebook looks like an ideal platform to make big money from online betting. According to the company, it had a gigantic user base of 955 million monthly active users around the world at the end of June 2012. People trust Facebook due to its size and global popularity. The company is in a great position to make online gambling a social experience, adding considerable value to the platform.
The future of Zynga (NASDAQ: ZNGA) is also at stake here. Facebook decided to go into online gambling without Zynga in the UK; if that turns out to be a global strategy, Zynga could be in serious trouble. Zynga is Facebook’s largest gaming partner, responsible for almost all the payments revenue Facebook receives, but investors in the game developer have material reasons to be concerned about the future.
Shares of Zynga have fallen considerably to the $3 area from levels around $9.50 in December of last year. Selling “virtual goods” on Facebook doesn't seem to be a very reliable business model for the long term, and it has produced uninspiring numbers at Zynga lately. On the other hand, online gambling could provide a much better alternative for Zynga if it can become the vehicle for Facebook to avoid regulatory restrictions.
According to The New York Post, Zynga has been in negotiations with casino operator Wynn Resorts (NASDAQ: WYNN) to partner into the online gaming business: 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.
Some 20 US states are considering legalizing online gambling after the Department of Justice reinterpreted a decades-old federal law and opened the door for more permissive legislation. However, most of the proposed state legislation would restrict online licenses to those who already are licensed to run a state gaming operation. New Jersey, for example, has a bill that would grant Internet licenses only to those with computer servers based in Atlantic City casinos.
Zynga would probably have to seek more alliances with casinos, as a deal with Wynn Resorts would likely not be enough. But if the company manages to get access to online gaming in some important US estates, or perhaps in other countries, this could be a big game changer for both Facebook and Zynga.
Aside from making deals with casinos to clear regulatory hurdles, Zynga could offer Facebook a way to keep gaming relatively separate from the rest of the site, and avoid to some degree the social stigma gambling has in many countries.
Investors in Zynga need to beware though -- Facebook's move in the UK shows that the company won't necessarily partner with Zynga in online gambling unless the game developer has something valuable to bring to the table. In strategic terms, Zynga needs to become a necessary vehicle in an exciting business like online gaming to secure its position with Facebook and the long-term viability of its business.
It won't be easy to implement, but online gaming may be just what Facebook needs: a profitable business where the company can leverage its enormous user base and popularity for social interaction. If Zuckerberg and his team manage to grow in that direction, Facebook could become a bet with a very interesting payout.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook. Motley Fool newsletter services recommend Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.