Can Online Gambling Revitalize Zynga?

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It looks like Zynga (NASDAQ: ZNGA) is gearing up to make a serious run at internet gambling and sentiment is lining up to add a huge new market just as the company shifts toward gambling. Zynga has already signed a partner for online gambling in the U.K. and the U.S. is beginning to embrace online gambling state by state. The company has suffered as of late, driven in part by weak new games and the fickle nature of social gaming but gambling could provide the boost Zynga needs.

In the U.K., Zynga has partnered with Bwin.Party Digital Entertainment, the largest publicly traded online gambling firm in the world. The deal, which came to light in October, opens the doors to what is currently the largest online gambling market in the world. Two sites have already popped up here and here, which may mean that launch is rapidly approaching. The deal allows Zynga to quickly enter the U.K. market and avoid building its own gambling platform. Bwin, however, gains Zynga’s highly visible brand and a way into the U.S. market as sentiment continues to shift.

Recent earnings from Zynga were encouraging, though far from impressive. The company managed to beat analyst expectations, though still reported a net loss of $209 million on $1.28 billion in revenue for the year. The company managed to turn around the trend of escalating losses, though it expects a loss for the first quarter of 2013.

The most encouraging bit of information from the earnings release was buried in the conference call: Zynga intends to make use of Facebook’s (NASDAQ: FB) platform for its gambling operation in the U.K. Zynga is the largest and most visible social gaming company on Facebook, and tapping into its presence there could provide a major boost for its U.K. gambling aspirations. Facebook itself may also welcome this as it continues to struggle to monetize its services outside of the U.S. If Zynga’s gambling business takes off, Facebook stands to gain another stable revenue stream that is presumably less influenced by fads than social gaming.

Zynga has been making changes, cutting its workforce, discontinuing weakly performing games, and consolidating offices. Just recently, the company announced it would be cutting 30 jobs and merging offices in New York and Texas. Zynga also announced the closure of its Baltimore office, home to the soon to be shuttered CityVille 2. Zygna is working toward becoming a leaner, more focused company which should help it take advantage of online gambling. This comes just in time as online gambling in the US is quickly becoming more than a pipe dream.

Several states have been clamoring to legalize online gambling, with Nevada notably pushing a bill through in a single day. Governor Brian Sandoval signed the bill into law February 21, five days before Governor Chris Christie of New Jersey signed a similar bill for his state. Governors are legalizing online gambling in part because casinos are turning their attention outside of the U.S., opting to invest abroad. Las Vegas Sands (NYSE: LVS) Chairman Sheldon Adelson went so far as to say the company was no longer looking to expand in the U.S. at all. He pointed to the oversaturation of the U.S. market as one of the deciding factors. Las Vegas is no longer the casino paradise it once was, falling even further behind foreign competitors. For instance, Macau now generates six times as much gambling revenue as Vegas. Thanks to pressure from Macau and other gambling strongholds, these states are paving the way to new revenue possibilities for Zynga in the U.S.

One major hurdle for Zynga will be increased competition. Online gambling will add competitors like MGM Resorts International (NYSE: MGM) and Caesars Entertainment Group (NASDAQ: CZR) to the mix and it is clear that competition is already taking a toll on the company. MGM signed its own deal with Bwin, with the casino giant looking to use Bwin’s platform to build its U.S.-based online gaming site. Caesars owns World Series of Poker, the most visible poker brand in the world, and has already begun putting together its own online presence. Though the company reported a massive loss earlier this week, $3.75 a share, investors have continued to pile into the stock on the hopes of online gambling success.

While Zynga’s U.K. operation hasn’t launched yet, it will offer the first real glimpse into what Zynga can bring to gambling and what gambling can bring to its bottom line. If it pans out, it’ll prove to be a major catalyst for Zynga’s stock price. Stateside, things are murkier. While the bills passed do open up internet gambling there is still a long road ahead. As the online gambling market develops in the U.S., the best thing Zynga can do is continue to focus on building its brand and cutting costs where it can.


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