Social Gaming
in the Gambling Industry
June 2012
Latest Move
1.MGM Resorts' Planned Social Gaming Website
Offers New Growth
2.bwin.party extension of Group strategy into social
gaming
3.Crowdpark Secures $6M for Social Gaming
Strategy
4.Is Facebook Entering into The Online Gambling
Scene?
Change and Growth
5.PWC Global Gaming Outlook 2013
6.The competitive Landscape Online
Gaming/Gambling – A case study
7.Analysis of multi-player online game traffic based
on self-similarity
8.Analysts say investigation raises questions about
the gaming sector's future growth prospects
Legal
9.Japan's Consumer Affairs Agency is investigating
legality of social gaming sales tactics
10.William Hill shuts down Australian betting website
On Social Games, Virtual Currency and Gambling
1

The Case
that triggers the research
BWIN.Party announced their strategic plans in the social gaming space on 30 May 2012.
Social Gaming
Launched a new social gaming business unit called “Win” and strategy with its own dedicated
Move by BWIN.Party
management team and infrastructure.
Win will operate on a freemium model, with revenues derived from the sale of virtual currency and virtual
Operation model
gifts, as well as advertising income from banner ads, paid search and special offers.
1. Adopt a 'build and partner' strategy, that provides the group with both the resources and additional
management expertise to execute their planned extension into social gaming.
Business strategy
2. Focused on building a meaningful stand-alone enterprise that will operate outside core real money
gaming business but which will benefit from the Group's significant resources and assets.
1. The greatest concern is potential regulation of social gambling products.
Analysts’ concern
2. Doubtful about the legal basis for "social" variants of gambling games.
Competitive 1. Experience in regulated markets
advantage 2. Expertise necessary to limit access by location and age
Establish a competitive advantage in social gaming built on the following four pillars:
1.Experienced management team and proprietary gaming platform
Social gaming
2.Portfolio of new applications online and on smartphone platforms
strategy
3.Original IP in the creation and distribution of social gaming content
4.Best of breed partnerships with leading independent game studios
• Establishment of a dedicated social gaming unit, Win
Milestone over next • Development of dedicated social gaming technology platform
2 years • Release of social sports betting, casino, poker and bingo applications
• Launch of a new social gaming destination portal called www.win.com
Platforms “Win” will develop products for Android and iOS platforms.
2

How does gaming become a
lucrative business?
3

Gamification
Ride on three waves
4

What is social gaming?
Social gaming is a term used to
describe game applications
within social networks such as
Facebook.
Facebook is the largest social
networking site (901 million monthly
active users at the end of March12).
Third party applications on Facebook
are normally free to users.
Every day millions of people interact
with their friends and express their
unique personalities through games,
which range from harvesting crops to
playing poker.
There are also a growing number of
mobile games that are including
social functionality.
Social game developers generate
revenue through users who purchase
“virtual goods” and “in game
currency” during game play.
According to the Casual Games
Association’s 2012 Casual Games
Sector Report, social games revenues
spread are:
•20% from advertising;
•20% from offers;
•60% from virtual goods, which are
purchased using Facebook Credits.
5

Who is playing social games?
The Pretty New Face of Online Gaming: Women
Everybody is
playing:
Your mom, your
granny, your
niece, your
daughter.
Majority of social gamers
is female and they are the
ONE buying.
Source: White Paper Series - The State of the Social Games Industry: Gambling
to Social Gaming, Social Gaming to Gambling by Crowdpark, Feb 2012
6

Where do they play?
Social Gamers are not
Heavy Gamers: They are
your parents, your spouse,
your busy friends, who just
had two kids, not avid
gamers. The fact is that
social network users are
Facebook, LinkedIn, MySpace, Twitter, Slashdot, Reddit, Digg, Delicious, StumbleUpon,
the general internet user.
FriendFeed, Last.fm, Friendster, LiveJournal, Hi5, Tagged, Ning, Xanga, Classmates.com, Bebo.
What they do have
Social Networking Sites Where Social Games Are Played at US UK incentive to play are
brands that everyone has
Facebook 79% 90% played and knows is fun.
However, if it is not
MySpace 30% 12%
something everyone knows
Source: 2010 PopCap Social Gaming Research and likes, your brand's
name is not too likely to
bring you any great
benefits.
Factors Influencing Social Game
US UK
Selection
Recommendation from friends,
62% 57%
relatives or colleagues
Familiar with the title/Played similar
48% 43%
game elsewhere
Featured on a social networking site 30% 37%
7

What are the most popular games?
% of all of the players on
Year
Facebook (social casino games)
2012 13%
FarmVille took Facebook 2011 8%
by storm in 2009 and gave 2010 6%
rise to a sea of rival farm
simulations. But those
games have begun to
decline, and they are
giving way to social Many of those play Zynga Poker, joined by other
casino games. casino games such as Double Down Casino
Only a small number of social games
players are paying users
Expected avg.
Game types revenue per DAU State
(daily active user)
Lottery
Casino, poker & role-
Horse 10% Casino
5-10%
playing games
Hidden object, adventure &
3 – 7% Racing 23%
tournament games
18%
Puzzle, arcade, caretaking &
1 – 5%
simulation games
Sport Poker
Source: The Casual Games Association Sector Report
Betting 18%
Social casino gaming is so different from real- 22% Bingo
life gambling because users think of it as
casual games. The amounts of money placed
are far smaller, but it has elicited the addictive
9%
factor through a playful manner.
Casino games and sports betting make up 45%
of online gambling market 8

Business model of gaming
9

Experience shared by Zynga
Reynolds, chief game designer for Zynga, the company that made
the social game Farmville, shed a little light on gaming
development cost and behaviour of social gamers.
• Social games cost between US$100,000 to $300,000 to make.
• Between 3% and 5% of people who play social games pay
money for virtual goods in the game or sign up for advertising
"offers" that generate cash for the developer.
• Farmville is played by 45.8 million people every day. (2011)
Given these ballpark figures, that each person who plays a social
game generates, on average, a penny a day. Multiply that penny
by the number of days in a year, 365, and you get an average of
$3.65 generated per year per person.
If you are Farmville, you multiply that by the number of people who
play your game on a daily basis:
• US$3.65 x 45.8 million people = US$177 million a year
The business would be metric-driven, combining intuition and data.
This would enable the business to rapidly iterate and drive reach,
retention and revenue.
Its success factor includes ability to rapidly deploy new games and
in‐ game features. It learned what users wanted and modified its
games quickly, sometimes overnight, to better provide what the
users wanted.
Its games have a "significant presence" on sites such as Facebook,
Zynga makes nearly 40% of its revenue from those MySpace, Bebo, Friendster, Tagged, Yahoo and iPhone.
sales, the sale of virtual goods is the bread and
butter of social game monetization.
10

Business Model of Social Gaming
Methodology for revenue estimation Free to play with micro-
Most games monetize between $10 and payments business model
$30 for every 1000 DAU (Daily active Freemium games is a concept that you can play a
users). game for free, but if you pay, you can access premium
content.
The Apple App Store
Monetization of Social Games (Method borrowed from Under the old distribution model, developers only received 30
Lizsa Marinom, CEO of RockYou). Dated Mar 2010. percent of revenue on a game. The Apple App Store gives 70
percent of revenue to the developers.
Major risks
The game doesn't have the appeal to the targeted
Development cost (US$) demographic.
The game is not more unique than competing games.
In social game development cost boils down to three main areas: The game is fun for a short time, but has little replay
Development, marketing and live operation value.
Initial Live Operation Total cost of a The game is just not that fun.
Development
Marketing (4 months) Game Launch
$100k - $300k $50k - 200k $12.5k - $22.5k+ $175.5k - $522.5k
Usually company will launch multiple games within short time
periods to experiment with different designs and to establish a
network of related games that users can migrate between.
Ballpark figure provided by Zynga
Dated Feb 2010.
11

The challenges of social games
Churn Viral Coefficient Revenue Per User
In this context, churn is Finally, there is expected
The viral coefficient is a
defined as the loss rate of revenue per user. This is
measure of how effective
game players. Social an estimate of the
current game players are
gaming, because of its lifetime revenue that a
at drawing new players –
very nature, can have an game player will
a key capability enabled
extraordinarily high churn generate, based on an
by social network
rate. Typical estimates estimate of monthly
platforms. For example, if
are that, on average, revenue per user and the
100 Mafia Wars users are
social games have a churn. For example, if the
likely to cause five of their
churn rate of 50% per average monthly
friends to sign up in a
month – meaning that revenue is $5 per user,
given month, that would
half of the new players and churn is 50%, the
be a viral coefficient of
signing up today will be expected revenue can
1.05.
gone in a month. The be estimated as ($5 (the
churn for all apps was first month) + $2.50 (the
estimated at 62% in the second month) + $1.25,
first month by Flurry etc.) or approximately
Analytics. $10.
Understanding these characteristics is a major driver for a capable business intelligence platform
in the social gaming space, these three key metrics drive investment in all areas of the business.
It turns out that social games have a different social "graph" - or relationship between friends -
than the social network platform itself, depends on the nature of each game.
One best example is Mafia Wars game. Improving these interactions by guiding players to
communicate appropriately helps to reduce churn. In other words, to make every aspect of the
game more profitable by improving the player experience is significantly important.
12

Legitimacy of on-line
gambling
13

On-line Gambling
Source: THE SOCIAL AND ECONOMIC IMPACTS OF GAMBLING: FINAL REPORT, Nov 3, 2011 14

The Legality of On-line Social Gambling
The Legality of On-line Gambling/Sweepstakes In which jurisdictions do
William Hill shuts down Australian betting website, 5
The U.S. has criminalized most types of “gambling” June 2012 online casino operator
over the Internet. Both federal and state laws get their gambling
apply to Internet gambling in the U.S. Australia's Interactive Gaming Act of 2001 makes it license?
illegal for any company to provide casino and poker
In terms of regulatory developments in specific games to Australian residents. Violators can be
countries, the UK remains the largest online penalized with fines up to $1.1 million a day. No
gaming market globally, having legalized it in company has ever been tried for violating the Alderney
2005. UK citizens can legally place bets on Web Australian law. Anjouan Antigua
sites licensed in territories that are included on Bahamas
a “white list” of approved jurisdictions. As a result, Belize
Virtual currencies
most online gaming activity in the UK is Canada (Mohawk
conducted through offshore sites. territory)
Some business models use a form of “gambling” or Costa Rica
In 2009, France proposed new laws to regulate sweepstakes for users to acquire virtual currencies. Curacao
and tax Internet gambling. These models can run afoul of the gambling and/or Dominica
sweepstakes laws. Gibraltar
The German Interstate Treaty on gaming which Grenada
came into force on January 1, 2008, banned all Due to general lack of awareness of all of the potential
issues surrounding virtual currency, many companies Guernsey
forms of online gaming and betting in the country, Isle of Man
with the exception of wagers on horse racing. simply emulate other organizations without knowing
that they too are not in compliance. Jersey
Although widespread, online gaming is illegal in Liberia
nearly all countries in Asia Pacific, and there has Money Transmittal Licensure Norfolk Island
been little change to regulation in the region Panama
Virtual currency models that allow for value to be Seychelles Malta
in 2010 or 2011. The culture of legal gambling in transferred to third parties, including but not limited to
the region is very much focused on destination Vanuatu
redemption of virtual currency for real world money or
resorts such as Macau, and now Singapore. goods, can trigger the need for such licenses.
Philippines is the only country where online and Such licenses can be very expensive and difficult to
mobile gaming is permitted. obtain. Another option could be
partnering with a
Generally, state and territorial legislation prohibits Taxes Gibraltar- and Ukraine-
on-line sports wagering and lotteries unless the based development
operator is licensed in the relevant jurisdiction. Various countries have imposed or are considering studio as part of their
imposition of a tax on gains from virtual goods and investment (up to €40m ),
virtual currency transactions. For example, China has e.g. BWIN.Party .
Source: The casino and online gaming market to 2015
imposed a 20% tax on such transactions. 15

Virtual Currency
Virtual Currency Model Facebook Credits (1 July 2011)
Components The virtual currency on Facebook’s platform
How virtual currency can be Facebook Credits can be purchased in 48 currencies.
acquired:
That means one can buy anything on Facebook’s
platform via Paypal.
• Purchased with real money
• Earned by in-world actions Significance – Successful conversion
• In sweepstakes and contests Games will monetize better. Conversion of social games
• “Gambling” users to real money gaming is the goal that has received
• Release of user information the most attention by gambling operators because of its
• Survey participation obvious moneymaking potential.
• Acceptance of exposure to
advertising Facebook gift cards
• Gift of currency from others Other than in the U.S and UK, Facebook Credits gift cards
are also sold in over 500,000 outlets in five Southeast
What it can be used for: Asian countries, India, Australia, and New Zealand.
• Virtual goods and services Can minors buy Facebook Credits?
in virtual worlds/games Currently those terms state: “If you are under the age of
• Cashed out for real money 18, you may make payments only with the involvement of
• To buy real world goods a parent or guardian.”
• Traded for other currency
Legal risk
When it can be acquired: Social gaming seems
A class-action lawsuit has already been filed by a relatively constrained on
• At time of purchase of Arizona-resident against Facebook on 8 March 2012, a Facebook, as acquisition
virtual goods woman sought a refund after her son’s purchase. costs of active user keep
rising, e.g. Zynga’s cost
• Pre-purchased for later use High cost for developers - With Facebook’s standard per acquisition increased
Facebook Credits payment method, developers must fivefold in 2 years, from
Who it can be used with:
share 30% of all Facebook Credit revenues with $0.3 in 2010 to $1.5, in
• Virtual world operators Facebook. 2012. The trend in 2012 is
to push distribution to
• Third parties
Facebook Now Gambling Friendly other platforms (Web,
social, mobile). 16

A glimpse of the social
gaming scene
in China, Japan and Korea
17

Dated 2011 Social Network Players in China
China already has two listed social networks on the stock market:
•Tencent 騰訊香港 (listed in HK Stock Ex mainboard no.388) and
•RenRen (listed in May 2011 on the NYSE), called itself “the Facebook of
China”.
In the fourth quarter of 2011, Tencent had the largest market share in the
Chinese client-based online gaming market.
As Facebook’s relationship with its gaming partners becomes rockier,
more developers will be looking to China — the biggest growing mobile
market with one billion users.
China policy
Ministry of Culture of the People's Republic of China released new
regulations (1 Aug 2010) on online games,
• Requirement of real names and valid ID.
• The other key change is that online platforms are prohibited from
selling virtual currency to minors (under 18).
18

The Challenge in China
Facebook has been blocked in
mainland China since 2009,
along with Google, YouTube,
and Twitter, as Chinese
authorities claimed that those
sites were used to organize anti-
government demonstrations in
Xinjiang, and Rendezvous cited
data from
socialbakers in pegging users in
the country who access
Facebook via proxies, tunnels, or
virtual private network software
at around 450,000, making it the
101st-ranked country in terms of
users.
19

Mobile Gaming in Japan
Some figures on social gaming scene in Japan
•Fewer than 10 million Facebook users currently.
•Spend cash on mobile social games.
•Already has two existing mobile gaming and social-networks: Gree
and Mobage, each with at least 25 million registered users.
•Mixi, a social network often said to be Japan's Facebook (also with
22 million users), also offers an app platform that works much like
Facebook's for developers.
20

Social Gaming in Korea
The gaming capital of the world
Online infrastructure The Korean social network games Korean online gaming market is considered
most advanced in the world, to grow $2.3
come as more MMORPG-like: a
within Korea is at "near heavy client, more complex billion in 4 years and projected to hit $5 billion
by 2016.
optimal performance” graphics and a variety of in-game
contents. Popular Networks: Majority of users use Naver
South Korea has the world’s fastest and Daum, both Korean based search
Massively multiplayer online role-
internet. Average Connection Speed: engines. Cyworld, the second largest music
playing game (MMORPG) is a genre and video store after iTunes, has 48% of the
13.8 Mbps. Korea has the highest
broadband penetration of not only Asia, of role-playing video games in market share.
but also of the entire world. It is the which a very large number of
Government ‘s goal for universal, high- players interact with one another Online Gaming: Lineage II, Korea’s most
speed broadband access. within a virtual game world. popular online game touts 14 million users,
double that of the infamous World of
MMORPGs are truly the “mass- Warcraft. The best online gamers become
Nationwide broadband coverage and
consumer” form of online games in professional game players and are treated
high quality mobile phones has allowed like celebrities.
which hundreds of thousands of
users to post online content at will. South
Korea has 92% broadband penetration players interact with one another Social network: Cyworld is South Korea’s
making it one of the most wired in the concurrently online. This type of largest social network. It operates within the
world. games focuses less on eye-hand framework of Nate.com. Cyworld boasts a
dexterity and more on interaction massive 26 million (and climbing) registered
with real human players in real time. users, more than half the country’s population.
The games create a loyal following
The Korean gaming marketing is highly
with significant network effects, as penetrated and competitive; some experts in
more and more gamers form the area are already saying that this market is
communities and relationships with saturated.
one another.
Gaming addiction is no laughing matter
The wide popularity of MMORPGs is While other jurisdictions are still busy regulating
what sets the Korean game market the local gaming market, the Korean
apart the most from other countries. government already took steps to prevent
many gamer deaths stem from exhaustion.
21

An Engaging Marketing Tool?
Emotion, brand and customers
Gambling operators‘ social gaming
push set on Macau’s gambling industry
boom
MGM , myVegas, will be launched in
June 2012, a free-to-play social gaming
casino where only virtual money is bet
to win only virtual prizes.
The group looks to make it an engaging
marketing tool.
Caesars Entertainment Corp. acquired
a majority stake in social media and
mobile gaming business Playtika in 2011
for roughly $90 million.
All these can be an interesting move for
Wynn Resorts and Las Vegas Sands that
are looking for new ways to engage
customers by tapping the trends of
mobile gaming and social media.
Regarding online gaming, the Macau
SAR does not currently grant
concessions for online casinos. The
current casino concessions only cover
land-based gaming, not online
gaming.
There is no regulatory framework that
would permit the authorization of
foreign gambling providers to offer
remote services from Macau.
22

Gambling operators' foremost dream
What is the
take of a
company
to start?
23