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October 21, 2014

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U.S. tech firms betting online gambling is next sure thing

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Jim Wilson/The New York Times

Developers Cesar Miranda and his brother Edgar work on their game at home in San Jose, Calif., on Wednesday, Feb. 6, 2013. With states poised to clear the way for legal online gambling, Silicon Valley companies are expanding to meet the expected deluge of players.

SAN FRANCISCO — Look out Las Vegas, here comes FarmVille.

Silicon Valley is betting that online gambling is its next billion-dollar business, with developers across the tech industry turning casual games into occasions to wager.

At the moment these games are aimed overseas, where attitudes toward gambling are more relaxed and online betting is generally legal — and extremely lucrative. But game companies — from small teams working in living rooms to Facebook and Zynga — have their eye on the ultimate prize: the rich U.S. market, where most types of real-money online wagers have been cleared by the Justice Department.

Nevada and Delaware are laying the groundwork for virtual gambling. Within a few months they will most likely be joined by New Jersey. Bills have also been introduced in Mississippi, Iowa, California and other states, driven by the realization that online gambling could bring in welcome streams of tax revenue. In Iowa, online gambling proponents estimate that 150,000 residents play poker illegally.

Legislative progress, though, is slow. Opponents include an influential casino industry wary of competition and traditional anti-gambling factions.

Silicon Valley is hardly discouraged. Companies here think that online gambling will soon become as simple as buying an e-book or streaming a movie, and that the convenience of being able to bet from your couch, surrounded by virtual friends, will compensate for the lack of glittering ambience found in a Las Vegas Strip casino.

Think you can get a field of corn in FarmVille, the popular Facebook game, to grow faster than your brother-in-law? Five bucks says you cannot.

“Gambling in the U.S. is controlled by a few land-based casinos and some powerful Indian casinos,” said Chris Griffin, chief executive of Betable, a London gambling startup that helps companies negotiate licenses and handle the betting aspects of the business. “What potentially becomes an interesting counterweight is all of a sudden thousands of developers in Silicon Valley making money overseas and wanting to turn their efforts inward and make money in the U.S.”

Betable has set up shop in San Francisco, where 15 studios are now using its back-end platform.

“This is the next evolution in games, and kind of ground zero for the developer community,” Griffin said. Overseas, online betting is generating an estimated $32 billion in annual revenue — nearly the size of the U.S. casino market. Juniper Research estimates that betting on mobile devices alone will be a $100 billion worldwide industry by 2017.

“Everyone is really anticipating this becoming a huge business,” said Chris DeWolfe, a co-founder of the pioneering social site Myspace, who is throwing his energies into a gaming studio with a gambling component backed by, among others, the personal investment funds of Jeff Bezos, Amazon’s founder, and Eric Schmidt, Google’s executive chairman.

As companies eagerly wait for the U.S. market to open up, they are introducing betting games in Britain, where Apple has tweaked the iPhone software to accommodate them. Facebook began allowing online gambling for British users last summer with Jackpotjoy, a bingo site; deals with other developers followed in December and this month.

Zynga, the company that developed FarmVille, Mafia Wars, Words With Friends and many other popular casual games, is advertising the imminent release of its first betting games in Britain.

“All your favorite Zynga game characters will be there, except this time they’ll have real money prizes to offer you,” an ad says. “Play online casino games for pennies and live the dream!”

DeWolfe’s studio, SGN, is also on the verge of starting its first real-money games in Britain.

“Those companies that have a critical mass of users who interested in playing real-money games are going to be incredibly valuable,” he said.

Mark Pincus, the chief executive of Zynga, said the company is just following the market.

“There is no question there is great interest from all kinds of people in games of chance, whether it is for real money or virtual rewards,” he said. Zynga, which has been buffeted by missed revenue expectations in the last year, is making gambling a centerpiece of its new strategy. It has just applied to Nevada for a gaming license.

The powerful Las Vegas and Indian casinos have mixed attitudes toward online gambling. Caesars Entertainment in 2011 acquired the Israeli startup Playtika, developer of the popular Facebook game Slotomania, for about $180 million, offering it a springboard into the digital world. But Sheldon Adelson, the Vegas magnate and major Republican Party donor, is opposed to online betting because he thinks children will end up gambling.

In New Jersey, Gov. Chris Christie has had different qualms. He has vetoed two online gambling bills, the second this month. One concern: The state’s take, a proposed 10 percent tax, was not large enough.

The measure, which is likely to be refined and successfully resubmitted in the next few months, followed the state constitution, which mandates that Atlantic City is the only spot in the state where gambling can take place. So only the casinos were allowed to offer online games, although they could partner with tech companies; the computers allowing the gambling would have to be housed in the casinos. And, of course, players had to be over 18 and physically located in New Jersey.

Meeting those last two requirements seems a tall order to Doug Creutz, an analyst at Cowen & Co. who follows online gambling closely.

“The Internet isn’t bound geographically,” he said. “There are other problems too, like preventing money laundering. Online gambling is going to be a complex issue that will take a while to sort out.”

In the meantime, though, he notes that casual games themselves are sometimes changing to incorporate elements akin to gambling. Diablo III, the latest version of the extremely popular role-playing series from Blizzard, was released last year with an in-game auction house where players could buy and sell loot that they found. If they chose, they could literally take the profits out of the game.

Since the loot was randomly generated, kind of like the numbers on a slot machine, Blizzard had to remove the auction house game from the South Korean version of the game to satisfy the country’s strict anti-gambling provisions.

Cesar and Edgar Miranda are two young developers who have won hackathons, where the goal is to build a game in a weekend. The brothers, who rent rooms from their parents in San Jose, have spent the last few weeks refining their game, Claw Crane. It is a simple variation of the grabbing game found in amusement arcades for decades: successfully secure a toy from a pile and you win. If Apple approves, the game, offering cash prizes, will be available in Britain later this month. A virtual money version will be available in the United States.

“We saw the opportunity here,” said Cesar Miranda, 24. “Anyone can jump in and try and grab a piece of this market while it is still fresh. There’s a low entry to failure.”

Neither he nor his brother, born in Mexico and raised in California, has even been near Britain.

“I think the closest I’ve gotten is Las Vegas,” Cesar Miranda said.

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