Briefing Note

Virtual Worlds, Social Gaming, Serious Money.

Briefing Note

Traditional gambling games are also now beginning to appear on social media platforms. Users can play slots, poker or other card games without winning or losing a penny.
The Web Goes Social They say that the first version of the Internet was all about pages web pages as content first moved online but that the second, Web 2.0, was all about people. That, of course, is a simplification. The primitive bulletin boards and chat rooms were always about social interaction, and were usually the stickiest areas that kept people online and were the major revenue drivers for the early subscription services. Yet, it is certainly true that online life in the last five to ten years has been dominated by the rise of social networks and user generated content. The sheer scale of those platforms is obviously impressive: Facebook now claims 800 million active users worldwide in 70 different languages, Twitter users send a billion tweets a week. There are, however, two other powerful drivers of online activity. Virtual worlds, from immersive communities like Second Life to multiplayer games such as World of Warcraft, have developed their own large, loyal and passionate user bases. Gambling is, of course, another key online phenomena. An EC study quoted sector revenues for Europe alone of 11 billion Euros in 2012. Games and Growth True, each of these sectors has received more than its fair share of hype. Yet it would be shortsighted to ignore the increasing interaction between them as the next generation of online services start to emerge. The commercial potential for those services which successfully harness such dominant forces is clearly significant. Indeed, leading market players are already reaping the benefits. Whilst some of the valuations and flotation talk may have led to fresh warnings of financial techbubbles, the user numbers, growth rates and global reach are undeniable. The current focus is on social gaming: combining game-play with the interactivity of social media or online communities, often with viral promotion and distribution. Social games typically have two further identifying components. First, a mainstream target market of so-called casual, rather than hardcore, gamers. It was estimated last year that close to 60 million Americans were regularly playing such games on a social network. Secondly, a free-to-play or low access price model with additional brand value or revenue generation, in particular through virtual goods.

Freedom to Play

A Virtual Opportunity There are fees to be earned from licensing and advertising but the role of virtual goods is key. In one of the most well known games, set on a farm, harvests earn virtual farm coins allowing the purchase of further products to rejuvenate their crops. Virtual goods optimise game-play for the user. Users can also purchase goods with cash and that revenue stream can be huge. In 2010 one estimate put virtual good purchases at $7.3 billion with that market set to double by 2014. Facebook has introduced Credits, a virtual currency that can be used across its social games. Traditional gambling games are also now beginning to appear on social media platforms. Users can play slots, poker or other card games without winning or losing a penny. In these versions of the games the player is given a number of free credits. When the user runs out of credits they can purchase more with cash. So do these games pose a challenge to the gambling market or actually an opportunity? One of the main questions around social games is how they can generate interest in, and business for, other services.

Regulatory Models Before online gambling operators or others enter this market, however, the relevant regulatory regime needs careful consideration. Video games and virtual worlds on one side and online gambling on the other have, traditionally, been based around two different models. Whilst the latter operate within the highly prescriptive licensing regimes of national regulators, be they on or off-shore, the former are usually designed to be able to function outside of any such licensing or regulatory regimes allowing, amongst other things, a younger user demographic. For example, the purchase and trading of virtual goods is nothing new it has been a staple of games platforms for many years, but it has usually been structured so as to avoid being caught by electronic money and related financial supervisory regulations. At least that is so with Western services, in Asia different approaches have been taken. Of course, there are other generic regulatory requirements on e-commerce, consumer protection, advertising and privacy that no online service can ignore, but the two underlying regulatory models are very different.

Hybrid Services With the rise of social gaming generally and traditional gambling games formats in particular but also other developments around contests and sweepstakes in social media, video games and virtual worlds there is a potential blurring of these regulatory edges. Crucially, it is not necessarily true to say that, simply because a user stakes no money in a game, gambling law can be ignored. UK gambling legislation, for instance, explicitly states that whether or not a player risks losing anything is irrelevant for the purposes of its definition of gaming. In fact, some of the user protection measures adopted in other services often look similar to, or are actually based on, social responsibility requirements under relevant gaming laws. We could even be seeing the emergence of a hybrid regulatory model as new EU rules for e-money now make limited licences more available and law-makers and regulators begin to pronounce on the new services appearing. Ultimately, the social gaming strategies for operators of all kinds will be led by creative and commercial decisions but regulatory factors have to be an important element.

Conclusion The market for online social games is booming and many gaming operators are adapting accordingly in order to seize this opportunity. The introduction of traditional gambling formats within the realm of social networks can build familiarity for new audiences, as users play with friends and engage with these games within a well-known setting. Some operators may feel challenged by the limitations of delivering these formats on social networks, not least by allowing users to play without staking real money bets. Nonetheless, operators are finding new ways to monetise such games by incorporating virtual goods, virtual currency and maximising advertising revenue streams. The new Electronic Money regime aims to ease the regulatory burden within the EU and promote e-money markets, but gaming operators should still consider compliance requirements carefully if they intend to incorporate virtual currency or similar functions into their formats. Also, as the regulatory lines blur, gaming operators should always review their gambling licence position before taking any gambling game formats to social networks.

Total Compliance Limited A Total Compliance Group Company Phone +44 (0) 207 286 3960 Fax +44 (0) 207 289 0802 Email info@totalcompliance.co.uk www.totalcompliance.co.uk Author Credits Duncan Calow, Partner, DLA Piper UK LLP Duncan is co-author of Digital Media Contracts Oxford University Press 2011 (ISBN 978-0-19-956220-6) Filippe Scalora, Director, Total Compliance Limited Adam Vaziri Zanjani, Total Compliance Limited