Real-money gaming promises real profits

July 26, 2012: 2:58 PM ET

Rapidly growing social gaming companies like Zynga are looking to online gambling to boost profits. Startup Betable wants to help them get there.

By Alex Konrad, reporter

FORTUNE -- Betable CEO Chris Griffin has spent years cultivating what he calls "a new renaissance in gaming." The 30-year-old entrepreneur wants to upend the rapidly growing social gaming market by making it simple for game makers to incorporate old-school, real-money gambling.

Griffin may be on to something. And not just because, with his Mad Men hair cut and sharp suits, he looks the part of a Monaco croupier. Social game giant Zynga (ZNGA), for one, is paying attention. In the seven months since it went public, Zynga has been actively looking for ways to make more money from its millions of players. CEO Mark Pincus told Fortune's recent Brainstorm Tech audience that the company was "actively exploring adjacent markets like real-money gambling." The company reiterated that position in its July 25 earnings call, when executives announced revenue of $332 million for the quarter and a net loss of about $23 million. "They realize that just having a lot of scale in terms of users is not the greatest business," Griffin says.

If Zynga and competitors such as Electronic Arts (EA) do enter real-money gaming, Griffin wants to facilitate things. His London-based startup has over a year's head start in a potentially lucrative but still thorny market. Founded in 2008 to build gambling games, Betable shifted last year to focus on providing the behind-the-scenes technology that makes other developers' games compatible with real-money wagers. The company is backed by the likes of Founders Fund's FF Angel, Greylock Discovery Fund, and individuals Dave Morin and Yuri Milner.

MORE: Zynga's Pincus on mobile, gambling and over-paying

Betable's founder claims that his company is the only firm to have solved the regulatory puzzles involved. To receive a license, all beneficial owners (with a 1% or larger stake) of a gambling service must undergo a months-long diligence process. Griffin calls it "incredibly invasive" because company officers are checked out, as well as software, security and location of servers, operating policies and procedures. It took Betable over two years and millions of dollars to receive the go-ahead from regulators in the United Kingdom. The company is now moving into private beta after 30 developers completed an alpha test round; its founder is bullish that no other customizable platforms are licensed and in the market.

Griffin hopes that Betable's solution will be adopted as a partner for major game makers. Social game makers who use Betable's tools can legally offer gaming components, such as a slot machine function, within the game, but don't need their own regulatory approval because it's Betable that actually conducts the gambling activity. Betable's U.K. servers receive the activity request from a particular game, whose developers can set rules on what type of mechanic they want to run. Betable then sends back a winning or losing result, taking a portion of the revenue from the transaction and paying back an affiliate fee to the game's owners proportional to volume of traffic. Whereas the process can take months to set up independently, Griffin says a company like Zynga can layer on Betable's solution to its games in just one hour.

In its earnings call, Zynga confirmed that its first real-money games are in development in countries where it can obtain a license. But Pincus declined to specify whether Zynga would pursue its own licenses or obtain their use through a partnership, leaving the door open for a potential Betable deal. If Zynga calls, Griffin will pick up the phone, saying his platform is open to all. In the meantime, Griffin calls Zynga's launch timeline of first-half 2013 "the biggest early holiday gift ever" for Betable's growing community: developers joining Betable today can work knowing they have six months to steal a march on the industry leader.

MORE: What it's really like to work at Zynga

While at Brainstorm Tech, Zynga's Pincus pointed to his company's poker and bingo offerings as immediate opportunities for integrating real-money gambling, so first Zynga offerings would seem likely to put real-money to work in casino style games. But both Griffin and Pincus seem to agree that the long-term opportunity is broad adoption in mainstream social games. Users of Farmville-like games could, for example, run a slot machine mechanic to bet on a better crop.

But neither country will be involved in real-money games in the United States any time soon. Betable's service operates legally under United Kingdom regulation in countries that do not have their own specific restrictions. Various identity checks ensure that users can't game the system to misrepresent their location and get in on the action. For now, that leaves out a few countries, including the United States. But Griffin is unfazed, noting that of hundreds of developers with whom he's discussed his product, the average game maker told him up to 60% of their business was now outside the U.S. market. Last week, Pincus pointed to the non-U.S. online gambling market as a $15 billion industry.

Legislation to open the United States up to real money gambling would of course be a major boon to both Zynga and Betable, which recently opened a San Francisco office for its developing team. Zynga reported on July 25 that it still depends on the United States for 60% of total revenue, and Pincus said last week that Zynga plans to be a part of any online gambling lobbying conversations in Washington in the future.

MORE: The problem with Zynga's growth

In the meantime, Griffin notes that users in non-starter countries may even spend more on virtual goods to keep up with their real-money gambling peers within a game. At the very least, Betable has wagered its regulatory head start will be enough chips to stay at the table.

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