(Bloomberg) Zynga Inc. (ZNGA), the leader in social gaming, is running into obstacles in its effort to offer real- money gambling, as states such as New Jersey legalize Internet betting with conditions favoring existing casinos.
Zynga, which offers the world's most-popular free-to-play poker game, has surged 46 percent this year largely on investor optimism the company will reign over real-money online betting, much as it has in social gaming.
The bet may be a longshot. The laws benefit casinos, such as Caesars Entertainment Corp. (CZR) and MGM Resorts International (MGM), which dominate gambling, and may require others to seek them out as partners. The need for alliances will probably also play out in other states, said Skip Bronson, chairman of U.S. Digital Gaming, a Beverly Hills, California-based firm looking to enter the market.
"I can't tell you what games will be allowed or what the tax rates are going to be," Bronson said. "But I can guarantee in all the states, it's the existing stakeholders that will have their way."
The U.S. market for online gambling may reach $7.4 billion a year by 2017, according to Manchester, U.K.-based researcher H2 Gaming Capital. So far, New Jersey, Nevada and Delaware have passed laws letting residents play in their states. In Delaware, the state lottery will run the business with three horse tracks and is seeking bids from technology partners.
Nevada's law, signed on Feb. 21, lets land-based casino operators offer online poker only, according to Greg Gemignani, a Las Vegas attorney specializing in gaming law. New Jersey's law, signed by Governor Chris Christie on Feb. 26, lets existing operators offer all current games. Their hardware must be located in Atlantic City.
Christie was trying to protect Atlantic City casinos that have lost business to neighboring states, according to Frank Fahrenkopf, president of the American Gaming Association.
"If we are talking about the social-gaming companies, then we are talking about mergers or working agreements," Fahrenkopf said.
Caesars, the largest operator of U.S. casinos, licenses technology from Gibraltar-based 888 Holdings Plc (888), according to Seth Palansky, a spokesman for the Las Vegas-based company's interactive business. Caesars, with resorts in Nevada, Atlantic City and other U.S. markets, has said it may sell shares in the division to stoke growth.
MGM Resorts, with the biggest presence on the Las Vegas Strip, and Boyd Gaming Corp. (BYD), its partner in the Borgata casino in Atlantic City, have arrangements with Bwin.Party, which runs Internet gambling from Gibraltar.
In the U.K., Zynga has partnered with Bwin.Party to offer games such as "FarmVille" slots for real-money betting. The company is aiming to go live with the effort in the first half of this year, Chairman and Chief Executive Officer Mark Pincus said at a Feb. 25 investor conference.
In the absence of federal legislation, gambling is being introduced state-by-state in the U.S. In Nevada, Zynga sought a preliminary finding of suitability, a vetting of the company prior to applying for a license, according to A.G. Burnett, chairman of the state's Gaming Control Board.
"Entities such as Zynga can obtain service-provider licenses to provide services to the operators," Burnett said in an e-mail. The actual operator has to be a resort hotel or an entity under full or shared control.
Dani Dudeck, a Zynga spokeswoman, declined to elaborate on the company's plans for online gambling in the U.S. beyond comments made by Pincus.
"We've said that we have applied for an operator license in Nevada, and I think that process, we've heard, is 12 to 18 months," Pincus said when asked on the Feb. 25 call how soon the company could be offering its products in the U.S. The company applied for the suitability finding in December.
Nevada legislators took the additional step of adopting a "bad actor" clause in its law to exclude operators that were taking bets from U.S. residents before it was legal.
"The Legislature wanted operators that were reliable, that had more at risk than some servers in a facility somewhere," Gemignani said.
Elsewhere, proposals also favor incumbent operators. In California, Zynga's home state, a bill sponsored by state Senator Roderick Wright limits online betting to Indian casinos, card clubs and horse tracks, according Arthur Terzakis, staff director of the Senate Standing Committee on Governmental Organization.
Online companies always have the option of becoming land based. Rational Group, the Isle of Man-based company that operates PokerStars, the world's leader in real-money online poker, has agreed to buy the Atlantic Club Casino Hotel, one New Jersey's 12 licensed casinos. The deal requires regulatory approval.