March 28, 2024

Tech Industry Sets Its Sights on Gambling

Silicon Valley is betting that online gambling is its next billion-dollar business, with developers across the industry turning casual games into occasions for adults 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 to Facebook and Zynga, have their eye on the ultimate prize: the rich American market, where most types of real-money online wagers have been cleared by the Justice Department.

Two states, Nevada and Delaware, are already laying the groundwork for virtual gambling. Within 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 streams of tax revenue. In Iowa alone, online gambling proponents estimated that 150,000 residents were playing poker illegally.

Legislative progress, though, is slow. Opponents include an influential casino industry wary of competition and the traditional antigambling factions, who oppose it on moral grounds.

Silicon Valley is hardly discouraged. Companies here believe 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 offset the lack of glittering ambience found in a real-world casino. Think you can get a field of corn in FarmVille, the popular Facebook game, to grow faster than your brother-in-law’s? 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 start-up that handles the gaming licenses and betting mechanics of the business for developers. “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,” Mr. Griffin said.

Overseas, online betting is generating an estimated $32 billion in annual revenue — nearly the size of the United States 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 E. Schmidt, Google’s executive chairman.

As companies eagerly wait for the American 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!”

Mr. 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 that are interested in playing real-money games are going to be incredibly valuable,” he said.

Mark Pincus, the chief executive of Zynga, said the company was 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 missed revenue expectations in the last year, is making gambling a centerpiece of its new strategy. It has just applied to Nevada for a gambling license.

Casual gaming first blossomed on Facebook’s Web site, where players could readily corral friends into their games. It is now being rethought for mobile devices, so people can play in brief snippets as they wait for a bus or a sandwich.

Some games mimic the slots and poker found in casinos; others emphasize considerably more creativity. The vast majority of casual game players play at no charge. A small number buy virtual objects in the game to speed their play or increase their status.

Tech executives expect an equally small number to play for real money but believe they will bet heavily, making them much more valuable to the gaming companies. By Betable’s estimate, the lifetime value of a casual player is $2 versus $1,800 for a real-money player.

Article source: http://www.nytimes.com/2013/02/18/technology/tech-industry-sets-its-sights-on-gambling.html?partner=rss&emc=rss

Economic View: When Business Can’t Foresee Consumer Outrage — Economic View

Consider Bank of America’s move to charge customers $5 a month to use their debit cards. The bank eventually decided against the fee, but not before helping to create a storm big enough to induce many people to move their business away from large banks to credit unions.

For late-night comedians, the brouhaha was irresistible. On Halloween, Jay Leno chimed in. “One kid wanted to charge me five bucks to give him candy,” Mr. Leno began. “I said, ‘Who are you supposed to be?’ He said, ‘Bank of America.’ ”

For hints about how to avoid the consumer backlash, the bank’s executives might have consulted a paper I wrote in 1986 with the psychologist Daniel Kahneman and the economist Jack Knetsch. The central question was this: What actions by companies do people consider “unfair”?

Our method was to ask randomly selected people some simple questions by telephone. Here is an example:

“A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20. Please rate this action as: completely fair, acceptable, unfair, very unfair.” Some 82 percent of the participants called it either unfair or very unfair.

To be sure, we weren’t trying to figure out what is fair. That task is best left to philosophers. We were trying only to determine what actions customers perceive as unfair. As the responses illustrate, most people don’t view a spike in demand as an acceptable excuse to raise prices.

Such judgments are puzzling to economists, business executives and M.B.A. students. I have posed the same snow-shovel question to students in my course on managerial decision-making — and only 24 percent have said that raising the price is unfair. And it isn’t hard to see why: they have learned in economics classes that when demand increases and supply is limited, prices must rise to prevent shortages. What the students don’t realize is that the rest of the population may view such actions as gouging.

Many businesses implicitly understand this. After a hurricane, products like plywood and bottled water are in great demand. Local stores, including branches of large chains, keep the long run in mind and typically supply such products without raising prices. Other “entrepreneurs,” who have no such long-run concerns, will buy a load of plywood and sell it off the back of a truck at premium prices.

Both the stores and the truck owner may be making good business decisions. The stores want to build loyalty, and the truck owner wants to make some money — and provide a good that is in high demand. If people are angry, they don’t have to buy the plywood.

LARGE businesses can face problems, however, when they forget about the long term and start acting like the truck owner.

Bank of America is not the first company, or even the first bank, to make this mistake. In 1995, First Chicago imposed a $3 fee to use a teller for a transaction that could be conducted with an A.T.M. A storm of protest erupted. (Mr. Leno had a good line on that one, too: “So, if you want to talk to a human, it’s $3. But the good news is, for $3.95 you can talk dirty to her, so that’s O.K.”)

It took until 2002 for the company, by then called Bank One, to eliminate the fee and to acknowledge that it had been a public relations error.

Why can’t managers anticipate that their actions might provoke such outrage? The best explanation may be that people’s fairness judgments are gut reactions, not economic analyses. As Mr. Kahneman explains in his new book, “Thinking, Fast and Slow,” these are the types of judgments we make instinctively rather than reflectively. Feeling your blood boil typically does not involve careful calculation.

The fact that we react instinctively to some company actions can also mean that the public anger may be misplaced. Bank of America’s debit card fee was public and transparent — generally desirable features of a pricing policy, though they may not be good for public relations. Unfortunately, more unsavory actions that are less visible may be less likely to provoke customer fervor.

In a case I consider much more troubling, Bank of America recently settled a class-action lawsuit regarding overdraft fees on debit cards. Two bank policies were called out in the lawsuit. First, when a customer ran out of money and used a debit card, the bank would allow the purchase to go through — as a courtesy, it said — and then charge a fee of $35. Worse, the bank was accused of processing a day’s transactions in this order: from the largest to the smallest, rather than in the sequence in which they were actually made.

This practice could put the customer over the limit with an end-of-day shoes purchase that would then trigger a series of $35 penalties on small purchases made earlier in the day when the customer actually still had money in her account. (Bank of America settled the case without admitting any wrongdoing.)

Regulators now require banks to ask customers whether they want overdraft protection, rather than just assuming that they do. I like this rule, but it is futile to think that regulators can or should try to prohibit every fee that customers find obnoxious. Businesses can think of new fees faster than regulators can ban them.

Instead, it would be better to ensure that all fees are transparent and salient. As I have said in a previous column, the best way to do this is to require a business to give its customers an electronic file that details all of its prices, as well as the customer’s past use.  Then, with one click, a customer could then  import the data into third-party Web sites that could help search for the best deal. Without such disclosure, businesses have strong incentives to make any price increases as inconspicuous as possible.

If you run a business, meanwhile, you might think twice about charging for a service that has traditionally been free. If you’re not careful, you could get some unwanted publicity from Jay Leno.

Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago.

Article source: http://feeds.nytimes.com/click.phdo?i=e9789d1440fcfe51ec286cb288d18f7f