Laws and regulators play catch-up
In less than two years social gaming articles and presentations have become a staple in magazines and conferences hitherto dedicated to its darker twin, online gambling.
Has the online gambling industry run out of talking points or are there genuine synergies from a commercial perspective? The latest acquisitions would suggest so, as the online gambling industry looks to boost its social gaming offerings and vice versa.
However, regulators are set to swoop too; is social gaming really gambling in another guise? Even if it is not, don't we wish to create some basic consumer protections? Social games can be accessed any time and anywhere by increasingly sophisticated tablets and mobiles and seemingly "free" games have a number of hidden costs.
In a society where it has become acceptable, if not de rigueur, to tune in and out of human interaction to check messages, postings and updates, continuously, if not obsessively, then shouldn't social gamers be forced to have a "cool down" period? Is the fact that customers cannot win anything that has a monetary value really a good enough reason for social games to fall outside regulation?
Therefore, one has to ask why companies are interested in supplying social games, what has led to their phenomenal growth and why it is important from a legal and regulatory perspective to take stock. What is social gaming and how does it differ from other games and/or gambling?
In crude terms these are internet based games which are accessed via: social network sites; specialist game portals; and browser-based access.
Clearly with the increase of broadband and multiple portable devices that allow access to the internet, there has been enhanced scope to source and play games, with increasing speed but with no compromise to the graphic quality. Again, the similarities to online gambling are clear, particularly given the anonymity of the gamers.
However, social games show some different characteristics in relation to content. Social gaming operators scoff at online gambling’s rudimentary product offerings, where little effort has been made to make the customer experience unique on each site. Also the following characteristics have contributed hugely to the appeal:
1. The asynchronous game play; people do not all have to play at once; 2. Communities that are built by participation; 3. While there may be scoreboards, there are no "winners" because the game continues; and 4. The creation of virtual currencies or goods.
The very successful pure social games have been the role playing and nurturing games, all of which display the above characteristics. The most popular tend to be the easiest to play. Less successful previously (although still attracting huge participation) have been the "social" equivalent of poker, slots and similar, as well as the skill(ish) based parlour games or "brain" games where clearly there must by their nature be a "winner" or an end to the game. However, it appears that there is now a shift in popularity towards the more traditional types of casino game. That surely must set regulatory alarm bells ringing.
The one unifying element in all social games is not just the technology or community elements, but the fact that customers cannot win any prizes or anything of monetary value for participating. It does not make the games any less addictive, albeit may make the success of the games even harder to fathom, particularly when you consider that users will pay extensively for apps and "advantages" to destroy or to build within certain games, or for virtual chips or currencies.
The no prize model has thus far been the critical distinction that has kept social gaming the other side of gambling regulation; virtual currency or bragging rights (for leading on scoreboards) have no monetary "value." This is open to debate however, as considered further below.
Do social gamers need protection?
The phenomenal gaming usage means that companies are making large sums of money from the purchase of virtual currencies, game advantages, in-game branding or sponsorship or subscription play. The total estimated revenues for 2012 is US$8bn with an estimated doubling of those revenues in the next three years.
Currently there are estimated to be 750 million users worldwide. While the latter may call for some form of consumer protection in its own right, it is the similarities and crossovers with gambling that have given rise to heightened concern for a number of reasons. First, some of the most popular games are now versions of traditional casino games, such as poker and slots.
This represents a marked shift in the winning formula for a successful social game and suggests a change in the customer demographic from those who were drawn to role playing and nurturing games, to those for whom the appeal of traditional games (albeit with a social "twist") are more compelling.
Also, despite the statistics indicating that the social gamer demographic is different from traditional games (suggesting the typical social gamer is a 40-plus-year-old woman) it still leaves a staggering number of minors playing. When you couple that with the fact that the purchase of virtual goods is by far the biggest revenue generator, it is not surprising that regulators are beginning to express concern.
If that was not enough, the shy courtship between Facebook and play for real money finally became a formal betrothal in August 2012 when Facebook launched a play for real money option with its Bingo Friendzy product. Zynga (the listed social gaming giant) too is rumoured to be buying its way into the online gambling industry by the purchase of Ongame, the poker network.
What are the legitimate causes for concern and how can we distil these from press frenzy and over-regulation? If something that looks and feels like gaming, but is not actually gaming, how is this squared off legally? The critical issue is that the social games are not played for any prize that has a money or monetary worth. Irrespective of whether there is a cost of entry and irrespective of whether there are other costs within the cycle of the game (voluntary or involuntary), the fact that there are no winnings results in the product falling outside the definition of gaming in most jurisdictions. It is a "pay for fun" model. In the UK and the majority of jurisdictions we have reviewed thus far, if the prize is not money or has no monetary value, it is sufficient to take social games products outside the parameters of the current legislation.
However, this is not a universal view. In Malaysia, for example, the fact that any money is spent to play will be sufficient (in the view of local lawyers) for the matter to be considered to be gambling. In Sweden, the Swedish regulator, the Swedish Gaming Board, would regard any prize that has an aspirational element sufficient to qualify social games as gambling. Where, for example, a party may win additional turns (even though the customer has paid nothing to participate) this is sufficient to bring games within the gambling legislation in Sweden. In other jurisdictions there may be a different view on a state-by-state basis which further adds to the regulatory complication.
If that was not enough, virtual currency clearly teeters on the brink of real value. Facebook credits (previously the only "currency" permitted within Facebook social games) can be purchased in Walmart. Q Coins introduced by the SMS and publishing giant Tencent in China were originally designed to buy avatars, etc, but quickly became so popular their usage seeped into the real market environment. This gave rise to the bizarre situation where when a disgruntled customer sued Tencent, he sought damages in Q Coins. Given the small penetration of bank cards and high usage of Tencent's products and services, this is not surprising.
The market in Q Coins is so large that that their usage has to a degree undermined the status of the country's legitimate currency, renminbi. Despite this, their usage is unchecked and Q Coins continue to be traded for real money goods. While their use in connection with gambling may still be prevented, it is illustrative of how the distinctions between real and virtual currencies may be blurred.
The potential for this blurring is not just in China; in the UK the Zynga hacking crime heard in 2011 was premised on the fact that virtual currency was property which required protection.
Ashley Mitchell pleaded guilty to hacking and stealing US$12m of poker chips from Zynga, to sell them on the black market with an estimated value of £184,000. That surely is one step closer to acknowledging that virtual currencies have a value. The judge in that case ruminated that the offence was no different to stealing notes from the Royal Mint; both Zynga and the Royal Mint can "print" more, but there is still a value ascribed to them once in circulation.
Also, where use of a virtual currency has pushed the boundaries of decency and legality the authorities have been quick to react; the FBI intervened when Linden's Second Life allowed participants to spend virtual money on child prostitutes and casinos. In short, if matters are pushed too far, regulators will react, irrespective of any academic debate.
While avatar child prostitutes may not need protection (albeit those that access them would undoubtedly need professional help) the other clear concern from a regulatory perspective is consumer protection. Social gaming is a KYC free world. Not only do companies currently have no obligation to block minors from any gaming content (despite the virtual currencies purchased), other forms of excessive spending within a game probably needs watchdog monitoring too, particularly where minors are concerned.
Typically, the first litigation to have reared its head is in the US. In San Jose last year, a judge refused an application by Apple to have a claim, brought by parents of children who had overspent buying virtual goods, struck out. In circumstances where a product may be a thinly disguised slots game which is designed to appeal to minors, and have the pull of prolonged usage that other social games do, it's hard to envisage the regulatory laissez faire attitude continuing. Surely the social gaming companies should think of protecting the vulnerable now before regulation forces them to do so? Some form of rudimentary ID checks and time limits on play would assist, particularly where the play may be regarded as "grooming" for gambling.
What are the moves to regulate and what are the hurdles? The UK Gambling Commission stated this year (in June) that it would monitor the social gaming space so as to assess whether it considered it either comprised gaming or it necessitated licensing as such. In Japan, the Consumer Affairs Agency took action against the companies offering the Kompu Gatcha mechanism (small virtual items are bought with the remote prospect of winning a much larger prize at random). This was prompted by two well reported cases of minors spending in excess of US$5,000 and US$1,500 within a very small time frame. The Japanese Consumer Affairs Agency determined that its usage was unlawful largely because of the resemblance to gambling.
The regulation of social gaming also gives rise to the same problems as online gambling, given the cross border nature of transactions. This may be easier to police in Europe where e-commerce protections including critically "cool off" periods are already embedded within national legislation as a consequence of European directives and may easily be adapted for social gaming.
We are certainly aware that it is very much on the radar of the European Commission. However, this may not assist where some of the largest players are supplying from the US, for example. Also, it is only one piece of the puzzle, if in fact the products should be regulated as gaming.
Conclusions
There are pros and cons in relation to the regulation of social gaming. Some cynics may regard gaming regulators to be unnecessarily expanding their remit to generate licence fees. From a commercial perspective most can clearly see the synergies in the two product types and therefore a consumer may no longer be able to see the distinction and that is an important point too.
If some customers do not know or care how their activities are legally classified, then surely the provider of those games should know, particularly where in some cases it is illegal for the customer to gamble. Were full regulation to extend to social games, however, the online gambling operator would very clearly be poised to take advantage. However, so would the tax authorities.
This feature can be read in the Autumn issue of European Gaming Lawyer magazine.
