In a surprising legal twist, Nevada this week became the first US state to allow online gambling within its borders.
The Associated Press reports that the fast-paced legislative action was spearheaded by Gov. Brian Sandoval and other local authorities in an effort to beat New Jersey to the punch in order to “remain at the forefront of gambling regulation,” thereby attracting more gambling and tourist activity to the state. But the move could also mean good things for struggling social game developer Zynga (NASDAQ:ZNGA), which began appealing to state regulators in Nevada late last year in an attempt to transition its business into online real-money gambling.
Sandoval signed the bill into law on Thursday to legalize online gambling, calling the bipartisan legislative action “an historic day for the great state of Nevada” that will “usher in the next frontier of gaming” in the state. The new law comes as a result of relaxed federal regulation against online gambling, which the Justice Department first enacted in 2011 when it reversed its previous prohibitions against the practice. Instead, federal law now technically permits online gambling, but only in states that approve specific legislation explicitly designed to allow it.
This could be the much-needed regulatory shift that Zynga needs to reverse its recent fortune. As the company’s last two earnings reports indicate, the company has struggled to transform its impressive player count across all of its Facebook (NASDAQ:FB) and mobile games into a meaningful source of revenue. Late last year, Zynga and Facebook also adjusted a two-year old contract between the two companies that gave Zynga a privileged position within the massive social network’s app marketplace -- a subtle piece of corporate engineer that no doubt helped Zynga attract many of its users in the first place. That contract winds to an end on March 31, but Zynga has already shed millions of users from its most popular Facebook games like “FarmVille 2” and lost its position atop the social gaming ladder in January when its rival King.com’s game “Candy Crush” became the most popular Facebook game in terms of monthly active users (MAUs).
Zynga already began to reconfigure itself as an online gambling company last fall when it recruited a veteran gambling executive as its new COO and partnered with the British company bwin.party (LON:BPTY) to bring its games to less harshly regulated territories abroad. But these have all been roundabout ways for the San Francisco-based company to target its desired audience of gambling-friendly online gamers within the US. Ending the prohibition against online gambling in a US state gives the company’s new business model a fresh dose of legitimacy and access to a segment of consumers much more willing and able to spend money on online games than the average “FarmVille” player.
Zynga will still have its work cut out for it in the coming quarters, however. The new law only allows for online gambling within Nevada, which limits the potential reach that any Internet company can provide as a major selling point for its service. And the Las Vegas Review-Journal notes that Nevada’s law was written to block companies that have already amassed troves of user data from gaining any sort of “head start” against their competitors in state. As Pete Ernaut, a lobbying for the Nevada Resort Association, told the Associated Press, Nevada’s incentive here is to draw more business into Nevada itself by offering other states the benefit of its “mature regulatory structure.”
“It’s imperative for the success of this that we compact with other states because we don’t have a universe of players,” Ernaut said.
This “compact” with other states, ironically enough, could actually turn Zynga into a competitor in the short run. But in the long run, Nevada’s new regulation could spur competition between any number of states to approve online gambling and vie for the attention and support of established businesses like Zynga’s. New Jersey Governor Chris Christie, after all, has already moved to reconsider his earlier veto against online gambling in his state.
Zynga may still be caught in-between two tenuous businesses models for the time being, but relaxed regulation can only provide it with new avenues for growth. Or at least that’s what investors think – the company’s share price jumped 3.7 percent in after-hours trading Thursday following the news, opening Friday trading at $3.07 and rising another 3.6 percent to $3.18 per share by the late morning.
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