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Facebook dips its toe in online gambling waters

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Facebook is placing a big bet on Internet gambling, but it's one critics warn it might not be able to cover.

The world's most popular social network recently turned bingo into a real-money game for its British users, and many see the move as an effort to find a new source of revenue for a struggling company that can't seem to get the money it needs via advertising.

Some in the gambling industry believe this is a step toward more online gambling with casino games such as poker, blackjack and slot machines.

But critics say Facebook risks alienating some of its 955 million users and won't be able to compete with such longtime players in the brick-and-mortar casino industry as Caesar's and MGM, which already have successful gambling websites.

"Facebook has started with quite a soft form of gambling to test the water," said Joel Keeble, director of mobile, poker and special projects at H2 Gambling Capital, a market intelligence agency for the gambling industry in London. "If this goes well, they may progress to other forms of gambling, giving them the opportunities to significantly increase growth."

Facebook could serve as a blueprint for other social networks interested in exploring online gambling as a source of revenue. Zynga reportedly is considering adding real-money stakes to some of its existing games.

But Facebook risks "polarizing" its users and investors if it moves into online gambling, said Jeff Kagan, a technology analyst based in Atlanta. He predicts a move such as this will cost the company many users, which would devalue it.

"Gambling crosses the line for many," he said.

Paul McWilliams, editor of Next Inning Technology Research, agreed, saying that Facebook would be "selling its soul" by getting into the vice business.

"If selling heroin was legal, that would help them too," he joked. "Going into prostitution might work as well."

Historically, gambling has been illegal in the U.S. with the exception of a few isolated spots, such as Nevada and Atlantic City, N.J.

The Justice Department had interpreted the Wire Act of the 1960s, which regulated interstate and foreign gambling, as making all Internet gambling illegal. While black-market online gambling was popular for years, in April 2011 the Justice Department cracked down on illegal operators. Since then, it has been more difficult for U.S. consumers to gamble online.

But in December, Justice reversed and said it would leave most online gambling decisions to the states. Sports betting, however, still would be outlawed. Illinois was the first to approve online gambling earlier this year, followed by Nevada and Delaware. Other states, such as California and Iowa, also are looking at it.

The industry is pushing for federal legislation on Internet gambling in order to avoid a patchwork of state regulations that would be too confusing if applied to the Internet.

While Britain has historically been more supportive of legal gambling then the U.S. — most every form of betting has been a legal, regulated industry for at least a half-century — the majority of Facebook’s users are in the U.S. This dynamic offers rich rewards and huge risks if Facebook were to enter the American gambling market.

"The U.S. is Facebook’s largest market," Mr. Keeble explained. "It would increase the potential upside massively."

Clive Hawkswood, CEO of the Remote Gambling Association in London, said opening the U.S. market would help the industry expand.

"Companies like Facebook and Zynga already have a huge footprint in the USA and their brands are household names," he said. "If they can establish the right partnerships, provide good gambling products, and convert even a fraction of their existing users, then they have every right to be optimistic."

But many analysts think Facebook should leave the gambling business to the casinos. Beyond the moral objections, they say social networks are outmatched when it comes to online betting.

"I don't understand why somebody who wants to gamble online would go to Facebook instead of Caesars.com or MGM.com," Mr. Stewart said. "That just makes no sense. That's like going to Coca-Cola for a steak. It's a funny business for them to think they can make a go at it."

Mr. Keeble agreed that social networks such as Facebook can't do it all by themselves.

"If a social media company intends to compete head-to-head with established gambling operators, they will find it much more difficult," Mr. Keeble said. "Gambling operators know their market well."

This has led some analysts to say Facebook or other social networking sites could make a go of it by finding a partner in the traditional gambling industry, one with a high name identification or brand recognition.

"The folks at Facebook are wicked smart, but the fact is you want to be with someone who’s been down the road and knows how to actually do it," Mr. Stewart said.

Critics also say that Facebook's searching for a new revenue stream is an acknowledgment that its current advertising-based business model isn't working, Mr. McWilliams said.

"Gambling, I think, is the wrong decision," he said. "It's an admission of failure."

While Facebook has a large group of users to draw from and some of the most popular applications involve gambling, games such as Zynga's poker and blackjack are played only with fake money, like Monopoly in another era. Some in the gambling industry say users might be reluctant to play an online game with real money.

"Historically, the conversion of free play to real-money players has been relatively low," said Simon Holliday, director of H2 Gambling Capital. "But the player traffic that these companies have access to means that even a small conversion would be significant to real money."

Furthermore, Facebook getting into gambling could cause a public-relations problem for the company.

Critics with moral and philosophical objections to gambling say online wagering is even more likely to lead to addiction than traditional gambling because of the constant access provided by being in the home. Facebook-played games such as Angry Birds and Zynga's FarmVille have become national punch lines for their "addictive" quality, but they are not played for cash.

"Now, they’re going to try to hook them on gambling," Mr. McWilliams said.

Others point to the challenge of preventing underage gamblers.

"It's controversial to tie it to social networking,” said David Stewart, an attorney at Ropes & Gray in the D.C. region. "They’re getting pushback because of the underage access, and I don’t know what they’re going to do to control that, but they’re going to need to be careful about that."

Casinos have far less to lose on the image matters simply because their customers, by definition, have no moral objections to gambling. But Facebook caters to as broad an audience as possible, millions of whom will not like the company’s new direction.

"Most gambling businesses don’t have to worry about that because those people aren't customers anyway," Mr. Stewart said. "That’s a fair risk, and one they need to be sensitive to."

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