Game Makers See Jackpot As States Make Online Gambling Legal

Patrons play a video blackjack machine at the Sands Casino Resort Bethlehem in Bethlehem, Pennsylvania Photograph by Mike Mergen/Bloomberg

3G Studios, a video game developer in Reno, Nev., is betting on online gambling. The private company, with 47 U.S. employees, has hired almost 80 new contractors in India and China and expects to have 200 dedicated solely to making gambling games by the end of the year. 3G is one of a handful of game makers jockeying for gambling business, expecting states, hungry for new tax revenue, to open the floodgates for Internet casinos.

Nevada is accepting applications for online gambling licenses, and in June, Delaware became the first state to approve online casino gambling for state residents, starting next year. States including California and New Jersey are considering loosening the rules for wagering on the Web after the Department of Justice reversed a longtime ban on many types of Internet betting in December.

3G Chief Executive Officer James Kosta thinks online gambling will draw bettors beyond the casino crowd, just as casual games such as Angry Birds attracted new players who would never log on to World of Warcraft. “Gambling is fundamentally going to change from something … where you had to sit in a casino and physically spin the wheel, to something that you could do casually while you have a three-minute break at work,” he says.

(Kosta, who once worked for the CIA, has a colorful past. He settled a lawsuit with the Securities and Exchange Commission in 2004 over his alleged involvement in a pump-and-dump stock scheme and was ultimately required to pay $50,000. Kosta said in a statement that he was “never a subject of a criminal investigation” and “there was no admission or proof of wrongdoing in the agreement.”)

The 6-year-old game developer, which helped produce Jillian Michaels’ Fitness Ultimatum 2009 and released its own first-person shooter title, Brave Arms, on Facebook, plans to launch an online slot machine site in August. Americans will play for free with virtual currency until it is legal to wager cash, Kosta says, while European customers will be able to play for real money.

3G isn’t alone in anticipating looser gambling rules. Betable, a London startup, recently announced plans to help game developers add real-money betting, both on the Web and on mobile phones, in jurisdictions where online wagering is legal. In February, Zynga CEO Marc Pincus said the company is open to the possibility of entering the social gambling sphere. International Game Technology acquired one of Facebook’s more popular virtual casinos, Double Down Interactive, for $500 million in January.

But John Acres, founder of casino consultant group Acres 4.0, says game studios are wasting their efforts. Even if online gambling is legalized, there will be so much red tape that most tech companies won’t be able to make money, he says. “It’s not a matter of tech but a matter of licensing,” Acres says. States must provide licenses for Internet gambling, and the process will be lengthy and complicated.

That means the deck is stacked in favor of companies that already have licenses: existing casino giants such as MGM Resorts and Bally. Like 3G and other upstarts, established gambling companies are currently building Web presences with play-money games to draw in potential players. In addition building to its own games, 3G has partnered with Bally to help the casino develop online offerings. Other game makers that don’t partner with the casinos could be pushed out of the profits.

The giants could still benefit even if online gambling isn’t legalized. Chicago-based slot-machine maker WMS Industries in mid-July announced the creation of a new division, Williams Interactive, to oversee its products on the Web. The group recently released its second Facebook offering: Jackpot Party Casino, which builds on popular brands currently available in brick-and-mortar casinos.

Williams Interactive CEO Orrin Edidin says having slots both online and in the real world could attract new customers for casinos. “We help build a community of players … that you can market to convert from free-to-play to pay-for-play,” he says.

Kosta says 3G will profit as non-gamblers begin to places small bets on casual games. He anticipates the studio will invest $5 million in its gambling business over the next few years. Even if online betting is slow to come to the U.S., he expects the investment to pay off as game players in Europe and elsewhere warm to the idea. “When people are going to be willing to bet $5 or $10 a week … when you get 140 million of those devices together, it’s going to make for a whole lot of money changing hands every week,” he says. Kosta, at least, appears to be going all in.