Glendale Startup Gambles on Casual Gaming Industry

In the popular world of online and mobile social games, the stakes are about to get higher. In fact, Eric Meyerhofer is betting on it. Meyerhofer is chief executive at Gamblit Gaming, a Glendale company that has developed software to add real-money wagering to casual games on laptops, tablets and smart phones. The company also is offering to handle the complex administrative backend to comply with regulations covering the players and the transactions. “You need to make sure moving currency in and out is clean, the players are legal age and not performing fraud or money laundering activities,” Meyerhofer said. Gamblit is getting in early on what could be a lucrative online gaming niche as more states legalize Internet wagering. In New Jersey, for instance, online gaming involving poker and other table games through Atlantic City casinos went live in mid-November. An estimated $8.4 million was generated the first six weeks. Nevada and Delaware also have made it legal, while in California, there are efforts to legalize online poker. Indeed, online poker is the most readily known version of online gambling, but Gamblit’s proposition is going after the games on tablets and cell phones. And it could be huge. An estimated 86 million Americans played casual games such as Angry Birds in 2013, an increase of 6 percent from the prior year. Through the first nine months of 2013, more than $1.4 billion was spent on tablet and smart device games. And while not every game can be monetized, Gamblit is counting on a world in which players might place nickel, dime or quarter bets, for example, on how many objects are knocked down by a player, or how many levels in a game a player makes it through. Founded in 2010, the company has kept a low profile to this point as it developed its software and moved through a time-consuming regulatory process. The company isn’t even listed in the directory of the downtown Glendale office building where its offices have been for more than a year – even though it has 40 employees. The startup hasn’t generated any revenue and is still in the early stages of talking with gaming companies to gauge interest in using its software. But Gamblit expects to attend more trade shows, including the E3 video gaming conference in June at the Los Angeles Convention Center. Financing has come from American Capital Strategies, a Bethesda, Md. private equity firm that is publicly traded. According to the most recent regulatory filing, American Capital has put at least $7 million into Hard 8 Games, a Boston company that is the parent company of Gamblit. Miles Arnone, managing director of the technology group at American Capital, said the figure is actually higher but could not be disclosed because it was not yet public information. He said the private equity firm is making a bet that Gamblit can take a lead in the emerging industry. “Eric presented us with a unique and powerful model of how the gaming market would evolve,” he said. Market growth Gamblit declined to be specific about any game companies it may first seek to work with, but said its software can work with multiple games by all sorts of developers. The software will provide the backend functions so that wagers can be made and connected with a player’s account. It will also include administrative functions such as geo-location to prove the players using smart phones or tablets are within the state where online gaming is allowed. Online gaming across state lines is prohibited by federal law. “Even a half mile inside (a state border) does not work,” Meyerhofer said. Age verification – players must be 21 years old or older – is done at the time an account is opened. Transferring funds to the account would be scrutinized to prevent money laundering, though Meyerhofer said he expects that would not be a big issue since most bets would be in cents, not dollars. Gamblit was founded as events opened the market for online gaming, or iGambling as it’s called in some circles. The Unlawful Internet Gambling Enforcement Act, signed into law in 2006, cracked down on transactions between financial institutions and offshore online gaming sites. An attempt to amend the law in 2009 to allow federal licensing of online gaming websites did not get out of a congressional committee. But in 2011, the U.S. Department Justice opened the door for online gaming and online sales of lottery tickets with an opinion that the Federal Wire Act of 1961 only applied to sports betting and states could not prohibit other types of online gaming within their borders. While the legislation in Nevada, New Jersey and Delaware doesn’t specifically address the types of games that Gamblit will serve, the company’s method of handling money is similar to that of a slot machine so it expects it will be able to operate under such legislation. Meyerhofer became chief executive of Gamblit in 2010 as online gaming was picking up momentum, At that time he was still leading FutureLogic, a Glendale company he co-founded with his brother, Mark, which develops and manufactures receipt printers used on slot machines, parking garages and ATMs. American Capital is also an investor in FutureLogic, but last month, Meyerhofer stepped away from his management role there to give his full attention to Gamblit, though he remains on FutureLogic’s board. “There was no way I could keep my eye on it part-time,” he said. For good reason. Gamblit is going through an intensive review by authorities at states where online gaming is legal. Regulators are inspecting the company’s technology down to lines of code. There are also background checks on who makes up the board of directors to ensure there are “good, clean people involved,” said Meyerhofer, who hopes to have the platform ready in a year or two. Growing industry While Meyerhofer knows of no direct competitors, research firms following online gaming have identified a number of U.S. and international companies that will benefit from legalized gambling with casual games, including Zynga Inc. in San Francisco, the creators of Farmville; International Game Technology of Las Vegas; and 888.com, a Gibraltar company licensed to operate in New Jersey. The U.S. online gaming market has the potential to reach $9.3 billion by 2020, according to a 2013 study from global financial services firm Morgan Stanley & Co. LLC in New York. However, there are headwinds. Market research firm IBISWorld, of Melbourne, Australia, found that legislation worldwide making online gaming legal is lagging behind the technological innovations, so gaming is likely to fall short of its potential despite market demand. “The continuing innovation in technology suggests that legislation is likely to trail some distance behind technology for the foreseeable future,” the report stated. Indeed, the U.S. is actually among the countries which have some of the most conservative online gaming laws. Some European countries have allowed such gaming for about 15 years. And in some instances, online gaming brings in more money than land-based casinos, said Gene Johnson, senior vice president for market research and online studies with Spectrum Gaming Group, a gaming research and professional services firm in Linwood, N.J. Johnson expects initial growth to come in states where there already is legal gaming. “We expect there will be an expanded ramp-up period in the states where it currently operates casino games and poker,” he said. Real-money online gambling in Nevada is limited to poker, which went active in April 2013. Delaware’s three casinos began offering free online slots, poker, blackjack and roulette on Jan. 31, with a real-money option to debut in October. But in New Jersey the results have so far been less than spectacular. The $8.4 million generated in the first six weeks is much less than expected. The early projections were for $348 million to come in the first year, Johnson said. “What we are seeing is less than the potential demand out there and it will be a long ramp-up period,” he noted.