According to Bloomberg, a frustrated Zynga is claiming that the app has wrongfully put the moves on registered trademarks like “Words with Friends” and “Chess with Friends.”

The lawsuit suggests Zynga may be desperate. Recall that investors find the company unattractive due to its ugly earnings, and its new CEO last week decided that its longtime dance with online gambling isn’t working out.

From a legal standpoint, the trademark claim doesn’t appear all that vigorous. That’s because Bang With Friends, which didn’t reply to Bloomberg’s request for comment, has several plausible defenses to the allegations.

On one hand, it could try to argue that its name is protected under free speech law’s parody rules (this is how the site LameBook staved off trademark claims from Facebook).  The app maker may have an even stronger argument by claiming that “with friends” is a generic term that Zynga can’t control; Amazon this week won a dispute on these grounds, fighting off Apple’s attempt to own the words “app store.”

(Update) Here’s a statement from Zynga’s counsel: ”Zynga filed a lawsuit to stop blatant infringement of its valuable “With Friends” brand.  A company calling itself “Bang with Friends” – whose own founders played Zynga’s “With Friends” games – decided to gain attention for its sex-related app by leveraging Zynga’s well-known mark. Zynga is compelled to file suit to prevent further consumer confusion and protect its intellectual property rights against infringement.”

Here’s a copy of the complaint:

Zynga v Bang With Friends

On Thursday, Zynga’s customary batch of disappointing earnings came with a kicker — the company is giving up its efforts to obtain a real-money gambling license in the U.S.. So what happened? Why did Zynga throw away a potential lifeline?

According to a source in the social gaming industry, the decision amounts to a choice by incoming CEO Don Mattrick to focus on core competencies rather than to try and enter a business for which Zynga is not designed. The source, who did not want to be named, explained that the highly regulated gambling arena means companies have to get approval in many cases to make even minor tweaks to their game codes.

“Part of the reason Zynga has been successful historically is that they’re able to iterate rapidly. But iterating quickly when you’re regulated is not an easy thing,” the person said, adding that the regulatory regime could apply to something as basic as changing the process for signing up for the game.

For Zynga to compete in the still-emerging gambling space, the source noted, it would have to fundamentally change its corporate structure to jump through “a whole lot of hoops.” As for Zynga’s partnerships with gambling players like BWIN: “It was just Zynga shipping them logo files .. they were BWIN games in Zynga clothes.”

This is just the perspective of one industry source but the view jibes with what others have told me in the past. It is also consistent with the fact that the legalization process for online gambling in the U.S. is still moving at a snail’s pace — and that the future industry is set to be dominated by Nevada and Atlantic City casinos rather than the likes of Zynga.

The news, in case you missed it, came last Friday when a company called 888 confirmed it will begin operating online poker games as soon as May alongside established casinos like Treasure Island and Caesars. The move comes in response to the federal government’s decision in 2011 that online gambling is no longer illegal if states explicitly permit it; Nevada, New Jersey and Delaware have so far passed laws to allow it.

So why is the 888 news not a big deal? According to a source who works in the gambling industry, 888′s opportunity comes with two major strings attached: it is limited to players physically in the state of Nevada and it only covers poker. The second condition is important because poker depends on player liquidity, which means it is less lucrative for the house than games like roulette or slots.

The source, who did not want to be identified, added that the online gambling industry is focusing instead on developments in New Jersey which has a much larger population (8.8M versus 2.7M in Nevada) and where the state law permits all casino floor games, not just poker.

In the bigger picture, even New Jersey is unlikely to be a game changer given that online gaming companies still have to cater to players on a state by state basis.

“It’s like taking the stock exchange and dividing it by 50. You have to ring fence players, and then account for whether the legal age is 18 or 21,” said the source, adding that the industry is crossing their fingers for a big state to come on board. “If Texas or California falls, that would be a more interesting thing.”

The online gaming industry, which was chased out of the United States in 2006, is also hoping for a bigger breakthrough in the form of new federal legislation that would establish unified rules and protocols across the country.

The outcome is important because potentially hundreds of millions of dollars are at stake for online gaming giants like Bwin that currently operate in Britain and elsewhere, and for fading social gaming sites like Zynga that are desperate for a new revenue stream. Finally, casino centers like Atlantic City are desperate to get a piece of the online action to make up for business they’ve lost to other states and venues.

(Image by  Doug Stevensvia Shutterstock)

According to CEO Brandon Ramsey, a former engineer at Yahoo and Zynga, Fanhood is aimed at the millions of Americans who make casual sports bets with friends for fun and bragging rights. He claims the site, which relies on Facebook’s platform, has 50,000 active users who can use virtual currency tokens to bet on everything from the Superbowl to NHL hockey games.

“It’s the same kind of psychology as taking $5 from a friend,” said Ramsey, claiming that Fanhood’s message boards and ongoing tallies of bet outcomes will keep users coming back. He adds virtual currency sales can sustain Fanhood because, unlike social games like Farmville, it doesn’t need fresh content — the sports matches supply that.

While Fanhood may succeed with virtual betting and sports chatter (much like the thriving fantasy sports industry), a big payoff would come through real money betting — a New York Times report pegged online betting as worth between $6 and $100 billion. But, for sports, this is a longshot at best.

Like Zynga Poker, Fanhood is only legal because players can’t cash out. If they could, these sites would be violating federal laws that forbid online betting unless states permit it.

In recent months, the prospects for social gaming companies have brightened as Nevada, New Jersey and Delaware have legalized online gambling. The process, however, is far from smooth sailing. Companies still must navigate established casino interests and, in the case of poker, assemble a critical mass of players (you can only gamble across state lines if all states involved permit it).

The legal challenge is even bigger when it comes to sports betting. According to Jim Gatto, a lawyer who specializes in gambling issues, the federal government deliberately excluded sports when they loosened online gambling rules in 2011. The reason, he said, is that sports depend on human action for the result — meaning there is an incentive to fix the results when there’s money on the outcome (history, including the NBA, shows he’s right).

This means Fanhood and other social sports betting sites will have to be content with virtual currency for the foreseeable future. There is also a chance too, of course, that a casino or other large gambling company will acquire them in the hopes of luring casual sports betters to a gambling site.

(Image by Jerry Sharp via Shutterstock)

Nevada’s governor signed the law on Thursday with bipartisan support and described it as a “new frontier” for the gambling industry. The law came about after the federal government in late 2011 decided to change its policy and permit online gambling to take place in states that explicitly permit it.

The new policy is significant in light of research that predicts online gambling will be worth $100 billion worldwide on mobile devices alone by 2017. This potential market has attracted the established casino industry as well as tech companies that are vying to make gambling games or process back-end betting operations.

The new U.S. gambling rules are also a potential lifeline to social game maker Zynga which has seen its titles like Farmville and Mafia Wars stutter. And since being cast adrift by Facebook last year, Zynga has seen its shares fall around 80 percent.

The Nevada law, however, is unlikely to change Zynga’s fortunes anytime soon as it only applies to internet users in the state. The law is also primarily intended not to help social gaming sites but to ensure that Vegas casinos have a first-mover advantage in providing operational support when — and if — other states follow suit. As the Las Vegas Review-Journal reports, the Nevada law is written to keep out companies that already have existing player data. The story in question refers to “illegal operations” and those who “operated online gaming with U.S. patrons” — it’s unclear if this refers to organizations like Full Tilt Poker who broke the law in the past or to any company with gaming data.

The upshot is that the U.S. will, at best, have a patchwork of states in the foreseeable future where online gambling is permitted. If big states sit it out, it will not be easy for companies to guarantee that online poker tables are full. It also means operational headaches and potential criminal penalties for the game makers which must ensure, for example, that a player in Colorado doesn’t slip into a Nevada-based poker game.

The bottom line is that full-scale online gambling is still far on the horizon as the U.S. regulatory process shakes out. In the meantime, the winners and losers among Zynga and other tech companies like Big Fish are likely to be determined in the U.K. and elsewhere.

This story was updated at 12pm PT to clarify how the law may favor Nevada companies.

(Image by Beto Chagas via Shutterstock)

We saw a preview of DerbyJackpot in November and now the pony game is live in 25 states. It works by letting players put small bets on horse races around the country and then letting them watch the race through a live video feed. Unlike the complicated race forms of real-world horse-betting, DerbyJackpot has a cartoon-like feel that invites casual players to make a simple “Granny Bet” starting at $1 or even a ten-cent “Dime Bet” on multiple horses. It looks like this:

As you can see above, the site also has social media features that lets friends or co-workers banter online as they wait for Old Dobbin to cross the finish line. Players can pay into their account with credit card or through online payment system Dwolla, which lets them cash out instantly; for now, the maximum bet is $20.

DerbyJackpot has a frivolous feel but it’s backed by serious economists and computer scientists as well as a mysterious “billionaire investor.” It is also playing for high stakes because the U.S. online gaming and gambling industry now stands at a strange crossroads.

Recall that, a few years back, the U.S. government cracked down on offshore poker operations like Full Tilt Poker, leaving American players with few outlets for online gambling. At the same time, flailing online social gaming companies like Zynga are hoping that gambling will save their skin as users tire of inane activities like Farmville.

Into this void have stepped companies like Doubledown, Betable and DerbyJackpot, which are partnering with casino companies in the hopes of turning gamers into gamblers. For now, most of the action is taking place in the U.K. and other countries while the companies badger state governments to change the gambling laws.

The companies got a glimpse of hope last year when the Department of Justice changed its position and said it would permit online gambling in states — so long as states in question passed laws for the gambling to take place within their borders. For now, that’s not happening and, we’re guessing, not much is going to change so long as powerful politicians like Nevada’s Harry Reid and New Jersey’s Chris Christie can protect their home states’ casino interests.

In the case of DerbyJackpot, the company has found a legal loophole because the laws are different when it comes to betting on horses. This because, unlike casinos, there is no “house” and players only bet against each other; in DerbyJackpot, the odds for each race are set by the track in question. While some professional off-track-betting parlors are offering online bets, DerbyJackpot says it’s the only one to target small-scale casual gamers. The company offers a mobile site too and hopes to partner with Facebook in the future.

The site is live in 25 states and, the founders say, it will soon be in about 12 others. Alaska, Arizona, California, Hawaii, New Jersey, Nevada, North Carolina, South Carolina, Utah, and Virginia are among the states that restrict online horse betting.

(Image by Alexia Khruscheva via Shutterstock)

This sorry situation means that Zynga has been looking to gambling as a lifeline. Reports this week say Zynga spent around $75,000 on lobbyists last quarter in efforts to bring online gambling to California and its CEO, Mark Pincus, recently told investors that the company hoped to enter international gambling markets by the first half of next year.

For Zynga, gambling could be a way to replace revenue lost from the virtual sheep people are no longer buying. The problem, though, is that the company is late to the online poker table.

According to Chris Griffin, CEO of gambling hub Betable, the winners and losers in the internet gambling market are being determined very quickly and Zynga will be hard-pressed to catch up. Griffin points to the mobile launch this week of Big Fish Casino — a game that lets people gamble on their iPhone in places like the U.K. The presence of these rivals mean there could be little left for Zynga.

“Big Fish has a six to nine month head start on Zynga … It’s a false notion that gambling will save them because the valuable players are already locked up and there is loyalty there,” says Griffin, who adds that the current population of Zynga users are unlikely to become overnight gambling fiends.

Griffin has skin in the gambling game so his words should be taken with a grain of salt. Betable, which received a large seed-round of investment this summer (see disclosure below), provides back-end services like payment clearing and legal permits that allow developers like Big Fish to offer gambling in the first place. But that doesn’t mean Griffin is wrong about Zynga.

Even if the game-maker can get gambling up and running, possibly with the help of casino giant Wynn Resorts, it will still need customers. And for now those customers are in the hands of established gambling brands like Poker Stars or the upstarts like Big Fish. To compete in Europe and the U.K., Zynga will have to outspend the incumbents on marketing (impossible) or else offer cheaper rates — leading to the prospect of more revenue but minuscule profit. Meanwhile, Facebook is going its own way with gambling in Europe.

But what about America? Online gambling was illegal until last December when the feds said it could take place in states that pass a law to allow it. This could give Zynga a fresh playing field on home turf.

The problem is that the state by state approval process is a muddle. While bills are inching forward in places like New Jersey, the process is still tied in politics and red tape, meaning it could be years before online gambling is up and running. And even if some states do allow it, only a handful of them have large enough populations to ensure a reliable supply of players at an online poker table. Finally, will American gamblers gravitate to Zynga or, more likely, will they seek out familiar gambling brands like Pokers Stars?

The bottom line is that gambling may be a huge potential revenue stream but that doesn’t mean any of it will go to Zynga.

Disclosure: True Ventures is an investor in Betable and also in the parent company of this blog, Giga Omni Media. Om Malik, founder of Giga Omni Media, is also a venture partner at True. Story and opinions are my own.

(Image by Beto Chagas via Shutterstock)

The overall market appears to have shrugged off the social network’s misfortunes as both the Dow Jones and the Nasdaq have posted modest gains.

Facebook’s latest swoon does, however, appear to be pulling down its ill-starred step-brother, Zynga. The social game maker has fared even worse than Facebook, falling nearly 15 percent today alone.

FB data by YCharts

Facebook’s underwhelming performance since going public have set off recriminations and lawsuits between the company’s bankers and investors who accuse Facebook of failing to disclose that its growth prospects were slowing.

Facebook’s flop has set off hand-wringing about the prospect of a new tech bubble or a gloomy market for future IPO’s.

As ReadWriteWeb reports, however, not everyone can come bolting out of the gate. Its three year post-IPO chart, which shows a slumping Apple and a soaring Yahoo, underscores how share price may not be the best metric of determining a company’s long term value.

Facebook closed down nearly 10 percent at $28.84 while the overall market finished up around one percent.

The Zynga Serve Reward program will also eventually involve turning Zynga titles into offers platforms, allowing brands to insert deals into games that can be saved to a Serve account and redeemed using Serve cards. The purchases of specific offers will unlock more virtual currency in Zynga games, potentially creating a virtuous cycle for both American Express and Zynga.

The timing of the branded offers is still yet to be determined. But for now, users can start to earn Farm Cash money in Farmville by registering for the Zynga Serve Rewards program and getting a co-branded prepaid card in the mail. Users can also earn in-game money by connecting a funding source to their card and activating it. Only the first five purchases of $25 or more on the rewards card will earn virtual currency.

Other Zynga titles including CastleVille and CityVille will also soon be integrated into the Zynga Serve Reward program. Users will be able to track their rewards through an in-game dashboard and also through their Serve mobile app.

Dan Schulman, President of Enterprise Growth for American Express, told me in an interview that this is the first rewards partnership for Serve and the deepest Zynga has allowed a partner into one of its games.  He said the partnership allows Zynga and American Express to give social gamers a richer experience and it allows Zynga to become a starting point for offers, with American Express Serve helping close the loop on redemptions.

“We’re seeing a tremendous amount of customers in our target market spending time on these (social gaming) platforms. If we can integrate and make their lives easier and customize things like offers and deals and move money back and forth in a social way, that’s tremendously powerful,” Schulman said.

This is another example of how American Express is trying to be aggressive using social media to keep its business relevant to users. It’s been working with Twitter, Foursquare and Facebook to distribute offers that can be saved to their American Express card. And it’s growing its presence on Facebook, including a Serve Facebook app that allows friends to pay each other.

I think the partnership makes a lot of sense, and could give American Express another way to reach younger users. And for Zynga, it’s another way to drive more usage and it builds on other recent offline rewards promotions. In March, for example, Zynga partnered with Frito Lay to put codes in specially marked bags of chips that would unlock certain virtual goods inside games. If it can expand on this relationship with American Express, it can show how it can make more money off its more than 65 million users.

The legal logjam could finally break in coming months as some states prepare to turn on the taps for new forms of gambling based on social media.

Nevada has already passed a law and New Jersey is likely to follow soon, according to Pillsbury lawyer Jim Gatto. He adds that Hawaii and California are also considering bills to legalize online gambling.

Right now, the status of online gambling in the U.S. is a no-man’s land. It was considered illegal for years under federal law but the Justice Department last year issued a green light memo. The memo gives the go-ahead for gambling so long as the state allows it, the betting takes place within state borders and no sports betting is involved.

The new rule hasn’t changed anything on the ground for now, however, as “gamblers” continue to play Facebook games like DoubleDown Casino that let them play but not cash out.

“Who wants to shovel shit in Farmville when you can play poker with other people?” a source at Doubledown told me last year in explaining the game’s appeal.

Casino Industry + Social Game Makers

The recent go-ahead from Justice has set off a flurry of courtships between app developers and firms that supply back-end services to casinos (slot machine operations, pay-out processing and so on). The most prominent has been casino giant IGT’s decision to buy DoubleDown for $500 million in January.

According to Gatto, more and more social game makers like Zynga are baking gambling-like activities into their games in anticipation of a switch towards legalized gambling. He says the partnerships are necessary because established casino players like Aristocrat and Shufflemaster don’t know how to make social games and game makers don’t know how to run a casino or deal with regulatory issues.

Gatto adds that famous casino brands like Bally’s and Caesars are also trying to get a piece of the action.

The money at stake is potentially staggering as a recent New York Times report cited an estimate of $6 billion to $100 billion. Much of this money may be flowing off-shore as Americans look for online casinos hosted in other countries.

While it’s not illegal for Americans to bet, it is illegal for companies to process their gambling transactions. Famous Antigua-based companies like Full-Tilt Poker were brought down after federal agents caught them routing payments through front companies like florists (the agents also busted the owners, which include several poker celebrities, for running a Ponzi scheme).

Gambling advocates say turning the legal switch will allow states to get badly-needed revenue and to recoup money that would otherwise flow overseas.

But a whole nation of Facebook-based gamblers is still a long ways off. Parents may not like the idea of a casino in their teenager’s room, and places like Utah have already passed laws making it illegal to place or receive a bet in the state.

Gatto adds that, in California, the legal process is “incredibly fraught” due to competing interests of casinos and Indian tribes.

Images by Louis Louro and Sanzhar Murzin.