Thursday, August 23, 2012

The Post That Brings it All Together

If you follow the market, you may have noticed that Zynga is up 10% over the past two days.  Zynga creates Facebook apps, including Farmville, whatever the fuck that is (I think, though I'm not certain, that its a game where you use real money to buy fake shit and then build a farm.  Seems reasonable.).  Zynga also created Zynga Poker.  You can log on and fold your QJ to some jackass who open-shipped $30 trillion fake chips with 74 off.  Zynga's IPO priced at about $10, if I recall correctly, and reached a high of about $15.  It's now down to $3.25.  Probably a fair price for a company that relies on people finding enjoyment in spending real money on fake tools. But, here's the rub -- Zynga is looking to transition to "real money" gambling, including real money poker.  It's been attempting to partner with some of the big casino names, such as Wynn Resorts.  Zynga's current player list may hold huge value.  Of course, whether Zynga can succeed in this market, and whether its platform can ultimately win over players who are use to PS, FT, Merge, etc., is a debate for another post . . .
Where was I?  Oh yeah - Zynga up 10% the past two days.  If you search Google Finance and similar sites, you'll see plenty of articles touting Zynga's upgrade.  Apparently, JMP Securities initiated coverage at Market Outperform and stamped Zynga with a $4.50 price target.  Yes, JMP Securities and its genius analysts are moving the market.  Or, are they?    
Not a single finance article on Zynga noted this -- on August 21st - the day before Zynga took off, the Honorable Jack B. Weinstein of the Eastern District of New York rendered a 120 page decision in a criminal matter styled United States v. Lawrence DiCristina, 11-CR-414 (E.D.N.Y.).  The defendant was indicted under federal law for running an illegal poker game.  The court's decision held, for all intents and purposes, that poker (NL Hold'em to be more precise) does not fall within the definition of "gambling" under the Illegal Gambling Business Act.  According to the court, poker is predominately a game of skill, and not chance.  The defendant's conviction was set aside. 
The court's decision is a worthwhile read if you can get your hands on it.  The court based its opinion largely on expert testimony.  There are some fantastic passages in the opinion, culled mainly from testimony presented by the parties at a post-trial Daubert hearing.  A Daubert hearing is, traditionally, a proceeding to determine the admissibility of expert testimony.  For instance, is the subject matter such that a jury will benefit from an expert's testimony?  If the issue is whether plaintiff's use of his Motorola Razor-phone cause his brain tumor, you need an expert to establish causation.  If, on the other hand, your case involves the question whether your child's day care center violated the applicable standard of care by hiring a three-time sex offender who ended up diddling little Jimmy, you prolly don't need an expert.  Rather, offering "expert testimony" that convicted sex offenders don't make good baby sitters may unfairly prejudice a jury.  In addition, a Daubert hearing is held to determine whether your expert knows what the fuck he or she is talking about.  Does he have the education, training and experience to offer a credible opinion on the subject?  If your expert has a two-year degree from University of Phoenix and is currently stocking the shelves at a Walgreens, the judge ain't gonna let him testify whether your Carpentier-Edwards Perimount Magna mitral heart valve was defective.  Anyway, in the DiCristina case, the issue at the Daubert hearing was whether poker was a game of chance or a contest of skill.  The court was educated on concepts such as hand ranges, position, and bet-sizing.  Graphs were presented depicting win-rates factored in terms of big blinds.  Man, I would have loved to have tried this case!  
In any event, the court's opinion is packed with awesomeness.  Far too much to detail in this post.  I did, however, find one aspect of the defendant's expert's opinion interesting and worth posting.  Specifically, the witness' data showed the following:
"Players in the 51st to 75th skill percentile lost approximately .15 to .45 of the big blind per hand.  In the $5/$10 game . . . this equates to a loss of approximately $1.50 to $4.50 per hand.  Even top players in the 90th percentile appear to have, on average, suffered losses from their poker playing.  Only between the 90th and the 95th skill percentile does it appear that "skillful" players begin to experience a positive win rate (i.e. have a positive expected return)"     
Hhmm.  Perhaps we're better off spending our money on a cyber-hoe after all . . .


  1. Are you buying? I've been toying with the idea since they applied for a bingo license in the UK. I don't know much about Zynga's fundamentals, but it seems like a decent "gamble"...

  2. Yeah, I bought some as a bet on on-line poker a few weeks ago at $5. It promptly dropped to $3 literally a day later. My timing is awesome. Regardless, if the gamble pays off, and if they can make a mark on real money gambling, it won't matter.

    Hard to tell who will benefit if online poker becomes a reality.... IGT, perhaps? shuffle Master?

  3. As for fundamentals, they have an insane amount of cash on the books. Of course, given their current business model, the company does not appear to be worth much more than its cash value !

  4. Excellent breakdown of Farmville (I'm guessing)... :)

  5. Interesting post and funny yet accurate interpretation of Farmville...I assume. I've never played it.

  6. This comment has been removed by a blog administrator.

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