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Bold move has Caesars on top

15 Jul 2013

By Howard Stutz
The Empire put a hit on the Mafia and buried the farm.

Two years after Caesars Entertainment Corp. perplexed Wall Street by acquiring social gaming operation Playtika, the casino giant has moved past rival Zynga Inc. to the top of the business model.

Social casino games are free to play on the Internet, through Facebook and other platforms. Customers have the option of paying a nominal fee — often less than $1 — to acquire thousands of gaming tokens to increase their virtual bankroll.

Apparently, those pennies add up.

One Wall Street analyst estimated social gaming is now worth $1.2 billion worldwide in annual revenues.

Caesars Interactive Entertainment, a subsidiary of the casino company that controls Playtika and the World Series of Poker, now owns a large chunk of that market.

Playtika’s Slotomania brand — slot machine and bingo-like games — is fueling the effort, which sent Zynga, owners of Farmville, Mafia Wars, Words with Friends, and a platform of casino games, including Zynga Poker, into second place.

“Social casino gaming has essentially gone from being a nonexistent sector a few years ago to one of the most popular gaming genres on desktop and mobile (devices),” Adam Krejcik, managing director of Eilers Research, recently wrote.

Eilers Research is a Southern California-based independent firm focused on the gaming equipment, technology and interactive gaming sectors.

Wall Street analyst Todd Eilers founded the company in 2012.

Krejcik estimates the total social gaming market could top $2 billion by the time 2013 is in the books, a 67 percent increase over 2012.

Social gaming has seen “significant growth” thanks to Facebook and mobile devices, such as iPhones and tablet computers. Several high-profile acquisitions of social gaming companies attracted media attention and financial world curiosity.

The gaming industry, however, views social gaming as a “potentially lucrative customer base that could be converted to real-money gambling,” Krejcik said.

Caesars gained attention in May 2011 when it acquired 51 percent of Playtika, a small social game developer based in Israel that didn’t have a positive cash flow at the time, but was building an audience through Slotomania. Caesars bought the remainder of the company seven months later.

Caesars never revealed a purchase price for Playtika. Social gaming websites estimated the initial 51 percent acquisition cost $80 million to $90 million.

Meanwhile, it was International Game Technology’s purchase of Seattle-based DoubleDown Casino in January 2012 that sent Wall Street into a tizzy.

The slot machine giant agreed to pay DoubleDown founders $500 million — $250 million in cash up front and another $250 million over the next few years for one of Facebook’s top social gaming networks.

Wall Street roundly criticized the deal 18 months ago. Recent IGT quarterly earnings reports, however, show DoubleDown to be a significant driver of revenues, vindicating the purchase engineered by CEO Patti Hart.

MGM Resorts International and slot machine maker WMS Industries have recently made inroads in social gaming, but Caesars is now the casino industry’s giant in the space.

In January, Caesars acquired Santa Monica, Calif.-based game designer Buffalo Studios, which gave Playtika control of Bingo Blitz, a popular Internet game.

With the potential for regulated and legal Internet gaming in several U.S. states and Canadian provinces, the companies that took the initial steps into social gaming are ahead of the curve.

For now, Zynga seems to be short-stacked.

Krejcik said the company’s once-dominant market share has been overtaken by Caesars. IGT and WMS have also gained traction on Zynga, which remains a solid No. 2 in the social gaming world.

Playtika’s push into mobile devices has been a primary reason for the shift.

Zynga, which has seen its share price tumble 75 percent since its December 2011 initial public offering, has been the focus of decidedly negative views from Wall Street.

The company earned accolades on July 1 when it named former Microsoft Corp. executive Don Mattrick as CEO, replacing company founder Mark Pincus, who retained his status as chairman and still controls 61 percent of the company’s stock.

The leadership change may delay Zynga’s move to gain a suitability finding from Nevada gaming regulators, the first step in earning a state license for interactive gaming.

This past week, Zynga announced plans to launch real-money online gaming in the United Kingdom through Facebook.

In June, Zynga bought a Chicago-based design studio run by longtime IGT slot machine designer Joe Kaminkow, who was responsible for many of the company’s best known slot machine titles and brands. It’s unclear whether Zynga will partner with a casino operator or offer content to online providers.

For now, social gaming fascinates casino companies.

It’s too early in the game to determine whether active social gamers can be converted into real-money casino customers, either online or land-based. Krejcik said not enough hard evidence has been gathered.

Still, casino companies shouldn’t be discouraged from entering social gaming.

“We believe traditional brick-and-mortar casino gaming companies will be the biggest players in the market in the next few years as they leverage their existing content and expertise,” Krejcik said.

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