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White Paper Series

The State of the Social Games Industry:

Gambling to Social Gaming, Social Gaming to Gambling
February 2012

Crowdpark 2009-2012. All rights reserved.

The State of the Social Games Industry: Gambling to Social Gaming, Social Gaming to Gambling

EXECUTIVE SUMMARY

The social games industry launched approximately half a decade ago and has experienced strong traction, especially with the ever-rising popularity of the Facebook platform now at 845M users.1 Companies such as Zynga (developer of FarmVille, Zynga Poker, etc.) and Double Down Interactive (DoubleDown Casino), acquired by International Game Technology, have launched very successful Facebook casino games. 2 Several trends are now coming into play to create the perfect storm for exponential growth in social games including: the explosion of mobile devices; additional networking platforms; and, increasing convergence between the gambling industry and the social games industry. This white paper delves into the factors driving the growth and convergence of social games and gambling. It clarifies how social games monetize when only virtual currency is used, sheds light on the regulatory climate around real money usage in social games, as well as analyzes the strategic advantage of gambling operators partnering with, investing in, or acquiring social games developers.

1 2

Kim-Mai Cutler, There is a $100M discrepancy in Facebooks payment revenues , Inside Social Games, February 10, 2012. Tricia Duryee, Casino social gaming ringing up big business on Facebook, All Things D, October 19, 2011.

Crowdpark 2009-2012. All rights reserved.

The State of the Social Games Industry: Gambling to Social Gaming, Social Gaming to Gambling

Casino Games Is Hot Growth Category on Facebook

Casino games, which include slots, bingo, blackjack, roulette and poker, were first offered online in 1996.3 Today, realmoney online gambling caters to over 53.6M users.4 Ten years after the first online casino game launched, social games were born. Social games have jolted the video games market, democratizing games reach. Social games leverage a players social graph, in the form of a social network, to motivate gameplay. While social casino games such as Zynga Poker, which launched in 2007, have been around for quite some time, many social games developers have recently ratcheted up their social casino game development, bringing an increasing number of slots, bingo and other casino games to Facebook. Together, the top five Facebook casino games Texas HoldEm Poke (developed by Zynga), Slotomania (Playtika), DoubleDown Casino (Double Down Interactive), Bingo Blitz (Buffalo Studios) and Best Casino (diwip) attract 49,800,000 monthly active users and 11,240,000 daily active users.5 At the 2011 Casual Connect Conference in Seattle, Sean Ryan, director of games partnerships at Facebook, listed casino games as a hot growth category on Facebook. Ryan noted that the category is creating unbelievable monsters, naming DoubleDown Casino as a particularly strong game.6 Capitalizing on the opportunity to broaden its portfolio and get a piece of the social games action, the long-established slot machine maker International Game Technology announced in January 2012 that it would acquire Double Down Interactive for $500M.7 Revenues for DoubleDown Casino are not public, but have been rumored to be $140,000/day as reported by All Things D.8 Certainly, the rumored revenues exceeded expectations around the revenue potential of social games. And thats the key. Take well-known user mechanics, or game mechanics, and marry it with your understanding of social. Whatever platform youre on socially it doesnt matter. Figure that out. Sean Ryan, director of game partnerships at Facebook speaking at Casual Connect 2011 in Seattle. There are many strategic reasons for gambling operators to invest in social games. Although the $500M price tag on the

Double Down Interactive acquisition surprised many, others readily acknowledged the value of the acquisition. Inside Asian Gaming cites a Union Gaming Research piece that describes Double Down Interactive as a shrewd investment for IGT because Double Down is free cash flow positive and provides IGT with an entry into the growing online for-play wager market.9 Much gambling industry conversation revolves around the promise of social games as a bonafide revenue opportunity. At the 2012 ICE Totally Gaming conference in London, gambling operators discussed the strategic benefits of entering into the social games arena. James Bennett of eGaming Review published a feature The New Face of Online Gambling, describing the lucrative offering of virtual-goods monetized games. He predicts that gambling operators will only be able to take a piece of the growing social games pie if they invest in or acquire social games developers.10

The attraction behind virtual goods monetization

For those outside the social games industry, it can be surprising that social games players pay to play casino and betting games without being able to win real money. Why do people pay to play social games with no chance of material gain? Social games developers, like many of their casual games and video games contemporaries, create entertainment products. Players pay for virtual goods and currency for entertainment just as they would to purchase a console video game or to go to the movies. Even though only a small percentage of players is willing to pay for virtual currency and goods, which unlock features and intensify game play, the broad reach of social games often translates this small percentage into strong revenues. Because social games players pay for entertainment in ways that are relatively new to the video games industry in micropayments, such as a few dollars to customize a pet or to unlock a new level more quickly rather than in larger sums, social games developers must be strongly attuned to users behavior, emotions and social drives. Social games users expect quick, continuous feedback, clear progress, and challenges that are interesting but not insurmountable.11 And all of this must occur in a friendly, competitive environment in which users can share their achievements with other players, secure placement on a public leaderboard, and if they choose

3 4

4onlinegambling.com. Exposing social gamings hidden lever, Betable Game Monetization Blog, October 27, 2011. 5 AppData, retrieved February 27, 2012. 6 Duryee, Casino social gaming; David Nixon, Nurturing a robust social games ecosystem Sean Ryan, Casual Connect, August 19, 2011. 7 International Game Technology toAcquire Social Gaming Company Double Down Interactive, International Game Technology Investor Relations, January 12, 2012. 8 Duryee, Casino social gaming.

IGT acquires Facebook gaming app developer Double Down Interactive for US$0.5 billion, Inside Asian Gaming, January 16, 2012. 10 James Bennett, The new face of online gambling, eGaming Review Magazine, January 2012. 11 The plays the thing: What video-game technology can do in the real world, The Economist, December 10, 2011.

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The State of the Social Games Industry: Gambling to Social Gaming, Social Gaming to Gambling

with their social graph on Facebook all to gain social status.12 The emotional thrill of winning a prize exists in virtual-currency payout social casino and betting games, but the fun of playing is more complex than simply winning a prize. Achievement and status are key drivers of social games monetization.

games strategies are focusing on slots as a first step into the genre as they are cheap to develop and monetize well.13 In addition to deciding how to go about developing social games, gambling operators must determine how they will use these social games in synergy with their core business. Gambling operators can use social games as: A means to broaden gambling operators operational regions because social casino and betting games are legal in all jurisdictions; A lead-generation model; Tie-ins with land-based casinos to broaden brand name recognition;14 and A tool to educate users and allow them to develop their skills. Risk taking in social games is different than in real money games because the stakes are not the same, and thus social games allow players to explore risk differently than in real money gaming.

Gambling operators expand business via social games

Gambling operators are giving a mixed welcome to the inevitable arrival of social games to their industry. The virtual goods economy is foreign to many gambling operators, but those who recognize the synergies between real money gaming and social games are hurriedly developing strategies, aware that time-to-market is of the essence in order to maximize benefits. Determining a social games strategy is not a one-size-fits-all move. Operators can decide to develop social games inhouse, to invest in talent teams via financing or acquisition, or to license games. Developing popular social games that monetize well requires deep social games industry expertise. Many operators consider that delaying making a move is costly, and that building social games know-how in-house takes time. Gambling operators developing their own social

Conversion of social games users to real money gaming is the goal that has received the most attention by gambling operators because of its obvious moneymaking potential. Facebook has a huge reach, and players of social casino and betting games could be more likely to convert to real money gaming than the average Facebook user. Moreover, those considering real money betting for the first time would likely consider the Facebook games they play in a virtual payout setting to decide which online gambling option to select.15

Figure 1: Casino games and sports betting make up 45% of online gambling market.
13 14

12

R Ray Wang, Research summary: Demystifying enterprise gamification for business, Forbes, December 7, 2011.

Zacks Investment Research, IGT set to acquire Double Down. Nick Saint, Las Vegas casino launching its own branded Facebook game tomorrow, Business Insider, August 9, 2010. 15 AJ Glasser, International Game Technology buys Double Down Interactive for $500M, Inside Social Games, January 12, 2012.

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The State of the Social Games Industry: Gambling to Social Gaming, Social Gaming to Gambling

Regardless of the lucrative potential of conversion, it is important to remember that social games are formidable stand-alone businesses that bring in compelling revenues.16 Moreover, social games allow the operator to amass large amounts of player data because of the social nature of the games. Gambling operators have accurately identified potential synergies between online gambling and social betting and casino games. Indeed, the earliest social games have in part grown out of land-based casino game mechanics. Blockbuster games such as Zyngas FarmVille include slots images and sounds, as well as slots mini-games.17 Casino games, which are increasingly a top growth category on Facebook, are thus a natural trend in social games.18 Nonetheless, social games developers have seen that while social games can adopt traditional casino game mechanics, they must also adapt them to the social games environment.

are now playing video games as games are not distributed only in the form of console games.23 While Facebook is an important platform for social games, many social games developers are looking towards mobile games. Mobile gaming revenues have been calculated at $8B for 2011, more than twice the social games market, and are expected to reach $11.4B by 2014.24 The reach and revenue of the mobile market are promising. Zynga is the premier social games behemoth. Prominent gambling blog Calvin Ayre reported on February 14, 2012 that Zyngas Q4 2011 revenues were $311.2M (up 59% from 2010). Online game revenue was $283.9M (up 51% from 2010) and advertising revenue was $27.3M (up 230% from 2010). Zynga Poker, which is the biggest poker network in the world, is one of Zyngas top three money makers.25

The social games industry enjoying upward trend

Facebook had 845M monthly active users by the end of 2011, 50% of whom play games. Approximately 2-6% of these players pay to play. Facebook made $557M from Facebook Credits in 2011, representing 15% of its total revenue.19 The total social games industry was estimated at $3.65B20 and the online gambling industry was measured at $30.3B in 2010.21 Both social games and online gaming are healthy markets, and together they can accelerate each others growth: Online gambling monetizes very well on a per-player basis, and social games have a huge reach. Social gaming has grown out of the video games industry, which unbeknownst to some is itself a colossal industry. PricewaterhouseCoopers estimated that in 2010 the video game market was worth $56B, and is thus twice the size of the recorded-music industry.22 The growth and reach of the Internet has led to changes in the video games industry as game player demographics evolve. More people of all ages

Gambling and the Facebook ecosystem

Facebook is only one of many platforms for social games development, but is a strong entry into social games because of its accessibility and reach. Currently, gambling per se defined by the Merriam-Webster dictionary as to bet on an uncertain outcome or to stake something on a contingency is not allowed on Facebook.26 Nonetheless, social casino and betting games do exist, and indeed generate strong revenue on Facebook. Gambling by definition includes consideration, chance, and prize as legally defined in the US.27 The social casino and betting games currently on Facebook do not include the prize element. All winnings are in virtual goods that cannot be converted to real money.

16 17

Duryee, Casino social gaming. Joel Brodie, Monday morning quarterback: Forget Freemium, its all about gambling in 2012! Gamezebo, January 2, 2012. 18 IGT Set to acquire Double Down, Zacks Investment Research, January 13, 2012. 19 Cutler, There is a discrepancy. 20 Social Network Games: 2012 Casual Games Sector Report, Casual Games Association, 2012. 21 H2 Gambling Capital, May, 2010. 22 All the worlds a game, The Economist, December 10, 2011; Shoot em up, The Economist, December 9, 2011; Dean Takahashi, The DeanBeat: DICE Summit entices the game industrys insiders to Vegas, VentureBeat, February 10, 2012..

23

Dean Takahashi, The DeanBeat: DICE Summit entices the game industrys insiders to Vegas, VentureBeat, February 10, 2012. 24 Mobile Gaming by the numbers, Geekaphone, July 27, 2011. 25 Peter Amsel, Zynga in unique position to enter very interesting online gambling biz, Calvin Ayre, February 15, 2012. 26 Merriam-Webster Dictionary, http://www.merriamwebster.com/dictionary/gambling. 27 Sean Cole, A no-lose, no-cash-out way to gamble, Marketplace Tech, May 30, 2011.

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The State of the Social Games Industry: Gambling to Social Gaming, Social Gaming to Gambling

As of summer 2011, gambling operators are allowed to advertise on Facebook as long as they abide by local legislation.28 As with their advertising policy, Facebook would require that gambling operators abide by local legislation, privacy and age-restriction terms and conditions if it allowed real money gaming. The US Department of Justice is currently reworking its online gambling legislation. In December 2011, the US Department of Justice reinterpreted the 1961 Wire Act, which increases the likelihood that online gambling could be permitted in the US on a state-by-state basis.29 In an exclusive article published in December 2011, eGaming Review revealed that Facebook has been in discussions with gambling operators to issue eight licenses to create real money social games for Facebook in jurisdictions where online gambling is legal.30 Monetization strategies are still in negotiation, as is the question of whether the platform will be opened up at all.31 Despite the indefinite status of the negotiations, gambling operators are preparing for this eventuality as being one of the first developers, or licensed games, to offer real money gambling on Facebook presents a formidable opportunity.

Zyngas CEO Marc Pincus recently announced that Zynga is considering developing real money casino games, but only with the appropriate partnerships or talent acquisitions.32 Similarly, Greg Enell, CEO of Double Down Interactive has announced that with their new partnership with International Game Technology, they will explore developing real money social games.33 Facebook does not develop their own games because they intend to encourage developers to create the best games for their platform on a level playing field.34 With Facebooks standard Facebook Credits payment method, developers must share 30% of all Facebook Credit revenues with Facebook. Facebook recognizes the strong monetization of casino games. Julien Codorniou, head of platform partnerships at Facebook, has expressed Facebooks intention to foster the growth of the casino games genre. Facebook has recently been improving its platform to encourage users conversion to Facebook Credits so that games will monetize better.35

32 28

Daniel O., Facebook now gambling friendly, Online Casino Reports, August 29, 2011. 29 Cooper, As states weigh online gambling. 30 Wauters, Facebook in talks. 31 John W, Facebook to launch online casino games? Online Casino Reports, December 8, 2011.

Shayndi Raice, Zynga chief talks IPO, lessons learned, Wall Street Journal Online, January 17, 2012. 33 Todd Bishop, Real gambling on Facebook? Double Down CEO says IGT deal could help make it a reality, GeekWire, January 12, 2012. 34 Sebastian Sujka, Start developing HTML5 casino games for Facebook, Social Games Observer, November 22, 2011. 35 Sujka, Start developing HTML5.

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The State of the Social Games Industry: Gambling to Social Gaming, Social Gaming to Gambling

The monetization of social games

In September 2011, the Inside Network published a report entitled Inside Virtual Goods: The Future of Social Gaming 2012. This report clarifies the monetization process and benchmarking metrics of social games. A useful metric to assess a games success is average revenue per user (ARPU) which equals total monthly revenue/active user. More specifically, this is measured as revenue per thousand DAU (US$/KDAU). It is generally accepted that for a game to be profitable, it must be above $25/KDAU. A successful game will attain around $100/KDAU, and some extremely successful games have even reached $150/KDAU.36 According to the Casual Games Associations 2012 Casual Games Sector Report, 20% of social games revenues are derived from advertising; 20% from offers; and 60% from virtual goods, which are purchased using Facebook Credits. The credits themselves are bought using credit cards, PayPal, by completing special offers or by purchasing credit vouchers at 12,000 retail locations in the US.37 Only a small number of social games players are paying users. The Casual Games Association Sector Report describes casino, poker and role-playing games as on average monetizing the best of all social games categories with 5-10 cents expected average daily revenue per daily active user (DAU). This number compares to 3-7 cents for hidden object, adventure and tournament games and 1-5 cents for puzzle, arcade, caretaking and simulation games. A whale is a player whose spending is particularly high. This definitional threshold can vary, but >$25 is a generally accepted benchmark. Most whales concentrate their spending on 1-2 games.38 The average social network games player is a 40-year-old woman, quite closely resembling the average land-based casino user.39 While this is the average player, the Millennial Generation (born between the early 80s and the 90s) has grown up within a gamified environment, finding the virtual goods economy to be intuitive to their lives.40 Although having a large user base is important for social games developers, the sale of virtual goods is the bread and butter of their monetization. Virtual goods purchasers in social games are 58% female, 42% male. Of top spenders, 70% are female and 30% are male.41 Women, who are more likely to play casino games, are also social games money makers. One must remember that the ARPU metric is a ratio which can be manipulated by shrinking the base, or number of users, leading to potentially overall lower revenues. The focus of game developers should be on growing revenue by growing the absolute number of paying users as well as their rate of pay.

Figure 2: Reach of social games provides opportunity for highly profitable online gambling industry.

38 36

Justin Smith and Charles Hudson, Inside virtual goods: The future of social gaming 2012, Inside Network, September 2011. 37 Facebook Credits, https://www.facebook.com/credits/.

Casual Games Association, Social Network Games. Exposing social gamings hidden lever. 40 White Paper: Enterprise gamification The Gen Y Factor, Bunchball, 2012. 41 Smith and Hudson, Inside virtual goods.
39

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The State of the Social Games Industry: Gambling to Social Gaming, Social Gaming to Gambling

Conclusion
There are several potential entry points to social games for gambling operators, and there are many potential benefits for gambling operators of developing social games strategies. Many gambling operators agree on the central importance of making a move soon. As the timeline below demonstrates, some gambling operators who want to be ahead of the curve are willing to pay impressive sums for social games developers in the hopes that the reach of social games will increase their profits. Analysts predict a promising future for the social games market.42

With the acceleration of investment and M&A in social games in 2011, the crossover between social games and what people normally think of as gambling is a fascinating trend. The recent IGT/Double Down Interactive acquisition is an indication of what can happen when the two markets come together. Tim Merel, partner at games-focused investment bank Digi-Capital. The international regulation for real money gaming is uncertain. It is clear, though, that teams with social games development talent are in high demand. While we wait for the future of the online gambling and social gaming markets to unfold, the growing success of social games is already proving the overall attraction of social games and viability of virtual money business models in the larger gaming industry ecosystem.

Figure 3: Gambling operators acquiring social games developers.

42

Inside Asial Gaming, IGT acquires Double Down; Press Release: Crowdpark announces new games Pet Vegas & AnteUp Strengthens position in social betting games, February 28, 2012.

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The State of the Social Games Industry: Gambling to Social Gaming, Social Gaming to Gambling

Glossary
Average Revenue Per Paying User (ARPPU) total monthly revenue/paying active user, measured as revenue per thousand DAU (US$/KDAU). Average Revenue Per User (ARPU) total monthly revenue/active user, measured as revenue per thousand DAU (US$/KDAU). Betting wagering, mostly on sports can be done with real money or virtual prize determining whether it qualifies as gambling (see gambling). Customer Lifetime Value (CLV) the net present value of the cash flows attributed to a customer. Casino Games Blackjack, Roulette, Poker, Slots can be done with real money or virtual prize determining whether it qualifies as gambling (see gambling). Daily Active Users (DAU) the number of unique users that have used an application at least once over the course of a day.

Facebook Credits virtual Facebook currency that can be converted into game-specific currency. The credits are bought using credit cards, PayPal, by completing special offers or by purchasing credit vouchers at 12,000 retail locations in the US. Gambling all real money related products (games of chance - Poker, Blackjack, Dice + betting). Currently, Facebook does not permit gambling on its platform. Gambling must include consideration (something at stake), chance and a real-value prize. Facebook casino and betting games remove the prize element, so they do not qualify as gambling. Lead generation the creation of consumer interest in products or services of a business. Monthly Active Users (MAU) the number of unique users that have used an application at least once over the course of a month. Virtual goods gameplay enhancing in-game good and services such as character customization and items which unlock special game features or speed play. Whale a player whose spending is particularly high. This definitional threshold can vary, but >$25 is a generally accepted benchmark.

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The State of the Social Games Industry: Gambling to Social Gaming, Social Gaming to Gambling

References
4onlinegambling.com. All the worlds a game. The Economist, December 10, 2011. Amsel, Peter. Zynga in unique position to enter very interesting online gambling biz. Calvin Ayre, February 15, 2012. AppData, retrieved February 27, 2012. Bennett, James. The new face of online gambling. eGaming Review Magazine, January 2012. Bishop, Todd. Real gambling on Facebook? Double Down CEO says IGT deal could help make it a reality. GeekWire, January 12, 2012. Brodie, Joel. Monday morning quarterback: Forget Freemium, its all about gambling in 2012! Gamezebo, January 2, 2012. Cole, Sean. A no-lose, no-cash-out way to gamble. Marketplace Tech, May 30, 2011. Cooper, Michael. As states weigh online gambling, profit may be small. New York Times, January 17, 2012. Cutler, Kim-Mai. There is a $100M discrepancy in Facebooks payment revenues. Inside Social Games, February 10, 2012. Duryee, Tricia. Casino social gaming ringing up big business on Facebook. All Things D, October 19, 2011. Exposing social gamings hidden lever Betable Game Monetization Blog, October 27, 2011. Facebook Credits, https://www.facebook.com/credits/. Glasser, AJ. International Game Technology buys Double Down Interactive for $500M. Inside Social Games, January 12, 2012. H2 Gambling Capital, May, 2010. IGT acquires Facebook gaming app developer Double Down Interactive for US$0.5 billion. Inside Asian Gaming, January 16, 2012. IGT set to acquire Double Down. Zacks Investment Research, January 13, 2012. International Game Technology toAcquire Social Gaming Company Double Down Interactive. International Game Technology Investor Relations, January 12, 2012. Merriam-Webster Dictionary, http://www.merriamwebster.com/dictionary/gambling. Mobile Gaming by the numbers. Geekaphone, July 27, 2011. Nixon, David. Nurturing a robust social games ecosystem Sean Ryan. Casual Connect, August 19, 2011. O., Daniel. Facebook now gambling friendly. Online Casino Reports, August 29, 2011. Crowdpark 2009-2012. All rights reserved.

The plays the thing: What video-game technology can do in the real world. The Economist, December 10, 2011. Press Release: Crowdpark announces new games Pet Vegas & AnteUp Strengthens position in social betting games. February 28, 2012. Raice, Shayndi. Zynga chief talks IPO, lessons learned. Wall Street Journal Online, January 17, 2012. Saint, Nick. Las Vegas casino launching its own branded Facebook game tomorrow. Business Insider, August 9, 2010. Shoot em up. The Economist, December 9, 2011. Smith, Justin and Charles Hudson, Inside virtual goods: The future of social gaming 2012. Inside Network, September 2011. Social Network Games: 2012 Casual Games Sector Report. Casual Games Association, 2012. Sujka, Sebastian. Start developing HTML5 casino games for Facebook. Social Games Observer, November 22, 2011. Takahashi, Dean. The DeanBeat: DICE Summit entices the game industrys insiders to Vegas. VentureBeat, February 10, 2012. W., John. Facebook to launch online casino games? Online Casino Reports, December 8, 2011. Wang, R Ray. Research summary: Demystifying gamification for business. Forbes, December 7, 2011. enterprise

Wauters, Robin. Facebook in talks to open platform for real-money gambling in the UK. TechCrunch, November 30, 2011. White Paper: Enterprise gamification The Gen Y Factor. Bunchball, 2012.

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The State of the Social Games Industry: Gambling to Social Gaming, Social Gaming to Gambling

Contact
Crowdpark offers several betting and casino gaming products for multiple platforms including the Web, mobile, and social networks. Its product portfolio includes Bet Tycoon, Pet Vegas, and AnteUp. Crowdpark games allow players to make bets with virtual currency, engage with friends and gather achievements in story-rich environments. Crowdparks patent-pending dynamic betting technology is what generates live, real-time experiences allowing players to leave a bet at any time similar to the stock market. Crowdpark is backed by Earlybird Venture Capital and Target Partners. For more information on Crowdpark please write to info@crowdpark.com. Crowdpark GmbH Rotherstr. 18 10245 Berlin Germany Crowdpark Inc. 795 Folsom St., 1st Floor San Francisco, CA 94107 USA

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