Revaluing the social casino sector

Playtika’s $4.4bn sale to a Chinese consortium will be seen as symbolic of a turning point in social casino, and leave some egaming executives wondering what might have been. But the question that should be asked is what comes next?

Caesars Interactive Entertainment spent roughly $300m on the various businesses that now comprise Playtika, and its original acquisition was less than five years ago. By any metric that is a stunning return on investment, and creating a business worth more than 888 and GVC Holdings combined in that time frame is an incredible achievement.

Playtika is unique in its sector, and dominates social casino with around 25% of the entire market. So to suggest egaming operators should have created a business of similar value is nonsense, but there is a valid question of whether egaming gave up on the sector too early and even if it’s yet to learn the right lessons from it.

For all the interest and investment in social casino, few online gambling firms made a success of their attempts to capitalise on the sector, and there is a widespread belief that it’s a vertical that flatters to deceive. Various proof of concept models aiming to cross-sell social players into real-money gaming (RMG) have failed, while there is little perceived value in the reverse model.

Bwin.party rapidly came to view its Win Interactive social subsidiary as non-core, while 888 rarely mentions its social unit Mytopia. Sky Betting & Gaming closed its short-lived social experiment in September 2015 and even Gamesys, one of social casino’s early cheerleaders, has a relatively low key approach to the sector these days, although it does have social casino versions of all its main RMG brands.

You’d be forgiven then for thinking the social casino sector was in decline, but growth is continuing with Eilers & Krejcik Gaming’s latest report on the sector showing 15.8% year-on-year growth and estimated revenues of $3.8bn in 2016. And it’s not a market where market share gains are impossible, as shown by the recent rise of Aristocrat and Murka. So why the lack of interest from egaming?

Maturing market

The obvious reason is financial. There are are clear signs of a maturing market in social casino and any egaming operator looking to buy in at this stage would face a significant cost. The Playtika deal was at a 13x EBITDA multiple and it remains a seller’s market with few strong opportunities to enter at scale, in a business where scale is crucial in the current market.

Eilers and Krejcik Gaming noted in its recent report: “We believe the ‘easy’ growth is now behind us as it’s becoming increasingly difficult to drive significant DAU growth, especially in key markets such as North America and Australia. Future revenue growth will largely be driven by improving paying player conversion rates, higher monetisation rates, and penetrating new markets (Asia, LatAm, Eastern Europe).”

This should be of interest to an egaming industry with an existing presence in any or all of those markets, rather than those looking to gain revenues from a very competitive US market. Maximising revenues from emerging Asian and Latin American markets in advance of regulation shouldn’t be dismissed out of hand, even if burned fingers from previous attempts to enter the social casino sector may act as a deterrent.

Alongside this costs of entry are high, competition is fierce and conversion models are at best optimistic. It’s also apparent that right now Europe remains a very small segment of the global social casino market. And while the likes of 888 and Gamesys can bring the benefits of in-house content to bear on their social casino products, most operators have no clear value-add they can bring in terms of games that has helped the likes of Aristocrat and SciGames to gain substantial revenue growth.

But as more and more slots content is being created by in-house studios this may change with time. And it’s here where we are perhaps starting to see the first real signs of convergence. 888’s Mytopia division is less than prolific in creating social casino brands and content, but it’s noticeable that two new RMG brands have launched recently from the 888 stable with a decidedly social gaming feel to them.

Much talk often surrounds Casumo and its social casino style meta-game concept, which has been taken on by other firms such as Unibet to varying degrees. But social casino game design is also starting to filter down into the egaming sector. Gaming Realms has an RMG version of its social casino brand Slingo at the centre of its growth plans, with the game reportedly performing very strongly.

What Gaming Realms is doing is reimagining the social concept for RMG and not just adding layers of social content into an RMG product. This can not only appeal to a new consumer base, but improve retention and player yields as the games become “stickier”. And it’s arguable some of the leading casino operators should be looking beyond RMG for the next big thing in content. An acquisition of an innovative social casino studio could be a very smart move indeed.

The Playtika deal signifies that phase one of social casino is over and we now move into a new era where innovation around content and international expansion becomes key. Beyond the US, can Europe ever become a market of scale? It’s hard to say, and it’s not even apparent that this is important. But what is vital is the egaming sector takes a fresh look at social and works out a new way of valuing its potential contribution.