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Brave New World

Online gaming was feared by some suppliers, but evidence indicates they may benefit.

Brave New World

The first sketchy images of online gaming in the United States are starting to appear, and they suggest brick-and-mortar companies might fare well.

The clearest comparisons so far are in social gaming.

On their last conference call, IGT CEO Patti Hart and CFO John Vendemore boasted of the emerging prowess of DoubleDown, their social gaming division.

There have been 10 million downloads of DoubleDown poker on Facebook, the third most of any app, gaming or otherwise. And it is the most downloaded app on iPad, they said.

More important, revenue has grown 105 percent in the past year to $61.4 million in the June quarter and DoubleDown will be GAAP break-even by early fiscal 2014, they said.

The really impressive number, however, is what are called bookings. That’s the amount of money spent by players who have exhausted their free chips. For IGT, it grew 60 percent to 40 cents a day per user. That is nearly double the nearest competitor, they pointed out.

And what is IGT’s big advantage? Its rich library of hundreds upon hundreds of games that allows IGT to continually refresh its offerings to players, they said.

A few days later, Zynga held its investor conference call and presented a stark contrast.

Founder Mark Pincus said ZNGA is abandoning plans for real-money internet poker in the U.S., and had to report deterioration throughout his business. ZNGA’s bookings: 5.3 cents.

At one point in the call, Pincus was asked why ZNGA has 2,300 employees when a similar company was doing as well with 400.

His answer boiled down to a multiple of 400 people can do that multiple or more of games, plus ZNGA is developing a platform and infrastructure.

Later, he said ZNGA’s strength is its ability to create games, and that FarmVille showed a single game could generate $1 billion.

Aside of the fact that his comments can be interpreted as somewhat contradictory, it makes for an interesting comparison to any online casinos being supplied by the likes of IGT,  Bally, WMS, Aristocrat, Ainsworth, Konami and others.

They don’t have to develop games because they already have them. They have the makings of platforms. They understand the gambling mentality and the math of gambling games.

So, it would seem that ZNGA is caught in the middle. Anyone can invent a hit game, so competitors can bubble up from the bottom with the next FarmVille. On the other side are the established gaming suppliers with libraries and other resources.

It’s also worth asking if ZNGA was a one-hit wonder that attracted investors who confused a hit with a franchise.

Meanwhile, Adam Krejcik of Eilers Research thinks free-play will continue to be a major source of revenue even after real-money gambling is legalized.

Using Caesars Entertainment as an example, he estimates that even if it gets 50 percent market share in Nevada and New Jersey, it would generate just $68 million in EBITDA, while it already is on track to generate $90 million this year from its social casino.

The top three social casinos in the past quarter were CZR at $71.4 million counting World Series of Poker licensing, ZNGA at $68.6 million and IGT at $61.4 million.

Together, they comprise 40 percent of all social gaming revenue, Krejcik said.

Cannibalization

One of the big debates is whether i-gaming will cannibalize brick-and-mortar.

So far, the evidence is that it will not.

The World Series of Poker, for example, exploded in part because of online qualifying tournaments, and that, in turn, led to an explosion in the number of poker tables in casinos throughout the U.S.

Companies like British bookmaker William Hill continue to grow their bricks-and-mortar business even as online gaming revenues soar.

And in the U.K., where online gaming has been regulated for about a decade, bricks-and-mortar spending is holding up.

Consider these U.K. numbers from Global Betting and Gaming Consultants as culled by David Briggs, the entrepreneur who helped Ladbrokes go online and who now runs GeoComply, which verifies player location:

Racecourse Attendance
2000                2010
5.16 million      5.77 million

Casino Gaming Revenue
2001                2011
£3.316 billion   £4.98 billion

Casino Attendance
2001                2011
11.29 million    17.39 million

Number of Casinos
2000               2011
118                  149 

Lottery Sales
2004/5           2010/11
£141 billion     £207 billion

Bingo Stakes 
2000                2011
£1.106 billion   £1.309 billion

Clearly, there has been room for growth in mature bricks-and-mortar Britain even as online gaming has emerged.

And, Briggs argues that brick-and-mortar companies need to get into the e-game, citing studies showing a majority of casino patrons are over 65 while 75 percent of smart-phone users are under 35.

Finally, we think New Jersey will offer the perfect laboratory to study the impact of i-gaming in the U.S.

Casino gambling there is limited to one small city removed from the state’s major population centers. There aren’t a lot of complications that will confuse the results.

A year from now, other states should be able to look at New Jersey and draw some conclusions about whether, why and how to legalize online gaming.

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