A few months ago, Jeff Connors disrupted his own illustrious career in the gaming supplier space to accept a position at a startup.
You’d think somebody with Connors’ pedigree—a University of Nevada Las Vegas graduate who spent the next 20 years in top posts at companies like Aristocrat and Bally Technologies—would move on to some lofty position at one of the newly consolidated super-suppliers, or perhaps settle into a spot at an emerging U.S. iGaming operator.
But Traffic Generation—the company for which Connors is now vice president of North American sales—is neither traditional supplier nor iGaming operator. Founded in 2011 and headquartered in Gibraltar, Traffic Generation specializes in helping land-based properties craft marketing strategies inspired largely by consumer behavior on social and free-play casinos.
“I found the technology and user experience compelling,” Connors says. “Personally, I enjoy playing free games online and gambling at my local casino in Vegas. It’s important for operators to research multiple casino-centric opportunities for new sources of revenue. The analytics behind these monetized applications provide mechanisms for those opportunities.”
This incident of a real-money gaming veteran jumping ship to the free-play side is hardly an isolated one. Traffic Generation’s own founder, Andy Caras-Altas, worked for years in the European iGaming space before he could no longer ignore that the tide was shifting elsewhere.
“Real-money online wagering was always going to be eclipsed by social, simulated and free-play products,” he says. “The biggest shift in 2014 was the realization that significant revenue can be generated from simulated and social gaming, when the products are fully integrated into the property’s marketing and player development systems.”
Free Fall
It seems ludicrous on face that something with the word “free” in it would have anything to do with real-money gambling. And yet in just the last few years, the traditional U.S. gambling industry hasn’t just embraced social casino—it’s come to dominate the space almost entirely.
“Today there are few differences between the traditional gambling companies and the social casino publishers,” according to Joost van Dreunen, “for the simple reason that the former has managed to acquire most of the latter.”
As the CEO of Superdata, a market intelligence firm that monitors the digital goods space, van Dreunen has had a front-row seat to the social casino takeover of recent years. “Caesars Interactive owns Playtika, IGT owns DoubleDown, Aristocrat owns Product Madness, Churchill Downs owns Big Fish Games, and so on. There has been significant consolidation of the market—and we expect this to continue in 2015.”
But why would the gambling industry so passionately covet a product that only looks like gambling, but doesn’t monetize like gambling and isn’t considered gambling?
Because social gaming makes a lot of money and provides additional opportunities for customer acquisition and retention. Already rich with casino gaming resources and IP, many gambling companies had an edge in product development over social gaming startups that had to build from scratch. You see this in how gambling companies that offer social casino do a much better job monetizing it than their non-gambling competitors.
“The three highest-earning titles in the social and mobile casino market in November 2014,” van Dreunen says, “were Big Fish Casino (Churchill Downs), DoubleDown Casino (IGT) and Slotomania (Playtika/Caesars). These games generate around $500,000 in revenues per day—but, surprisingly, do not have the highest traffic numbers. A title like Zynga’s Texas Hold ‘em Poker has a worldwide daily active user base of around 2.5 million, but generates less per paying user.”
iGaming Bust
The U.S. gambling industry’s dominion of social casino surprised many who believed the progression of traditional gambling into the online world would take the form of real-money online gaming, also known as iGaming and RMG. And in some ways, it has—but at an underwhelming pace.
“I think U.S. casinos have been restricted and defined in their digital product strategy by external forces,” says Caras-Altas. “The lack of progress in real-money online gaming regulation has meant that the barriers for entering the real-money digital market were too high. This meant U.S. casinos have been limited to free-play, simulated or social casino.”
But that did not turn out to be an annoying limitation. In fact, it has been a godsend. Social casino makes way more money than its regulated real-money counterpart in the U.S., and customer acquisition costs for social are way lower than what they are for RMG.
What’s more, the widespread geographical and demographic availability of social and free-play casino can connect land-based operators with scores of casino gaming-inclined players around the nation and produce voluminous amounts of data on their gaming behavior. According to Caras-Altas, “32 percent of U.S. social slots players we surveyed visit a land-based casino more than once a week. This indicates that not only is there a real opportunity for casinos to engage with existing land-based players when they’re out of the property, but also there is a very large group of potential players who present a target for new player acquisition.”
It’s probably worth taking the time to reflect on why “social” and “free-play” are often used interchangeably. Although some literal distinctions can be said to exist, the term “social gaming” has generally come to apply to any number of web-based games, typically available free of charge, whose mechanics pit the user against other players on the same network—hence, the “social” part and the reason why Facebook in particular has done so well with these games.
Social casino is only one subgenre, but its explosive popularity has been noted not just by the casino industry, but by everybody who tracks social gaming. A recent survey conducted by media research firm Frank N. Magid Associates found that 55 million Americans ages 8-64 have played “social/casual casino games without cash payouts,” and 71 million Americans in the same age bracket have either played them “or are interested in playing them,” indicating “serious near-term growth” of the genre. This destroys the widespread belief, held primarily by real-money gamblers, that poker and casino games aren’t worth playing if there’s no real money at stake.
“People are doing it because it’s a degraded reality of real gambling,” says Mike Vorhaus, the president of Magid Advisors. “It has a lot of the attraction of real gambling, but it’s much less expensive. The thrill of winning and the fear of losing still exists with this type of currency.”
Vorhaus, who enjoys playing live poker during his frequent visits to Las Vegas, compares his own gambling attitude to that of the average social casino player. “If I’m gambling and I’m winning, I’m trying to make money that I’m going to spend or save. But when social casino players are winning, they are accumulating credits that they intend to continue to play with.”
But if social casino is “free,” how is it capable of monetizing at all? This is where Vorhaus suggests that “free-play” isn’t exactly a misnomer, but perhaps an incomplete description. “When I hear ‘free to play,’ I understand that to mean ‘free to start playing.’”
A social game that permits the user to purchase in-game goods or credits will eventually lead to a level of gameplay where the buying option will start to seem more attractive. “In varying degrees across different games,” as Vorhaus puts it, “it becomes more and more difficult to resist playing, because the pain of not paying grows and grows.”
Grading Gameplay
That sums up the free-play monetization model in a nutshell. The most engaged players are the ones who desire access to advanced levels of gameplay—and are thus more likely to consider paying for the privilege if the only other option is to continue to invest time into earning enough credits.
There is a standing joke in the real-money online poker community about this natural inclination to play at a skill level one considers himself fit for. Frustrated low-stakes grinders who are upset that they can’t move opponents off superior hands are advised to move up to stakes “where they respect your raises.” In social poker, this is frequently why players who desire a more competitive challenge spend money to acquire additional play chips—to be able to play at a higher level, even though those chips can’t ever be cashed out for real money.
Yes, this is sacrilege to the cash-minded gambler—and yet it happens. For all of his work researching the space, Vorhaus himself is incredulous. “I personally can’t believe people do that. When people tell me that they spend real money to buy currency with no dollar value to play casino games, and if they win more currency, it still has no value—that to me is insane. I still think it’s insane, even though I totally understand why millions of people play these games, and for them it is not insane at all.”
If it is a form of insanity, at least it’s not epidemic. Unsurprisingly, the majority of social gamers, casino or otherwise, never spend a dime on these games in their lives. The percentage of players who do become buyers is very small—for the average social casino game, it’s seldom much higher than 2 or 3 percent.
Believe it or not, those tiny conversion rates have created a multibillion-dollar industry. Social casino revenue in the U.S. alone was almost $3 billion in 2014, according to Superdata and Eilers Research. What’s more, social casino is one of the best performing subgenres in the entire social gaming family. “Social casino-style games, which almost exclusively use a free-to-play monetization scheme, generate two to three times more than regular social games,” van Dreunen says. “For slot games on Facebook, we see an average monthly spend among paying players of around $60—compared to $20 for average social gamers. Similarly, conversion rates also skew higher, roughly double.”
Pick Your Poison
In view of findings like that, the gambling industry’s interest in social casino goes from mysterious to a no-brainer—but it wasn’t always so. Alun Bowden, head of content for Pageant Gaming Media—which publishes Social Casino Intelligence (yes, the space eventually got big enough to require its own trade magazine)—remembers a time when the idea of getting into social must have seemed as crazy to the gambling companies as paying for chips seems to people like Vorhaus.
“Caesars Interactive CEO Mitch Garber was one of the first from the real-money sector to spot the opportunity in social casino,” Bowden says, “and he was smart enough to realize that the best way to enter the sector was through the acquisition of an existing operator.” In so saying, Bowden puts his finger on social’s Big Bang:
Starting in 2011, Caesars Interactive went on an aggressive acquisition spree, a strategy so quickly imitated by others that only a few years later “we are now in a situation where the big players in social casino are predominately owned by major land-based firms,” says Bowden. “This is an industry that has gone rapidly from an innovative startup culture to one where the price of entry is very high.”
It’s not just the tech companies that have seen fit to get in touch with their social side, bypassing the need for iGaming completely. MGM Resorts—whose CEO Jim Murren has publicly called on the American Gaming Association to cool down its advocacy of online gambling regulation—entrusts social casino platform myVegas with providing a free-play experience to the property’s loyal customers. Even Station Casinos, which recently divorced itself from its real-money investment Ultimate Gaming, has taken on myVegas as a social gaming partner.
Social casino is thus clearly past the “fad” stage, and its usefulness to the gambling industry is by now well ingrained and continuing to grow. In fact, we are beginning to witness the emergence of a separate industry geared directly toward maximizing social and free-play returns for land-based stakeholders. Traffic Generation, one of the first companies to serve this new area, utilizes a sophisticated platform that aggregates data on social casino players to reconcile the resulting online profiles with a land-based property’s customer database—thus delivering enriched consumer insights once considered unavailable.
“The most important conclusion that the data leads us to,” Caras-Altas reveals, “is that there is little or no cannibalization of the property’s players when they also play in the digital space. The net value of the player is higher by every metric when they play in both. This includes total hold, reduced dormancy, and increased response to marketing messages and promotions.”
Traffic Generation made its U.S.-facing ambitions clear when it brought Connors on board in November 2014. How prepared is the U.S. casino industry to explore modernized, social-facing marketing practices in 2015 and beyond? Numerous properties have already warmed up to them, and some, like MGM, have set standards for everybody else to catch up to.
