It took years for the gaming industry to come around to online gambling. The entrenched power players in the gaming industry were fearful the upstart industry would become a ubiquitous competitor in what was already becoming an increasingly crowded market in many locales.
Fast-forward to 2016 and the gaming industry, with few exceptions, has fully embraced online gaming, so much so that you’d be hard-pressed to find a major gaming corporation without an online division.
Far from the cannibalistic threat they envisioned just a decade ago, online gaming, whether real-money or social, has proven to be a valuable asset, a complementary product that can create a new revenue stream for the casino, and/or used as a marketing tool capable of bringing new players to their brick-and-mortar properties. This is particularly true of social gaming.
Social gaming was initially seen as a placeholder of sorts, a way to create an online footprint while casinos waited for real-money online gaming legislation to be passed. What they soon found was that far from being a placeholder, social gaming turned out to be a boon, a versatile product that could be deployed in a number of different ways. The gaming industry’s Swiss army knife, if you will.
The Fuse Is Lit
Social gaming first shed its cottage-industry label in 2009, spurred on by the rise of social media giant Facebook, and the silent dreams harbored by millions of people to be virtual farmers and demolish shoddily built structures with the assistance of a cartoonish avian species and a catapult.
And Angry Birds and Farmville weren’t outliers. Subsequent social gaming successes, ranging from traditional-looking slot machines and skill-based puzzle games like Candy Crush, to eSport crossover megahits like League of Legends, gave the gaming industry pause, and a glimpse at the possibilities that could be found in the social gaming market.
In 2016, social gaming has infiltrated virtually every sector of the gaming industry. Yet, social casino games still have a lot of room for growth and future innovation, as the ancillary benefits to traditional gaming, beyond revenue, are just starting to be fleshed out.
Social Gaming Is Already Bigger Than You Think
When it comes to headlines and buzz, social gaming tends to take a back seat to its sexier cousins, real-money online gaming and daily fantasy sports. But compared to social gaming, the DFS and regulated real-money online gambling industries in the U.S. are small potatoes. In fact, social casino products (a single segment of the larger social gaming industry) absolutely dwarf these two industries.
Industry-leader Caesars Interactive Entertainment, a Caesars Entertainment subsidiary that operates the popular line of Playtika social casino games, is on its way to generating $1 billion in annual revenue, some 13 times more than CIE’s real-money online gambling products generate, and 10 times the combined 2015 revenue of media darlings DraftKings and FanDuel combined.
The social casino market generated an estimated $3.5 billion in revenue in 2015 (exceeding Eilers’ $3.3 billion prediction at the beginning of the year), with revenues expected to jump to $4.4 billion (which would represent some 4 percent of the entire gaming industry’s revenue) by 2017, according to Eilers Research.
If we take an even wider view of social gaming, beyond social casinos, the numbers are even more impressive. The global social gaming market is expected to reach $17.4 billion by 2019, according to Transparency Market Research. Candy Crush generated $1.4 billion in 2014. League of Legends, a “freemium” eSport game, is also expected to cross the billion-dollar revenue mark in 2016. These are not simply billion-dollar companies, these are billion-dollar games.
Monetizing Players: The Freemium Model
The bulk of the revenue generated at social casinos comes via the purchase of virtual chips.
The chips have no value, although as noted by Kevin Vonasek, chief product officer for the Americas at NYX Gaming, social play can be tied into a brick-and-mortar casino’s loyalty program, allowing a social player to earn points while playing at the casino’s social casino.
“NYX will emphasize the ties to brick-and-mortar casinos in its social offering as a key differentiator,” Vonasek says. “We’ll cater our product to operators that want to leverage the social space by providing a channel for their gamblers to do so, with products that they’re familiar with and by enticing them back to the property. Gamblers will spend money on virtual coins, if they are getting credit against the land-based loyalty program.”
Even though the social casino provides a fresh supply of chips to players every day, some users simply don’t want to wait, others want to risk more chips. This is where the word freemium comes in, and players become monetized. Freemium games are games that are free to play, but the user can, if they so choose, purchase additional items (in this case, casino chips) for a nominal fee. A player simply punches in a credit card number and spends a few dollars and receives thousands or tens of thousands of chips. For the players that monetize, it’s a small price to play if they are enjoying the game.
Unfortunately, monetizing a social game isn’t easy.
During a panel discussion at G2E 2014, Monty Kerr, the chief product officer and co-founder of PlayStudios, said that only 3 percent of their customers monetize—that is, they purchase additional items for an otherwise free-to-play game. However, he noted these monetized players tend to stay monetized and continue to spend money, as Kerr indicated 80 percent are still active and monetized players two years later.
Despite the low monetization rate, social casinos are playing, and winning, the numbers game thanks to the sheer number of users they attract and the loyalty these players have when it comes to their favorite games.
For example, Knute Knudson, International Game Technologies’ vice president of business development and tribal relations, says IGT’s social casino platform, DoubleDown Casino, sees over 1.9 million players log on every day, and over 4 million players each month, according to data he provided at G2E 2015.
Monetizing Players: Other Models
There are other monetization models as well, such as in-game advertising and brick-and-mortar loyalty reward tie-ins. As Vonasek explains, “We are not competing directly with products such as IGT’s DoubleDown that cater to the casual gamer; rather, we’re providing a social gambling product that will appeal to real-money gamblers who want to extend their bricks-and-
mortar entertainment while leveraging their loyalty program.” NYX accomplishes this by being content-agnostic, giving online players the same game options they find at the brick-and-mortar casino.
There is also the opportunity to convert social players into real-money online players for operators in legal markets, or in markets considering legalizing real-money online gambling. “NYX has the most popular regulated real money gaming in U.S., and we will install that in the data center of the brick-and-mortar casino,” says Vonasek, “allowing operators to start with social and be ready for real money.”
Social Gaming as a Marketing Tool
For most casinos, creating their own social casino products is out of the question, but this doesn’t mean they can’t share in the benefits of social games.
For many casinos, social gaming’s real value doesn’t come from direct monetization. In fact, many casinos don’t monetize their social games at all. The value for these operators is the ability to use social gaming as a marketing tool to bring in new customers and keep current customers loyal.
The beauty of social gaming is it allows the casino to pick and choose how they want to deploy it, and how deeply they want to invest in social gaming, since most social gaming platform providers can act as a B2B or B2C partner, handling as much of, or as little of, the front end and back end as the casino desires.
“NYX will provide a turn-key social solution for brick-and-mortar casino operators; think of it as B2B2C,” Vonasek says. “We’ll manage the operator’s social gaming offer and allow them all the access to back office and reporting that they need to direct us in this endeavor. In addition, with a tie-in to their bricks-and-mortar loyalty program, they will have the added benefit of seeing the direct effect on their player loyalty.”
According to Knudson’s G2E presentation, 83 percent of people who visit a bricks-and-mortar casino at least once a year play social games, making social games a vital part of a casino’s marketing efforts.
Mario Maesano, the senior vice president of marketing at Maryland Live! Casino, sees social gaming as an important way to market to current and prospective casino patrons. At G2E 2014, Maesano explained how Maryland Live! uses its non-monetized online social casino to convert free-to-play customers into brick-and-mortar casino customers by marketing directly to each player based on their online play. What Maryland Live! has discovered, according to Maesano, is just how valuable these customers are. “The value of our social players exceeds that of our traditional walk-in customer,” Maesano said. “We’re getting about 100 percent to 300 percent more gaming value out of our social gamers that convert to our brick-and-mortar facility.”
In addition to bringing in new players and converting them to brick-and-mortar casino patrons, social games also allow a casino to better understand its current customers. At G2E 2015, Brett Callap, who heads up Pala Interactive’s social gaming products, explained that while a casino knows everything about their players when they’re on property, as soon as they walk out the door they go dark. Callap feels social gaming is able to bring these customers back into the light, as you’re able to see what games they may have an interest in, if they’re willing to monetize online, and how much time they spend playing social games.
Social Gaming Is Not Without Regulatory Concerns
Because it’s not gambling, social gaming can also serve a tertiary function for a casino, as it can be used to test new games. Unlike real-money online gaming, social games don’t have to go through the rigorous regulatory testing and scrutiny that a real-money bricks-and-mortar machine, or online game must be subjected to.
This loophole for social gaming is not void of regulatory concerns.
While it’s not gambling in a technical sense, as players cannot win anything based on the results of the game, social casino games certainly mimic gambling products, and there are concerns over the social impact of these products. Social casino players may not be able to win, but they can certainly spend quite a bit money if they get hooked, best demonstrated by Chris Grove’s tweet from the United Sates Online Gambling Conference in 2014, “Wow. Top customer at PurePlay has spent over $250,000 on play chips. Chips with no redemption value. No. Redemption. Value.”
This is even more concerning when you consider that the lack of regulation also allows social casino operators to skew the odds in a player’s favor with impunity, as they can change the payout percentage on a slot machine to 103 percent or 200 percent if they desire, and can do so whenever they please.
It should be noted that even though they can, not all social casino operators take part in this practice. NYX is one such company that sees finagling with the odds as counterproductive. As Vonasek explainas, “It is our position to provide the exact same gaming experience as they would expect in the brick-and-mortar or real-money iGaming scenarios.
“We’re looking to build long-term relationships with our players and our casino partners where we envision real-money gaming being the end goal.”
Still, this capability raises many questions about the need for regulatory oversight. However, with the current debates over legalizing and regulating daily fantasy sports and online gambling taking place across the country, it’s a real possibility that social gaming will be the next sector of the gaming industry to come under regulatory scrutiny.
That being said, with so much on their plates, it will likely be quite a while, if ever, before lawmakers and regulators get around to social gaming. And if they do, it’s unlikely the social gaming industry couldn’t adjust to and comply with the policies put in place.