New Social circles

Aristocrat Leisure recently snapped up social games developer Plarium for $500 million, but what exactly is the appeal of acquiring a studio that creates strategy/ role-playing game (RPG) titles for a very different player demographic to social casino gamers?

Mergers and acquisitions in the social casino space have been rife since the turn of the decade, with blockbuster deals worth hundreds of millions – even billions – of dollars becoming commonplace.

But not many industry observers foresaw Sydney-listed Aristocrat Leisure’s recent takeover of  sraeli-headquartered strategy and role-playing games developer Plarium. The deal includes a US$500 million upfront payment plus an earn-out arrangement, which implies a multiple of 10x the last 12 months’ EBITDA at year end.

Aristocrat said the purchase boosts its digital revenue contribution from 14 percent to 22 percent of its overall business and will expand its addressable market from the $3.2 billion social casino sector to the $25.4 billion strategy, RPG and casual segments.

Privately owned Plarium, which recorded revenues of $201 million and an adjusted EBITDA of US$44 million for the 12-month period ending March 31, 2017, boasts a headcount of 1,200 spread throughout Israel, Europe and the US, though most of the workforce is based in Ukraine. Focused on free-to-play mobile games, Plarium’s portfolio includes hit games such as Throne: Kingdom of War, Stormfall: Age of War, Soldiers Inc and Vikings: War of Clans.

Boutique analyst firm Eilers & Krejcik Gaming estimates that Vikings: War of Clans accounts for more than 50 percent of the mobile, social and web-based game developer’s revenues. This is the first social gaming acquisition Aristocrat has executed since buying social slots studio Product Madness in 2012 for $27 million, including earn-outs.

Eilers & Krejcik Gaming’s Adam Krejcik says Aristocrat has enjoyed “overwhelming success” with Product Madness and that it was an “incredibly timely and lucrative acquisition”. Indeed, $27 million looks an absolute snip in hindsight.

“Now that Aristocrat has several years’ exposure to the digital games market, it clearly is getting more comfortable with the space and sees this as a long-term growth opportunity,” Carter Rogers, senior analyst at SuperData Research tells AGB. “It’s no secret that millennials are currently less interested in real money gambling than their older peers, and their interest in video games is a contributing factor. Whether or not this will be a successful acquisition depends on future titles in Plarium’s pipeline. Revenue for their flagship title, Vikings: War of Clans, peaked in June, 2016.”

Strategic sense

For a slots manufacturing giant like Aristocrat, purchasing Product Madness made business sense. Similarly, IGT buying DoubleDown Interactive (DoubleDown Casino) for $500 million in 2012 and Bally Technologies acquiring Israeli social casino studio Dragonplay for $100 million in 2014 were logical plays. Bally’s parent company, Scientific Games posted a 31.8 percent gain in Q2 revenue from its social casino division, the strongest growth across its business sectors.

That M&A activity has continued apace, particularly in Asia. In April, IGT announced the sale of DoubleDown Interactive to one of the leading social casino gaming publishers, South Korea’s DoubleU Games, in a deal worth $825 million. And last year, Caesars Entertainment Corp. sold its social casino heavyweight, Playtika, to a Chinese consortium for an eye-popping $4.4 billion.

Aristocrat’s latest acquisition is unusual in that it’s a real-money gambling company buying a business with no connection to the gambling space.

“Plarium may be a gateway to more social slots,” says Guy Hasson, a social slots consultant who has worked for social casino giant Playtika and online gaming supplier Playtech.

There are not the same obvious synergies with the Plarium deal as there were with Product Madness. And there doesn’t appear to be much crossover in terms of player demographics between Plarium’s games and Product Madness’ flagship slots title Heart of Vegas. The typical social casino player is over 45 and female and Vikings: War of Clans may not appeal.

Meanwhile, strategy/ RPG gamers are usually male and under the age of 45. Social casino probably isn’t going to appeal to these players.

Aristocrat says it recognizes player demographics are diverse and that Plarium will operate as a largely standalone division once the deal is finalized.

An Aristocrat spokesperson says Plarium and Aristocrat have a high degree of cultural alignment. “This transaction is about growth.

Plarium provides Aristocrat with an ideal entry point into the high value, fast-growing social gaming sector, consistent with our strategy to maintain our growth trajectory and in particular to continue to scale profitably in the dynamic digital gaming market.

Loyal gamers

While mobile social gamers can be notoriously fickle, social casino players do tend to be more loyal, which is partly why social casino apps are steady, reliable earners for the industry’s biggest publishers. The average lifetime value (LTV) of a mobile social slots player has been estimated at $324. Zynga struggled for years to replicate the success of point-and-click PC hits like FarmVille and Mafia Wars with the transition to mobile, but play-money title Zynga Poker is still going strong and its slots titles, Wizard of Oz and Hit it Rich!, continue to perform well.