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 Israeli-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 LTM 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.

“Aristocrat has continued to deliver significant growth and outstanding results in our Digital social casino business,” CEO and Managing Director Trevor Croker said when making the announcement. “The acquisition of Plarium allows Aristocrat to expand our addressable market into logical adjacent segments in the fast growing mobile gaming market.”

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.”

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. The closest historical comparison is probably racetrack operator Churchill Downs snapping up Big Fish Games for $885 million in 2014, though Big Fish operated both social casino and non-casino games at the time.

“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. “Aristocrat is limited in the number of social players that will play its slot games, including Product Madness, because games that are based on real casino games do not have the widest appeal in social slots. It would be wise in any case for Aristocrat to expand what it offers to players of casual slots that would never play Aristocrat slots.”

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. In essence, cross-promotion and marketing of both genres will probably prove to be difficult.

Eilers & Krejcik Gaming also expresses concern about signs of flattening revenue growth at Plarium, user acquisition (UA) challenges in the strategy/ RPG segment, and an unusually low revenue-to-employee ratio. Just over $200 million revenue for 1,200 employees equates to $167,000 per member of staff. By comparison, Product Madness generates $1 million revenue per employee. But the main challenge, of course, will be churning out more hit games along with upgrades and other add-ons to existing popular franchises. This is easier said than done, though a dozen of the management team, including CEO Avraham Shalel, who co-founded the business in 2009, will remain in place.

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. The problem for Aristocrat and Product Madness, Rogers suggests, was that they had become too reliant upon one social slots game.

“Aristocrat is currently the number four social casino publisher and revenue has trended upward over the past few years,” he says. “However, it is highly reliant on one game, Heart of Vegas, to generate most of its revenue, so diversification is a smart move.” The strategy, RPG and casual games market is estimated worth more than US$22 billion, while the social casino segment is thought to have generated $3.8 billion in 2016. SuperData predicts that social casino games will earn $4.5 billion this year while all mobile social gaming titles will claw in $57.5 billion. “We also project that mobile social games’ revenue will grow 13 percent next year,” says Rogers, “while social casino revenue will shrink slightly before returning to growth.”

The question is whether we could see more studios taken over by owners in the Far East – a part of the world still largely untapped where social casino gaming is concerned. “Asia generates substantial social casino revenue but player tastes are highly distinctive from the rest of the world,” Rogers explains.

“In Asia, local games like fight the landlord [a Chinese poker variant] reign supreme. Companies can’t simply localize western slots games for Asia and expect to succeed.” He continues: “In Playtika’s case, a big part of its appeal was due to its expertise in data analytics. As for DoubleU Games, the company focuses almost entirely on markets outside of South Korea – where social casino games are heavily regulated. Buying DoubleDown and licensing IGT slots content at the same time gives DoubleU more brand recognition in the west.”

Although Krejcik believes it will be “incredibly challenging” for Aristocrat to replicate the same success it has enjoyed with Product Madness, you have to applaud the bold move. Not only is Aristocrat diversifying its digital income streams and increasing its online presence, but it is also targeting those hard-to-reach millennials and tapping into a whole new player base.