Games as services, games monetisation, Publishing

Taking a Gamble?

December 2009

2009 has been a remarkably quiet year for games company mergers and acquisitions; the volume of transactions so far in 2009 is half that during the same period in 2008. Despite this reduced M&A newsflow, I am willing to bet that you missed a transaction (albeit modestly sized) that took place in September, the sale of a majority shareholding in Dutch online games publisher United Games. What makes this particular transaction unusual is the identity of the acquirer, Austrian company Bwin, one of the giants of the online gambling world. This was followed in October by a $5.5m investment led by Bwin’s UK-based rival Betfair in Watercooler Inc, a fantasy sports and social network games company. Online gambling companies have rarely invested in, let alone made, acquisitions outside of the gambling universe so what is going on? Given the sizeable cash reserves on many of the top gambling companies’ balance sheets, is the games industry about to be flooded by gambling dollars?

The games and gambling industries have co-existed alongside each other for decades now with almost no interaction, nor, it would appear, much desire to interact, with each other. Both industries use the term “online gaming” to refer to two completely different phenomena without confusing many people, such is the infrequency with which the two industries overlap and share media or research coverage. These two interactive entertainment industries have grown to vast sizes in similar time frames but are utterly different. Regulation is the most important differentiator and is the reason why no major games companies operate in the gambling business but that does not explain why online gambling firms have not diversified into games until now.

To understand why, we need to look at some recent gambling market trends. The early and mid part of this decade saw the online gambling industry explode, fuelled by the rapid popularisation of multiplayer poker in particular. Lofty IPO valuations and vast fund-raisings accompanied this internet gambling frenzy and in many senses helped accelerate it. However, this began to be tempered around the middle of the 2000s by increasing restrictions on online gambling in Europe but in particular the USA where the legality of online gambling had hitherto been a grey area, exploited by companies located offshore. By 2007, online gambling had effectively become illegal in America as had any commercial dealings by non gambling companies with offshore online gambling companies. This forced the big European online gambling companies to abandon all operations in the USA. Americans, however continued to gamble online, finding ways round these restrictions but making themselves the target of government crackdowns. 27,000 poker players were subject to funds seizures in raids in mid 2009. The evaporation of the American market combined with the arrival of the recession has resulted in many of the surviving online gambling companies posting earnings declines and even losses in the last few years.

Whilst all this has gone on, the games industry, and online gaming in particular, has boomed not just grabbing an increasing proportion of global consumer entertainment spend but experiencing a radical demographic expansion that has given parts of the industry a mass market demographic profile. This has resulted in an increasing cross-over between typical online gamers and online gamblers. Whilst online poker players tend to be male and between 25 and 40, other forms of gambling such as online Bingo can attract a predominately female and older gambler. In addition skill-based variants of gambling and casino games have long proven popular on casual games services such as Pogo whilst Zynga Poker is one of the most successful social network games with some 19m active players per month. Games represent not only a rapid growth alternative revenue stream but also a player base which increasingly matches its own customer base.

Bwin attributed the rationale for acquiring United Games to its belief that there will be a strong convergence between MMOGs and online gambling. Betfair’s investment in Watercooler on the other hand was made to give it an interest in a legal online games operation in the USA (there is now a widespread anticipation within the gambling industry that the Obama administration will eventually reverse the existing online gambling prohibitions). Betfair’s move has therefore given it access to a sizeable gamer database to which it believes its gambling products will appeal.

So is this a brief foray or the opening sortie of gambling companies moving heavily into games? Many gambling companies are currently focused on re-establishing strong profit margins and so are less likely in the short term to make potentially expensive and speculative investments in a wholly different industry. But there is a huge amount of cash swilling around the online gambling business and I would wager that with increasing demographic overlap with and high margin opportunities presented by games, we will see a few more of these smaller market entries over the next few years and quite possibly even a large-scale acquisition especially if the US market does open up again.


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