January 16, 2012 – In a recently announced deal, International Game Technology (NYSE:IGT) announced it will acquire Double Down Interactive LLC, a social media game developer, in a deal worth up to $500 million. Las Vegas, Nevada-based IGT is one of the largest players in the casino games and gaming equipment market, producing nearly 70% of all slot machines in North America. As IGT’s core business segments struggle to recover from the recent economic downturn, the growing social gaming market is a tempting extension for IGT as it offers a new revenue stream with a large, growing user base.
Double Down is a Seattle-based developer of Internet games and has been operating since 2010. The company began when founders Greg Enell and Cooper DuBois pooled their money together to form the first online social casino game. Double Down’s flagship game, DoubleDown Casino, has seen a steady rate of growth on the Facebook platform, growing to 4.7 million Monthly Active Users in mid January 2012. Although DoubleDown Casino is currently free-to-play, the acquisition by IGT hints at a transition into a paid operation.
According to the terms of the deal:
- IGT will pay $250 million in cash upfront and $85 million in retention payments over the next two years
- Additionally, IGT will pay up to $165 million over the next three years based on Double Down Technologies reaching certain financial targets
PrivCo, the private company financial data authority, has broken down the multi-faceted deal and analyzed its implications for social media giant Facebook and competing social game developers:
- The deal marks the latest in a string of acquisitions made by more established companies jockeying for position in the emerging social gaming scene. Notably, EA acquired PopCap in July 2011 for a payment of up to $1.3 billion.
- As the social gaming landscape becomes more competitive, game developers will have increased player acquisition costs as the industry settles into a margins-based revenue stream. Early movers such as Rovio and Zynga may find themselves undercut in terms of player acquisition costs due to the cross-marketability of large companies such as IGT and EA building on their already existing brand name.
- The possible transition to paid online casino games on the Facebook platform also necessitates the use of Facebook Credits, further diversifying Facebook’s revenue stream away from paid advertisements. The rumored online gambling legalization may provide the catalyst needed to monetize both Facebook’s and social gaming developers’ large user bases.
- The Double Down acquisition may trigger a wave of deals from established casino giants such as privately-held Caesars, competing for their shares of the less capital-intensive (and potentially more lucrative) social gaming scene.
As the line between live and online gambling begins to blur, we can already see synergistic companies consolidating and positioning themselves for the growing social media landscape. Despite the flurry of deal activity, Zynga’s recent IPO flop hints that the social gaming grass may not be green for much longer.