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International Game Technology’s Social Gaming Gamble

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On Friday, the CEO of International Game Technology Patti Hart let everyone know that the rumors were completely true:
IGT has agreed to pay $500 million for Double Down Interactive, a company that develops Facebook applications.

Before the announcement, a lot of people speculated that there was no way that IGT would pay so much for DDI. One of the main arguments against the purchase was that IGT only makes between $50 million and $70 million each year, so the cost of this purchase could be a decade’s worth of profits. What IGT is getting in return is technology that no one is sure will be worth such an extreme amount of money.

In a similar deal, Caesars purchased Playtika, another popular social networking site application developer. If you compare the two deals in terms of price, Caesars paid just under $100 million total for 100 percent of Playtika, and this makes the IGT deal with DDI look ridiculous since DDI only had about twice the number of users playing its games than Playtika did. The total number of DDI users seems to be around 4.7 million according to estimates, and that would mean that IGT would be paying about $1 each for users who, for the most part, do not contribute any real money to the games.

Double Down Interactive’s casino application features poker, slots, blackjack and roulette all within one interface. Because all of these games are in the same application, it’s difficult to see where DDI’s revenues are coming from in terms of specific games. To give you an idea of how much could be made with one game, Zynga’s poker game based around hold’em poker generates about $3 per month per user on average. DDI’s limited number of available games seems to indicate that IGT’s move was not so much for the software as it was for direct access to their customer base, but at $1 each, it’s hard to see where the value is going to come from to make up for the $500 million price tag since it’s assumed that several of them do not play poker.

A perfect situation for any online gambling company right now would be to have gambling on Facebook for real money. While the legal situation in the United States is keeping them from allowing it at the present moment, Facebook representatives have suggested that they would be very open to the possibility in the future. While access to several million people would be great for IGT and any other online gambling software company, one potential problem is that there might not be any lasting popularity. A great industry example is social networking giant MySpace who crumbled within a few years of its peak in popularity.

In terms of the legal picture in the United States, it looks like regulated online poker could be a reality by 2014. However, the chances of regulated casino-style gambling are very low, and this could be a big problem for IGT as it tries to use DDI as a platform to reach new customers with its casino offerings. All of this aside, it’s possible that IGT has something up their sleeve in terms of monetization that industry experts haven’t figured out yet, and unless they do, then it’s difficult to see how this was a good business deal.