IGT rolls dice on Facebook gaming, but hedges bet

Contact: Brian Satterfield

In yet another sign of the power of social networking, casino gaming systems maker IGT agreed on Thursday to purchase Facebook casino videogame startup Double Down Interactive for a potential consideration of up to $500m. The Double Down deal highlights the growing importance of social networking websites to traditional gaming companies, as Double Down enables IGT to reach millions more players online in a single day than the company could ever hope to in the smoke-filled parlors of Las Vegas or Atlantic City. But in a nod to the risk associated with entering a new market, IGT has hedged its bet by structuring the deal to include a $165m earnout (as well as $85m in retention incentives), which is equal to two-thirds of Double Down’s $250m price tag.

The transaction is one of the largest in the social gaming industry, and follows half a year after Electronic Arts made a similar move in buying PopCap Games for $750m (that acquisition also included a substantial earnout payment of up to $550m, or nearly three-quarters of PopCap’s deal value). Founded in 2009, Seattle-based Double Down’s large user base and rapid growth could help to explain why the company commanded such a large valuation for its sector. In November 2011 alone, its games received 54 million visitors, of which 1.2 million returned to play on a daily basis. Double Down also has a healthy base of what it calls monthly ‘active users,’ which the company said rocketed 30% from 3.3 million in October 2011 to 4.7 million at the time of acquisition.

EA gets serious about casual gaming

Contact: Brian Satterfield

In an expensive nod to the ever-increasing importance of online social media and mobile gaming, Electronic Arts has reached deep into its pockets to purchase Seattle-based PopCap Games for $750m. The transaction, which could end up costing EA as much as $1.3bn if the full earnout is hit, stands out as not only the priciest acquisition in EA’s history, but also the largest-ever deal in the online videogame sector.

This isn’t the first time that EA, best known for its console titles, has had to pay big to bring its gaming portfolio up to date. In 2005, the company entered the mobile sector with the $680m acquisition of Jamdat Mobile, then took out social gaming vendor Playfish for $300m in late 2009. However, the diversification has been slow. Sales of console-based games still accounted for 70% of EA’s total revenue in the just completed fiscal year. Overall revenue at the company was flat and EA guided for only slight growth in the current fiscal year.

In contrast, sales at social gaming upstart Zynga more than quadrupled last year. It’s all but certain that when Zynga, which filed its IPO paperwork earlier this month, hits the market, it will be valued higher than EA’s current market cap of just less than $8bn.

With the acquisition of PopCap games, EA now boasts six of 2010’s top 10 revenue-grossing iOS games and roughly 10 million daily average players on Facebook. But EA still has a long way to go if it hopes to grab a larger slice of Zynga’s daily average user base on Facebook, which currently numbers about 53 million.