What does Aristocrat’s acquisition of Big Fish Games mean for social casino?

The Australia-listed slots giant Aristocrat continued its assault on the social games and social casino market in December with the $990m acquisition of Big Fish Games from Churchill Downs.

The deal made Aristocrat the second-largest social casino publisher on the planet with revenues increasing from $290m to $486m for the year ended September 30, 2017. The transaction, which came just three months after Aristocrat bought Plarium for $500m, also offered some unique insight into the state of the social casino industry, the state of Big Fish Games and the ambition of Aristocrat.

The first thing to note is the implication of the price. The $990m figure represented 11.9x of Big Fish’s LTM EBITDA, putting the purchase at the upper range of recent transactions, including Plarium (10x LTM EBITDA) and DoubleDown
Interactive (10.5x LTM EBITDA).

It’s perhaps a surprising multiple to pay given the studio’s most recent results, which saw Q3 adjusted EBITDA down 38% year-on-year to $17m. However, those same results also suggested something of an upswing on the way, with Big Fish successfully pivoting away from paid PC games to free-to-play mobile games, while also seeing positive trends in the key social casino vertical. Indeed Q3 social casino bookings were up 21% year-on-year, driven by new social features in Big Fish Casino like ‘Club mode’ that allowed players to team up to take on new challenges.

Expanding portfolio

Eilers & Krejcik Gaming said it believed Big Fish had hit an “important inflection point,” and subsequently raised its bookings expectations significantly for 2018. Stuart Lewis-Smith, senior vice-president for GSN Games, also praised the recent updates to Big Fish’s social casino titles after a challenging couple of years under Churchill Downs “2017 was successful thanks to the very robust ‘clubs’ feature which added a collaborative meta-game and appeared to give fairly immediate performance results,” Lewis notes. “In addition to a solid year on Big Fish Casino, their Jackpot Magic Slots got significant traction which now looks like a meaningful addition to their slots portfolio.”

Indeed, Aristocrat specifically pointed to the meta-game capability as one of the key reasons behind the Big Fish acquisition, adding that the firm’s social casino content was “highly complementary” to Aristocrat’s existing land-based digital content business.
What’s key here is that Aristocrat bought something it did not already have with its Product Madness studio, which largely caters for real-world casino players who are familiar with the land-based slot machines and want a highly authentic land-based casino experience.

By contrast, as Lewis-Smith puts it, Big Fish Casino has “always been about the social experience” and is positioned “much more as a casual product.” It is this kind of product that has been taking market share lately, with Huuuge Games perhaps the poster boy of the benefits that a social metagame can offer. Indeed, Eilers & Krejcik specifically noted the transaction puts pressure on Huuuge Games, which has been a “primary market share gainer from Big Fish Casino mishaps over the past 12-18 months.”

Tipping the scale

Of course the benefits of the acquisition go beyond the sharing of social features. Carter Rogers, a senior analyst at SuperData Research, notes that Aristocrat will benefit in user acquisition and retention by having more scale and multiple brands. For starters, there will be significant cross-sell opportunities with Aristocrat able to offer users the chance to try other apps once they show signs of dropping off from one. That could increase retention, while the combined company’s scale will enable it to boost marketing spend.

“The cost of UA is extremely high in social casino because the audience really isn’t growing,” notes Rogers. “So you have to steal your users from your competitors, which is expensive and that’s where scale helps. You can deliver large volumes of ads and share advertising expertise across the whole group.”

Scale of course can have some downsides, with Aristocrat now tasked with integrating Big Fish’s major studios in Seattle and Oakland along with Plarium’s major studios in Israel and Ukraine into its existing operations, including Product Madness studios in London and San Francisco.

Rogers however downplays that risk, noting that the game types and audiences for social casinos are “pretty universal.”

“I don’t see the same integrations risk that you might in real-money gaming,” he adds.

Elsewhere, the deal also continues Aristocrat’s relatively nascent push into the broader mobile gaming space with group CEO Trevor Croker noting: “Big Fish’s strength in casual and card games is highly complementary to Plarium’s strategy games portfolio.”

Big Fish’s Gummy Drop! and Fairway Solitaire titles are ranked the number 10 and number six games in the casual and card game categories respectively. With the wider mobile and web-based games market valued at $40bn, this could be the area with the most upside for Aristocrat, especially when combined with Plarium’s developing expertise.

The other interesting thing to note about the sale price is that it is near identical to the price paid by Churchill Downs three years ago in terms of EBITDA multiple and absolute cash when accounting for inflation. The sale then could reflect a recognition by Churchill Downs that there really wasn’t that much overlap between its core wagering business and social casino. Rogers suggests Churchill has squeezed the expertise it wanted out of Big Fish, namely technical capability to help it improve its online wagering platform.

Merger merry-go-round

So what does the near billion-dollar deal mean for the future of the social casino industry? As noted above, the benefits of scale are clear and coveted by many, as demonstrated by the weight of eight and nine-figure deals taking place over the last year.

Lewis-Smith expects to see further consolidation with several likely buyers coming from outside the established social casino category, a-la Giant and Playtika.

Rogers agrees that the M&A merry-go-round shows no signs of abating, explaining: “The top 11 publishers control 95% of the market as of November, so we’re going to see even more big mergers.”

He points to Huuuge Games, Murka and Playstudios as potential candidates to acquire or be acquired, with SG Interactive also very likely to be on the hunt for a target.

“SG Interactive is the most likely candidate because they’ve done it so often over the last five years and they’ve avoided too much cannibalization,” Rogers adds.

But despite all the machinations, the chasing pack shows almost no sign of catching the runaway market leader. Product Madness and Big Fish Games combined made around $42.6m in bookings in November, according to SuperData Research, or little more than a third of the $107.7m generated by Playtika.

“I don’t think there’s a chance anyone can approach Playtika’s scale in the next couple of years,” Rogers says. “They’re probably pulling away in many ways. Slotomania is seeing huge revenue growth on mobile. They generated $50m on mobile alone in November, which is more than any other publisher period.”

The social casino industry then will see a lot more wheeling and dealing in 2018, but the prize for the winner might only be a silver medal.