Here’s why Ultimate Gaming failed so soon

The demise of Ultimate Gaming just five months short of the company’s second birthday was attributable to several factors that make online poker in Nevada a challenging business model.

Until Nevada is able to find a populous state to be an online gaming partner — the pending agreement with Delaware won’t move the needle — the Silver State is just too small in population to support a vibrant Internet poker market.

The growing acceptance of social gaming also played into the decision by Station Casinos to pull the plug on its interactive arm last month.

Social gaming is no longer a curiosity.

For Caesars Entertainment Corp., International Game Technology, Scientific Games Corp. and Aristocrat Leisure, social gaming has grown into a vibrant revenue provider.

In the third quarter, social gaming provided businesses $691 million in revenue, according to report by Eilers Research gaming analyst Adam Krejcik, who follows both social gaming and the Internet gaming businesses. Krejcik said the revenue projections came from quarterly filings by public companies and estimates from private operators.

The report focused on the main publicly traded social gaming companies — Caesars (through Caesars Growth Partners, the company affiliate that owns Caesars Interactive Entertainment), IGT, Zynga and Scientific Games.

“It was another record quarter for the social casino game industry, as mobile continues to drive industry growth,” Krejcik told investors.

Social gaming is free to play, most often through social networks such as Facebook. Players pay nominal fees for thousands of additional gaming tokens, commonly less than $1. That’s the revenue stream. The largest growth for social gaming is from mobile devices, such as smartphones and tablets.

“Mobile accounted for 54 percent of total industry revenues eclipsing Facebook,” Krejcik said.

Social gaming is a live casino training ground. Social casinos offer free-play versions of blackjack and other games, while slot machine manufacturers struck deals to place interactive versions of their popular games online.

Caesars Interactive is the driving force in social gaming. The Montreal-based business owns and operates the World Series of Poker, but social gaming, which includes Slotomania and Playtika, produced $151.3 million in revenue during the third quarter.

Analysts are no longer making snide comments about IGT’s 2012 purchase of DoubleDown Casino for $500 million. DoubleDown contributed revenue of $75 million in the quarter to the slot machine giant.

“Gaming equipment and technology suppliers remain among the top grossing social casino game publishers, largely due to their ability to bring premium land-based content online,” Krejcik said.

Other gaming equipment suppliers have found their way into social gaming. Ainsworth Game Technology entered into a partnership with a social gaming provider. Konami Gaming and Multimedia Games have licensing agreements with different companies.

PlayStudios of Burlingame, Calif., which is operated by former Wynn Las Vegas President Andrew Pascal, is the newest force in social gaming. The company’s MyVegas website is the social casino arm for MGM Resorts International and recently signed a similar deal with Station Casinos.

The locals casino operator decided to focus more attention on social gaming, which comes at a minimal cost, after Ultimate Gaming lost market share in Nevada.

Ultimate was the nation’s first regulated real money online poker website when it launched in April 2013. Seven months later, Caesars Entertainment unveiled WSOP.com, ending Ultimate’s monopoly in Nevada.

In September, Ultimate canceled its agreement to manage online operations for the Trump Taj Mahal in Atlantic City.

Krejcik said Station Casinos made the right decision by focusing on mobile sports wagering and social gaming through the PlayStudios partnership.

“The (small in population) Nevada market cannot support more than one operator,” Krejcik said. “So it really was just a matter of time and how long a company was willing to withstand losses before closing down.”

Another sign social gaming is here to stay was last month’s announcement by racetrack operator Churchill Downs that it was buying social gaming operator Big Fish for up to $885 million ($485 million upfront and $400 million in potential earn-outs).

“The deal is not only significant from a transaction size standpoint, but also because the buyer represents another company from the traditional gaming industry and notably one of the premier pari-mutuel horse racing companies,” Krejcik said.