IGT boss says big buy will pay off
International Game Technology CEO Patti Hart said the much-maligned purchase of a social gaming company eight months ago would eventually be viewed as "the best investment" the slot machine manufacturer ever made, behind the development of cashless gaming.
In an interview this week at the company's Las Vegas headquarters, Hart defended the decision in February to spend up to $500 million to acquire DoubleDown Casino, one of the largest social gaming operations on Facebook.
Hart said the use of DoubleDown by customers is growing and would pay off on IGT's bottom line in the future.
"At some point, with (ticket in-ticket out cashless gaming) as the shining example that no one will ever be able to replicate, (DoubleDown) will be the best investment we ever made," Hart said.
IGT developed ticket in-ticket out technology, which was slow to take hold in the early 2000s.
The slot machine enhancement has since become the industry standard.
Over the past few decades, IGT spent billions acquiring rival slot machine developers, technology providers and Internet operations, such as United Kingdom-based WagerWorks.
Most of the deals took place before Hart took over as CEO in April 2009.
DoubleDown could cost as much as $500 million. IGT paid $250 million in cash for the Seattle-based company, $85 million in retention payments over the next two years for DoubleDown's employees, and up to $165 million over a three-year period that is subject to certain financial targets.
Last year, IGT spent $115 million to buy Entraction, an Internet gaming company based in Sweden. IGT shut down the Entraction's online poker operations in Europe a week ago because the business model was hurt by regulatory changes.
TAKING IT FROM THE STREET
The DoubleDown deal was questioned by Wall Street because it was hard to quantify the effect social gaming would have on IGT, the market leader in slot machine technology. IGT owns some of the more popular games found in casinos, such as Wheel of Fortune, which is based in the highly rated television show.
Union Gaming Group managing director Bill Lerner said in January that interest in social gaming would hurt IGT's core slot machine business.
Hart said it would have been "naive" of her to think observers wouldn't have questioned the purchase or had been skeptical of the deal.
"People were shocked by the sticker price," Hart said. "It's a big sticker price, but that's what it takes to play. We believe we structured the deal completely appropriately. That allowed us to retain the management team. In the Seattle office, there has been almost zero turnover. That's unheard of in previous IGT deals."
Social gaming involves free-to-play casino games, but offers an element in which players can purchase hundreds of thousands of virtual gaming tokens for a nominal fee, oftentimes 99 cents.
In the quarter that ended June 30, IGT said DoubleDown's users declined 7 percent, but the average customer spent 25 cents per day on the website, up from 24 cents per day in the previous quarter.
"Most of people of covering us on Wall Street have never covered Internet application companies," said Hart, who was a CEO in the Silicon Valley-based technology industry before joining IGT. "Things that you measure and leading indicators are different. We're learning as well."
Hart said IGT "could have been more transparent" about DoubleDown's financial information after the deal was completed. "That will happen in the coming months," she said.
Lerner is still not favorable toward the DoubleDown deal, saying Thursday IGT's nearly 30 percent decline in its stock price this summer was attributable to the DoubleDown purchase.
"From what we can tell, DoubleDown has been dilutive to earnings and it appears as though performance suggests IGT won't need to make the contingency payment, which is also telling," Lerner said.
GAMING GOES SOCIAL
Some opinions have changed.
Macquarie Securities gaming analyst Chad Beynon said Thursday IGT bought itself a "head start" as competition increased in social gaming. His concern is IGT may risk placing too much emphasis on a business that might account for less than 10 percent of the company's overall revenues.
"In several areas of the casino food chain, IGT has a long history of being the leader," Beynon said. "With regards to social gaming, they certainly are making a big bet that would put them in a position to be the leader once again."
Hart said IGT wants to increase users on DoubleDown. The company is also seeking to increase the number of players willing to buy virtual tokens.
According to Facebook's App Center, DoubleDown casino is the No. 2 grossing application, trailing only Zynga's Texas Hold'em Poker. Zynga is listed as having 32 million players, while DoubleDown has 4.8 million users.
"We weren't even on the page when we acquired DoubleDown," Hart said. "But we have rocketed by all other applications. We're doing it with significantly fewer daily average users. What we've been focused on is monetizing the users."
IGT is placing its familiar slot machine titles on DoubleDown to grow interest. The company recently added its Cleopatra and Da Vinci Diamonds games to the Facebook website. Other games and brands are slowly being added as a strategic move.
"We have to feed the social gaming market one drink at a time," Hart said. "You can't just roll out a thousand game titles overnight. We went them to come back every week to see what's new."
According to IGT, 66 percent of DoubleDown players are women and the average user is age 35.
IGT is not alone in the social gaming world. Most of the manufacturers offer free-play virtual casinos on Facebook, MGM Resorts International recently launched myVegas and Caesars Entertainment spent an estimated $200 million to acquire Playtika.
"Whether it's our competitors in the manufacturer or vendor side or our operators, everybody is quickly recognizing that social gaming is an extension of casino gaming," said IGT Vice President Stacy Alonso.
IGT has also embedded the DoubleDown application on the websites of a dozen casino properties, most recently the Hard Rock Las Vegas.
Contact reporter Howard Stutz at hstutz@reviewjournal.com or 702-477-3871. Follow @howardstutz on Twitter.
