Not Just Geeks, Israelis Show They Can Be Innovative at Online Gaming, Too

Israeli companies, ranging from tiny startups to giants like 888, are likely to see combined revenues of $1 billion this year. The creativity isn't just about games but about getting and retaining users, too.

Ofer Vaknin

Just five years ago, there were virtually no online gaming firms operating out of Israel. Israel was already an established technology powerhouse, but its creative and innovative edge was in things like semiconductors, information security or data management systems. Game development, conventional wisdom had it, required creativity of a different sort where Israel had no comparative advantage. Creating the next Mortal Kombat or Minecraft was more akin to developing a hit television show than a next-generation computer chip.

As it turned out Israel isn’t bad at developing hit TV shows, as critically acclaimed and popular series like "Homeland" have shown. And Israelis have also proven they are good at games, too.

A survey taken by the Israeli gaming firm Playtika collected ahead of Casual Connect — a conference in which gamers from all over the world gather in search of the next big thing for the games industry — identified more than 150 gaming companies and independent developers operating in the country. It was the first time Casual Connect was meeting in Israel.

Last year, the industry generated $800 million in revenues and this year, if the pace for the first half holds up in the second, revenues will exceed $1 billion. Playtika predicts that next year, revenues in the Israeli gaming sector will ratchet up to $1.4 billion, including the regular 30% commissions Israeli companies pay giants like Facebook and Google for distribution of their games. Companies run the gamut from gambling platform 888 to TabTale, a maker of mobile games for children.

Gaming power

“It’s important for us to contribute to strengthening the ties between Israel and the world and to show the global industry’s top executives that Israel is a gaming power that can’t be ignored. So hosting the conference in Israel for the first time is a significant and necessary step, which we also expect to continue in the coming years,” says Robert Antokol, CEO of Playtika, which develops mass-audience games for mobile devices and social media. More than 700 visitors from abroad attended Tel Aviv’s Casual Connect conference, part of a circuit that meets in places like San Francisco, Amsterdam and Singapore.

“In recent years, a very successful ecosystem of gaming companies has developed in Israel,” says Gabi Shalel, founder of the Israeli social strategy gaming firm Plarium. “Every week we see more and more local entrepreneurs who are confident of their success, much due to the environment that was created in Israel.”

About 1,100 people work at Playtika in 12 offices around the world, but the company retains its crucial Israeli DNA, says Elad Kushnir, vice president for business development. “Our knowledge base is in Israel. That know-how is what runs our operations abroad. Even, the studio directors in Montreal and the United States are Israelis who started at the company here,” explains Kushnir. “Why Israel? Because there’s the combination here of technology know-how, creativity in content and knowledge about how to promote content on the Web. The combination works well in Israel.”

The transition of gaming to mobile in recent years has given Israeli game developers the chance to reach users around the world much more easily than in the past, he says. “When distribution channels are open and available, it’s the content that prevails. In Israel, there is creativity in the field of content to a much greater extent than people had believed. In addition, there is a lot of know-how in Israel in the field of Internet marketing and analytics. This combination has created a strong industry.”

Several Israeli gaming firms, such as Plarium, Playtika and TabTale, are leading niche markets, says Kushnir. “Around these companies dozens of startups are being created al the time in the industry. The money that the gaming industry in Israel is generating also supports other Internet sectors, such as website promotion and media acquisition, two fields in which impressive business activity has been developed. The gaming industry is funneling a lot of money to Israeli companies in the adtech field,” he says, referring to digital marketing.

Shalel says the domestic industry’s growth as well as its internal dynamics means it’s now ready for venture capital investment. “Once you didn’t need to invest a lot to develop games for mobile,” he explains. “But as the devices have gotten more powerful, so has the sophistication of the games, and with it, the investment required to develop a game has grown. Once you could develop a simple game in three months. Now it takes a year and even a year and a half to develop one. That requires a lot more investment so I think we’ll see more venture capital funds entering the business.”

But, Shalel warns, exits and initial public offerings —the two ways venture capitalists like to make their profits — aren’t the way for investors to make money in the gaming business. “The offerings by gaming firms Zynga and King weren’t major successes, but they are two excellent companies that have achieved amazing things,” he says. His advice to investors is to rely on the entrepreneurs and have patience. The creative work involved in developing a new game takes time and many of them won’t be successful. “But if we’re patient enough as managers and entrepreneurs, we will see an established industry here long term,” he predicts.

“Successful gaming companies generate excellent cash flow,” adds Playtika’s Kushnir.

‘All of us are players’

The global gaming industry, which is expected to generate about $91 billion in revenues this year, is bigger than the movie industry and is still growing quickly. Kushnir says in the next few years some 1.5 billion players will join because mobile devices make gaming so easy and accessible. “All of us are players. Our cultural background, age or income doesn’t matter. Anyone who develops a product of sufficient quality that addresses a certain niche well can succeed — and when you’re successful in this industry, it comes with a lot of money. Entrepreneurs don’t always need a giant exit.”

“I don’t discount the possibility that we will see IPOs from gaming companies in Israel, but it is more important that we see more entrepreneurs and more investors taking risks and setting up operations,” Shalel says. “We already employ 1,000 people around the world.” In addition to Israel, Plarium, which has 150 million registered users, also has studios in Ukraine.

$91 billion in revenues

The problem for the industry is that share market investors don’t always understand how these companies work or how to value them. Kushnir says the value depends on the niche in which the company operates. King Digital Entertainment, which created the hit game Candy Crush, operates in the puzzle gaming sector, which means it needs to constantly reinvent itself with new and different games It’s a risky business in a market of fickle customers and rapidly changing fads.

By contrast, Playtika is in a social gaming niche. “That’s a much more stable field. Generally anyone who has brought longstanding games online enjoys much greater stability. Our customers have a relatively high degree of loyalty. Because of that, Zynga is trying to become stronger in this sector,” says Kushnir.

Playtika was one of the fastest exits ever in Israel. Eight months after it developed its first product, the company was bought in 2011 by U.S. gambling juggernaut Caesars Entertainment for $90 million. At the time, Playtika had a few hundred thousand players a day; now it has six million a day and 20 million a month.

Kushnir said he thinks the firm could have been successful without Caesars, noting that the U.S. company has given Playtika operations independence, which has proven itself. But, he says, Caesars helped Playtika finance acquisitions and expand more rapidly than it ever could have on its own. “Now we’re generating enough profits to acquire additional companies ourselves.”