“We are not a gambling company.”
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This sentence, which should be obvious, is repeated regularly by Robert Antokol, the cofounder of the Israeli mobile gaming creator Playtika, and Mitch Garber, the CEO of Caesars Interactive Entertainment, the social gaming division of gambling giant Caesars.
Maybe the two men feel they need to repeat themselves because of the challenge they’ve faced since Caesars bought Playtika in 2011.
The huge gambling company owns several of the world’s largest and best-known casinos in Las Vegas, as well as the World Series of Poker. Meanwhile, the pioneer of the Israeli mobile gaming industry develops games based on casino betting games. Is it any wonder people make the connection?
“In the gambling industry, we’re always having to explain ourselves, but that’s all right from our point of view. I’m not complaining about it and I have no problem doing it, but I have a problem when I have to defend something like Playtika,” Garber says.
“Just because Caesars bought it doesn’t turn it into a betting company. We have celebrities who appear in our casinos every night – Celine Dion, Rod Stewart and Britney Spears. And we have famous chefs like Gordon Ramsay who run restaurants there. Would you say Britney Spears is a gambling company? She’s part of the gambling industry’s entertainment division, and that’s exactly where Playtika is.”
Playtika was founded in 2010 by Antokol and his partner Uri Shahak as a company that creates games for social networks — social gaming. With initial funding from investors such as Gigi Levy, at the time CEO of 888 Holdings, Playtika has become one of the most surprising success stories of Israel’s technology industry in recent years.
Indeed, just eight months after it was established, it was bought by Caesars, in two stages, at a company value of $160 million. That was the fastest exit in Israeli history.
Such a rapid exit would be impressive for any firm, but note that until the advent of Playtika, the gaming industry was virtually nonexistent in Israel and certainly not of the caliber that attracts international investors.
Back then, Playtika was a nearly anonymous outfit that had developed two games on Facebook: Slotomania, which was based on slot machines, and Farkle, a dice game. In a few months, the company had grown explosively and was serving millions, capturing the attention of Caesars.
Playtika’s games, like other mobile games, belong to the so-called freemium category — the game can be played for free but users have the option to pay for special services such as advancing to higher levels. “Our games are exactly like Candy Crush or Angry Birds, except that instead of candies or birds, there are dice,” Garber says.
Since the acquisition, Playtika has proved itself several times over in the eyes of Caesars. The gambling giant paid $100 million for Playtika and, in 2013, raked in revenues of $303 million thanks to the new purchase. Over the past three years, Playtika has become a key Caesars asset and the world’s third largest mobile gaming company after King Digital Entertainment, the producer of Candy Crush Saga, and Zynga, the creator of FarmVille.
Its revenues jumped 57% in 2013 after surging four-fold the year before. Today Playtika has 25 million users playing its three major games – Slotomania, Bingo Blitz and Caesars Casino – at least once a month. And the company, which had only 20 staff when it was bought, now employs 700 in offices in Tel Aviv, Santa Monica, Montreal, Romania, Argentina, Ukraine and Belarus.
“Playtika is probably the best investment we made,” says Garber, 49. ”The deal with Harrah’s [the hotel and casino chain that merged with Caesars in 2005] was good, and so was the World Series of Poker, but during the last 10 years at least, Playtika is absolutely the best acquisition we’ve made. We’re talking about an amazing growth story, and even more, it’s a field we were never involved in before.”
Over the past year, Playtika and Caesars have been especially active in the acquisition of mobile game producers. In February, Playtika bought the British-Israeli company Pacific Interactive, which created the Facebook game House of Fun. This marked the fourth acquisition by Caesars Interactive Entertainment since it bought Playtika, and its second in Israel.
Forging a new industry
The success the Playtika acquisition has brought its buyer has led to the growth of other Israeli gaming companies such as Dragonplay, which also develops games based on betting games. It was bought in June by Bally Technologies for $100 million.
“Playtika established a new industry,” says Antokol, 46, who was born in Latvia and immigrated to Israel at age 4. Although he cofounded Playtika only in 2010, Antokol is a veteran of the Israeli gaming industry, having cofounded CMate, which was sold to the now-defunct Oberon in 2006.
According to Garber, who until 2008 was the CEO of the British online betting firm PartyGaming, companies like Playtika that are not involved in betting are the wave of the future for companies like Caesars.
“It’s the next big thing in Las Vegas,” he says. “Some 60% of our current revenue doesn’t come from gambling. Rather, it stems from entertainment, food, beverages, nightlife and clubs. We also have a small online betting business, but in the division that includes both that business and Playtika, Playtika is responsible for 90% of the revenue.”
Caesars is in social gaming because online betting, of which Garber is a fervent supporter, will not become legal in many countries anytime soon.
As Garber puts it, “I was sitting in Las Vegas and said: ‘Online betting won’t be legalized so quickly, so what do we do?’ And that’s when we discovered social gaming. It’s a fascinating field. It’s not only that you put money in – only a tiny percentage of users actually do that. Rather, it’s that you can’t take money out.
“And that’s what makes these games so unique. I said: ‘This is a perfect business. If we just sit back and wait until online betting is legalized, it could turn out that it will never happen.’
“So we decided to get into this, and what seemed most natural, of course, was to go for games based on casino games. I specifically looked for an Israeli company, because in my opinion, the Israeli character is very well suited to this new industry, which demands constant acclimatization to new platforms.”
Garber is a keen supporter of lifting the prohibition that many countries (including Israel) have placed on online betting. In that respect, he’s much like other top figures in the gambling industry who envision the huge potential in online gambling.
Even today, despite all the image and legal difficulties, the online betting industry turns over $36 billion a year, more than half the revenues generated by the U.S. gambling industry in its current format. In the United States, where Caesars generates the great majority of its earnings, the legalization of online gambling is a particularly controversial issue.
Over the past year, the issue has turned into a wrestling match among billionaires. On one side stand gambling titans such as MGM and Caesars, which seek to exploit the potential of the Internet to boost revenues.
On the other side is Sheldon Adelson, who controls the massive gambling empire Las Vegas Sands. Adelson launched a campaign last year to get Congress to totally ban online betting, claiming that it’s impossible to monitor Internet gambling, which he says takes advantage of children.
While New Jersey’s legalization of online gambling last year suggested that the pro-legalization forces might prevail, Adelson and his partners have notched up significant gains this year.
As Garber puts it, “There’s no coalition, there’s just one man. True, he’s a man who’s very powerful and very wealthy, but he’s still one man. I’ve been in the gambling industry since 1992, so I’m used to defending the position that online betting, as long as it’s being supervised, is a good thing. I’m also used to explaining why all this hysteria being whipped up by people like Adelson is untrue.
“I’ve been making money from online gambling for so long that I know there are only a handful of young people playing online poker or similar games. Why? Because they’d need to steal their parents’ identification documents and credit cards, so unless the parents are cooperating with them, it’s a complicated business.
“I don’t know how it is that Adelson doesn’t view the Internet as integral to his future – maybe it has something to do with his age. In any case, it’s hypocritical of him because he’s been in the gambling industry longer than anyone else, and to be so deeply embedded in the business and still oppose a different form of betting, it’s inconsistent.”
The market: the whole world
But why social gaming?
“For two simple reasons: building a new hotel-casino today costs $2 billion, and creating a social game costs a lot less. The amount of capital needed for growth these days is just so massive that it’s much cheaper to develop games.
“Even more, if I’m the manager of a casino in Las Vegas, I can get only a certain number of people into the place every day. The online world has a billion users that can play Playtika’s games. Even if only 1.5% of them pay money to play, the fact that the whole world can be your customer is what makes this business interesting.”
Overall, you haven’t really moved too far away from your home playing field. Playtika’s games are based on the games that can be found in your casinos.
“That’s their subject, okay, and we’re not ashamed of it, but that’s only their packaging. By the same token, they could also be about toasters. It’s hard to say what makes people like a particular game, but our games have already been around for more than 100 years. If we make them fun to play on mobile devices, they’ll be successful, and that’s what Robert [Antokol] does.”
Is that what makes them popular, the fact that they’re based on real games? That they convey the experience of gambling, only without money?
“It’s hard to say, because the most popular mobile game today is Candy Crush, and if you had asked me five years ago which game would be more popular, blackjack or a game based on candies, I would have said blackjack – and I would have been wrong. If you had asked me which game would be more popular, blackjack or a game in which you kill birds, I would have answered blackjack – and I would have been wrong again.”
Antokol: “We didn’t invent anything new. Our advantage is performance. We took games of chance and adapted them to the Facebook environment, and that’s it. The same slot machine, the same poker, the same bingo – only on a social platform. We don’t go far from the casino experience. It’s a good subject.
“And yet, the same percentage of users who pay us also pay to play Candy Crush – only Candy Crush has 10 times the number of paying players. The big difference is that we’ll still be around in another year or two. It’s hard for me to imagine that in a year or two, Candy Crush will still be going as strong as it is today.”
Is there a certain resemblance between the gambling business and the mobile gaming business? Games like Candy Crush have been accused more than once of manipulating users and encouraging addiction.
Garber: “Only 1.5% of users on average pay to play. If there’s been manipulation, then it’s been spectacularly unsuccessful. When a game like Candy Crush is making $1 million a day, it raises questions about the business. People start asking, ‘How do you do that? You’re definitely using manipulation.’
“We don’t believe in that. Some people have behavioral problems, which can be manifested by excessive shopping online, or by spending exorbitant amounts on Candy Crush or Slotomania – but they exist, it’s part of the world. It’s a small percentage and we’re not seeking them out.”
Even so, there’s a small element of gambling here; the psychological mechanisms of action and reward are very similar to slot machines.
Garber: “I’ll explain it this way: You’re at home and you’ve got four credit cards, each with a $10,000 spending cap. But you’ve only got $10,000 in the bank. Who’s monitoring your spending on Amazon? No one. So it’s easy to shop on Amazon until all your credit cards are maxed out, and suddenly you owe $40,000 to Amazon.
“Is shopping addictive? Yes. Is there any way to control people’s shopping on the Internet? Not really. A limited number of people have addictive personalities, and it’s impossible to control this.”
Children in particular are liable to become addicted to these kinds of games.
Antokol: “I can sincerely say to you that we don’t have a young crowd playing our games. It’s boring for them. My daughter is bored by our games. They’d rather play Candy Crush, Angry Birds or The Sims. Our players are older, and there are more women than men – they’re people who are attracted to games like poker or bingo.”
How do you explain Playtika’s success? Companies have developed similar kinds of games, based on games of chance, and now there are competitors doing the same thing.
Antokol: “The uniqueness lies in performance. On Facebook, for instance, we weren’t the first game based on games of chance. We were told, ‘Forget it, that doesn’t work so well, try a different game.’
“The big advantage of our business, and the reason we succeed despite the competition, is that we were the first ones on every platform. We were the first on Facebook, we were the first on iPhone, we were the first on Android, the first on Amazon. Today we’re a big company and we still try to look ahead to the future and think about the next stage, because even if we don’t know what it is, we know it will be coming very, very soon.”
A little M&A
How do you continue to grow in a field as volatile as mobile gaming? A game that’s popular today can turn into old news very quickly, and a company that’s the market leader today can suddenly become irrelevant. That’s what happened to more than a few of your competitors.
Garber: “One of the important things is that we’re not looking for the next big hit. This isn’t Hollywood.”
Antokol: “Some of the companies in the business act like film studios, always trying to make the next hit. That’s a problematic business model because the next hit doesn’t always come. Three years ago you would say Zynga in the same breath as Activision and EA [two of the world’s biggest game developers]. But they didn’t manage to come up with the next hit and faded out.
“Playtika isn’t built like that. Our company is a lot more stable and a lot more conservative in that respect. Our games are games everybody was playing 20 or 30 years ago on one platform or another, and the games they will still be playing for decades to come. So our base is stable. Our games won’t have crazy exposure like Candy Crush, but they’re a lot more stable than Candy Crush.
“When I look at the coming year, I know that I’m going to grow. That’s not because I don’t want to come up with the next Candy Crush; we definitely want that and are working on it, but that’s not what our growth is based on. Some 80% of our employees are working on developing content for existing games.”
Garber: “At the same time, we’re very aggressive when it comes to acquisitions.”
Antokol: “Very. I don’t know of any other company that bought three companies within the past 18 months and succeeded with all of them.”
So the key to success is acquisitions and basing yourselves on familiar games?
Antokol: “And speed. This business moves fast. Three years ago, at industry conventions, everybody was talking about Facebook. A year ago, no one talked about Facebook; everybody talked about Apple. Now everyone’s talking about Android, and next they’ll be talking about Apple again. This business is very cruel. Three years ago there were gigantic companies developing games for Facebook, and today no one even remembers their names. Why? Because they were too slow.
“Four years ago, I had one game on one platform. One-hundred percent of our revenues derived from one game on Facebook. Today we have seven games on 12 platforms. That’s how we protect ourselves: more games of more types on more platforms. That’s the difference between the Playtika of three years ago and the Playtika of today – we’re more stable and more sustainable.”
Garber: “We also aren’t married to the concept of games based on games of chance. We’ll make further acquisitions of other kinds of applications. We now have the expertise and the structure to do that. We’ll also be buying games about panda bears if we think we can make a profit from them.”
The question is whether the market isn’t already saturated, and if it won’t get even more saturated in the future. That is, in a way that will make it hard for companies like Playtika to keep growing by a double-digit percentage every year.
Antokol: “That’s the biggest question in this business. I’m aware that no business in the world can keep on growing this way for decades, but I do think we’re at the beginning of the road and are just barely scratching our growth potential. The percentage of users who pay to play is still low – 98% of users play for free – and I hope that will improve.
“Candy Crush really helped educate the market and bring in new users who pay, but there are still a lot more who can be brought on board. So in my opinion, the growth will be with us for many years to come.”
Garber: “There’s also geographic expansion. If you look at our revenue and check how much of it comes from China, it’s zero. India, Brazil, Europe – we’re small players there. Today we’re making progress in Asia and Latin America. Those are our targets in 2015. The big growth will come from there.”
Antokol: “The world is changing. Ten years ago, the gaming industry had a different business model. Today the leading model is freemium, but in three or four years there will be another business model.
“It’s impossible to predict what will happen. In one of my first meetings with Caesars, they asked me where I see the company in three years. I said: ‘Three years? I don’t know where we’ll be in six months.”