GamesBeat: Were you surprised at how the value of the whole sector changed here since December or so? It was sort of off the map before then, and then it was suddenly on the map.
Walcott: As far as the valuations that are out there, you really heard about two. You heard about Playtika and their product, Slotomania, that got acquired by Caesar’s [editor’s note: for up to $90 million in May 2011]. That was reported on secondhand, generally, and so the valuations were never fully understood.
And then there was obviously our number, which was a big number that was out there. If you look at our valuation from a financial perspective, which is measured on a true profitable company, an EBITDA [earnings before income taxes, depreciation and amortization] number. It was a very fair multiple. IGT did a great job of structuring the earn-out to make sure that it’s a win-win for everybody. Over the three-year period, the valuation makes sense at any level. If we underperform, we get paid less. If we overperform, we get paid the full $500 million. We think it’s going to be a win for everybody.
But as to your question — was I surprised at the valuations? It wasn’t one company that we’d been talking to. We’d been talking to VCs [venture capitalists], private equity, and companies like IGT as well as the casino operators. The valuations were all in that range. And the market got super excited in December, too. The DOJ letter came out, and Facebook named us the number four most popular game. Those two things were a great Christmas present for us, happening the same week. I think that helped alert people to what was going on.
GamesBeat: Zynga gained something like $5 billion dollars in market cap? And then they lost it right back [laughs].
Walcott: Yeah. Well, as you know, market valuations are not about what you’ve done. They’re about what you’re going to do. The perception with Zynga is that they’re shrinking right now in terms of user base. And while in the short-term that may not be hurting their revenues, in the long-term it would impact their revenues. They can monetize their users more, but at some point that caps out and you need to have growth in users.
Zynga’s obviously a very different company. When you look at the demographic data, they have a much wider reach from an international perspective than we do. We’ve focused our efforts on growing in our core countries, the higher monetizing countries. That’s why our ARPDAU [average revenue per daily active user] is much bigger than someone like a Zynga. If you look at it, they have a lot of players from Asia who monetize a lot less. We’ve been focusing less on trying to grow that DAU or MAU number and really focusing on growing our quality user base. That’s why our revenues continue to grow.
GamesBeat: Kontagent [an analytics firm] showed that casino game demand on Facebook doubled. Six percent of all Facebook players played casino games in 2010. Then that grew to eight percent in 2011, and now it’s 13 percent in 2012. Have you seen that trend as well, where there’s just more people who want to play casino games?
Walcott: I chuckle, and here’s why. During our whirlwind tour with the investment bankers, a very common question I would get was: What do you think the casino-style market is on Facebook? I would chuckle and say, I’ll answer your question in a moment, but you’re asking the wrong question. The question isn’t, how big is the casino-style market on Facebook? The question is, how big is the entertainment market?
Let me put that into perspective. Three years ago, I don’t know how big the market was for slingshotting birds [laughs]. But I can tell you right now, it’s a giant industry, I’m addicted to it, and I can’t stop playing.
Really, the question is, how big is the entertainment industry? Five years ago, there wasn’t any gaming revenue on Facebook. Today social gaming is a $3 billion dollar industry. It didn’t steal that all from the casual gaming industry or the MMO industry. It stole some of it from those industries, but it also created a brand new industry.
I think what we’re seeing is that companies like us went on Facebook, developed an incredible social game, and it happened to be in the casino-style genre. We’ve created a new genre that’s been very successful. When I was back at Big Fish Games, we launched a game in 2005 called Mystery Case Files. I’m sure you’re familiar with it. Prior to that, there were no hidden-object games in the casual game market. We grew that to become the leaders among the hidden-object companies, and now those are among the most popular casual games in the world.
So am I surprised that this market, where it grew from zero to where it is today, has grown? Not at all. We’ve found that users like that type of mechanic, and so there’s lots of copycat developers who have said, oh, DoubleDown is doing really well, and we hear from Facebook that other companies are doing really well. Because Facebook was a giant evangelist of casino-style games. They went around pitching to everyone, oh my God, you have to build casino-style games, they do really well.
The reason Facebook did that is because they knew they were going public, and at some point, they were going to have to care about revenue and profits, so how could they monetize their users better? They could monetize them better with this type of game.
One of the reasons I believe that our games monetize better is that people understand the value proposition a little bit easier. When I say to you, hey, I’m going to sell you 150,000 chips for $3 dollars, you understand very clearly what the value is. You get 150,000 chips, you can bet 10,000 chips per spin if you want, or 100 chips per spin. You can see how the value works. But if I said, I want you to buy some seeds for your farm, and I’m going to charge you $3 dollars for 200 units of seed, you’d say, I have no idea what that means. People are more reluctant to do that.
So I think our monetization strategy is something people understand more clearly. It’s probably pretty obvious, but the more you spend on our site…for $3 dollars you get 150,000 chips, 50,000 chips per dollar. For $100 dollars you get 100 million chips, or a million chips per dollar. The more you spend on that, the bigger the value you get.