Imagine a casino that never ever has to pay out a penny in winnings to its billion players.
That's what Churchill Downs bought in Big Fish Games, the Seattle-based online gaming company it purchased last year in a deal valued at nearly $900 million.
Louisville-based Churchill has long pursued various forms of expanded gambling including bricks and mortar casinos and, more recently, online gambling, with mixed success. The racetrack company even developed its own online real-money games site, called Luckity, before pulling the plug last summer.
But with Big Fish, Churchill made a big leap: Away from players and into play.
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"Churchill's transitioned over the last nine or 10 years in ways that have surprised other people but to us have made perfect sense," said Bill Carstanjen, CEO of Churchill Downs Inc. "We expanded into casinos originally because our racetracks in some jurisdictions could operate them. We went into advance deposit wagering because that was a logical offshoot, since we are already in the horse racing business and had a great event with Kentucky Derby and a great brand. ... It was a logical extension to reach all our customers through the Internet."
That move has bought what many see as an almost anachronistic company a seat at a huge, lucrative global table. This year, an estimated $4.4 billion globally will be spent on "social casinos," games that look like gambling but don't pay players actual money.
The only thing game players win is the experience, Carstanjen said. "It's just a game."
With their real-money game, Churchill couldn't get enough traction to make the investment worthwhile. But as they studied the market, Carstanjen said, they realized they needed to be in much more than just casino games. They could get TwinSpires customers to try Luckity, and some would stay and play. But not enough.
"We needed a much bigger platform, much broader scope," he said.
They had to be in casual mobile games, too.
"Luckity taught us that having a good game isn't enough," Carstanjen said. "We learned it's not enough to have one game. We need to have a portfolio, and the ability to produce and create efficiently, consistently, regularly. The ability to market and understand if marketing is working."
A new game every day
For that, they would have to buy a company that could build and cross promote all types of games, he said.
"Big Fish is a very interesting company, with a very impressive historical track record," said Adam Krejcik, managing director of Eilers Research, a research firm in Orange County, Calif., focused on the gaming sector. "Churchill acquired a very good asset. Where they go, how they integrate it remains to be seen."
Big Fish's slogan is: "A new game every day." And they deliver, with about 450 mobile games in virtually every genre from time management to mystery search to match three to word and puzzles to slots. About 20 more games are expected to be launched this year.
The gaming market, which Big Fish's portfolio mirrors, is broken into three categories, Krejcik said:
â– Premium games, where players pay a monthly subscription and often play on a personal computer;
â– Free-to-play games, like the popular Candy Crush; and
â– Social casinos, which are traditional casino games like slots but with no payout.
How can free games make money? By offering premium content that is more easily accessed if players are willing to part with a few dollars. This kind of game is sometimes called "free-mium."
In some games, you run out of "lives" or need a particular "boost" to more easily win a level. In casino games, players get a limited number of free chips to start off and then can buy more if they go bust.
Social casinos are a relatively new phenomenon, one that has come on very strong with the move to smartphones and tablets.
"Free-to-play is a constantly changing, evolving, dynamic space," Carstanjen said. In recent years, gamers have moved away from playing on PCs to mobile, and away from premium games that are paid for up front to those where they can improve their experience as they wish.
"And within that genre, there are constant changes going on with the types of games they want to play," Carstanjen said. "You've probably seen the advertising for Clash of Clans and Game of War, but there's also Candy Crush, and our game, Gummy Drop, which are simpler."
With demand comes revenue
When Churchill announced the Big Fish purchase in November, Carstanjen said, they didn't mind that the company hadn't had a big hit. They didn't need one to be attractive.
But there is no denying that Churchill is pleased that Gummy Drop has steadily risen in the ranks of most popular games. And with that has come increased revenue.
On a recent day, Gummy Drop was number nine in the App store's Top Grossing Apps, while Big Fish Casino was number six.
"That bounces around all the time," Carstanjen said. "We're very proud with the development of Gummy, which is a game a year ago which didn't exist."
The biggest advantage might be the increased capacity to sell other games: more eyeballs. If you've ever been playing a game and been bombarded with ads for others, you know what he's talking about.
"That's important to Big Fish because we can leverage the portfolio of customers and we constantly introduce to customers of one genre other types of games. And we've found pretty consistent success to doing that," Carstanjen said. "Many (players) have very set preferences, but they like to look at new things, like to try new things. There's plenty of cross pollinations that happens and that's a big advantage with Big Fish."
The free-to-play market is growing very fast, Krejcik said. But it's also more unstable. Today's hit is tomorrow's has-been, and companies like King that have gone public with one blockbuster often have trouble staying on top once the mania wanes.
However, social casinos are a different story. It's a very predictable revenue stream that — so far — has only increased. And it's the best part of Big Fish's portfolio, Krejcik said.
"It's already biggest in terms of revenue, and it will be the most valuable because it's also growing very nicely," he said. "It's profitable, and it's a recurring and predictable revenue stream as well. The social casino category, unlike lots of others, has retention and longevity because there's no start to finish to these games."
Playing slots you can't win
The appeal has nothing to do with money, it seems.
Joost van Dreunen, CEO of SuperDataResearch, said it's fair to ask why people would play casino games they can't "win."
"Big Fish, at the time of the acquisition, was one of the highest-grossing companies, and their ability to retain customers is above average," he said. "What goes into the secret sauce ... is they have a very loyal customer base."
People come back because "something is there that appeals outside the game," he said. "What Big Fish does well is to funnel down the social layer. It makes playing the game just an excuse to be there."
At the Kentucky Derby, he said. "One horse wins, and the rest don't. But it's the whole dressing up and the ritual that build the excitement. Horse races are about much more than which horse is fastest. Whether it's digital or physical, it's about the ritual."
"The unique thing about Big Fish, the casino app, is that it does have characteristics of social app — players upload pictures, chat, and play at certain hours because other friends there," he said, adding, "It's free and very easy, so they do only need to have a very small percentage to convert."
By convert, he means convert to a paying customer.
Big Fish and Churchill have not disclosed any figures on conversion or on the amount that players pay, but Krejcik said that one top competitor, Caesars, which has the top casino app, Slotmania, has said their average spend is about $80 a month.
While spending in social games in general is low — less than 2 percent will pay and the average they pay is about $20 — in social casino games, the amount is two to three times more, with an average of around $60, Van Dreunen said.
In February, Churchill said that Big Fish's fourth quarter "bookings" or in-app payments were up $23.9 million, or 33 percent. Churchill will report its quarterly earnings April 27 after the market closes and discuss them on April 28.
When Churchill bought Big Fish in November, it said that in the previous four quarters the game company had $312 million in. If they can hit $1 billion in 2016, founder Paul Thelen will earn a $50 million bonus.
According to Krejcik, the paying profile skews 40-50 years old, female, and with a very high overlap among people who play slots at casinos. Bingo games are similar. Table games and poker skew younger and more male.
Real money gaming
Churchill hasn't given up on real money gaming, Carstanjen said. Although online gambling has yet to become meaningful, Churchill would still like to have it and he doesn't see it cutting into Big Fish's territory with customers.
"The casual games, social casinos, are real markets, established markets, that are going to be around and strong areas of interest well into the future," he said. "If we get the additional opportunity to have real money franchises in the U.S., that's a bonus, and we'll be looking to harvest those types of opportunities as well."
But a lot of people are never going to be drawn to social casino games at all and that's fine, Carstanjen said.
"While some customers prefer very complex, intense thinking and strategy games, others prefer casual experience, and want to tune out and multitask while they play," he said. "I never second guess. It's an extremely large market, and it's getting awful close to being as big as horse racing."
Last year, about $10.5 billion was wagered on horse racing in North America. Spending on social games just in the U.S. in March was about $150 million, according to SuperDataResearch. And the market is growing by an estimated 20 percent a year globally, giving Churchill a much bigger pool to play in.
The entire mobile games market, Carstanjen said, is estimated to be a $30 billion space in 2015 and $40 billion by 2017.
"It's a big world and lot of people playing, and you have the whole world to find customers," Carstanjen said. "Add them all together and you get a pretty good business."