The online world throws up anomalies that defy conventional business logic.
Take Facebook’s Social Casino. Played for fun with no real money wagered, it generated US$1.1bn in revenues last year.
It may sound barmy, but simulated gaming of this kind, where players buy and spend virtual currency on slots and at the tables, appears to have legs.
And for Game Account Network (LON:GAME), which provides the technology used by land-based casinos to move online, it represents a significant potential revenue stream.
In the US, where online gaming is largely illegal, it represents a potentially significant money spinner.
Simulated gaming was initially seen as a place-holder while online ‘real money’ gambling was incrementally legalised and regulated in the way that’s taking place in New Jersey.
GAN teamed up with Foxwoods, one of America’s largest casino resorts, to launch the first site and what it found out was revelatory.
Initial indications suggested the venture might yield 60 cents per player per day – between two and four times the amount spent in Facebook’s Social Casino.
Instead the figure was US$2.75, which adds up to a significant revenue stream given GAN will receive 30-50% of the money generated.
The model really works if Foxwoods (and the other four casinos signed with the AIM newcomer) can use their significant marketing might and large customer databases to recruit online players.
This is a land grab and GAN is the first mover in simulated games. So far it has 4.2% of this virgin market that is unencumbered with regulation that dogs the sites where money is actually paid.
The plan is to nab a far larger chunk more. “It is a significant opportunity if we can get them [the casinos] to move online quickly enough and get them to do a good job promoting to their huge customer databases,” said chief executive Dermot Smurfit.
“It is a separate standalone business. One of our firm beliefs before we set out was this would be a Trojan horse for market share. But if you can figure it out then it can make a lot of money in its own right. It is not substitutional.”
Floated in last November, GAN came to the market aiming to capitalise on the changes in the regulation of online gaming in the US and New Jersey in particular, which is at the vanguard.
However as the share price suggests (it is down 64% in the last 11 months), it hasn’t been plain sailing for the company.
New Jersey’s online marketplace, predicted in some quarters to be worth US$1bn a year, actually turned out to be worth US$130mln. GAN was less bullish with its forecast of US$200mln, but as Smurfit points out “we were still way off the mark”.
“The biggest reason for this was the banks . The banking infrastructure wasn’t and isn’t there to process these sorts of payments,” the GAN chief executive said.
“So you pull out a credit card, type out the number to deposit $100,000 dollars you want to gamble, you can’t get it into your account.
“So for example, only 25% of all VISA card attempts are being successful. So three-quarters of the nascent value is missing.”
Not only is the pie smaller, but Betfair, GAN’s partner providing online gaming to the Trump Plaza in New Jersey, managed to snag a smaller share of the pie. Its market share was 9% compared with the 12% most analysts expected it to command.
Smurfit is confident that New Jersey will eventually live up to the hype, but only after the banks have sorted out payment processing.
“By the time we get to the back end of next year, the issues should be sorted out. Some banks will still say they are not interested, but most should have sorted it out,” he added.
GAN earns its cash by taking a cut of the revenue its gaming platforms help generate. However it also makes one-off system sales to slot machine companies looking to move their libraries online.
These are chunky orders worth US$8-10mln a year and while market is finite there are still around 30 potential customers out there.
“I’m not sure you can describe these as one-off sales; the question is one of timing. So will we get a sale this year?” said Smurfit.
“Their size means they are what I call the dividend opportunity. We do one a year and spit back half the cash to the shareholders.”