Inside Double Down: How a $500M Deal Started With a $1M Investment

1/18/12Follow @curtwoodward

In the spring of 2010, at a small startup in Seattle, some online gaming veterans were ready to send their latest creation into the world. It was a blackjack game for Facebook, fully legal because players couldn’t cash out their virtual chips.

With much better production values and an ability to play with other users, they thought it would stand out among a sea of gambling-style games on the social network. But that was just a theory.

So the fledgling company, Double Down Interactive, turned on its marketing campaign with some ads on Facebook. It was like flipping a money switch—users started showing up, and dollars started flowing.

“Not just a return, but a positive return on our ad buy, in the same day,” Double Down co-founder and CEO Greg Enell says.

Greg Enell

The average Facebook game today, Enell says, makes about two or three cents per daily active user. Within just a few weeks, Double Down’s blackjack game was pulling in “upwards of 35 cents per daily active user,” he says.

“At that point we realized, ‘Wow, we’re on to something. This will work. And if we can aggregate a large enough audience, this will generate a ton of cash.’ It was incredible,” Enell says.

“We were hopeful and optimistic that we could generate positive cash flow from it right away, but did I really think that would happen? No.”

That first blackjack game cost right around $1 million to produce, money that came from Enell, co-founder Cooper DuBois, and one unnamed investor, who I’m still trying to track down. Last week, Double Down Interactive announced its pending acquisition by slot-machine maker International Game Technology in a cash deal that could be worth up to $500 million.

That’s one hell of a return on investment, in a short period of time, even in the world of high-growth tech startups. Enell notes that Double Down repeatedly poured money back into the development of new games and improving the infrastructure after the debut of blackjack, “doubling down” themselves several times (hence the name).

By the time the company sold, its app was attracting about 1.4 million daily active users and 4.7 million monthly active users, according to independent numbers from AppData. Revenue figures are hard to come by for the private company, but it appears to be raking in the dough.

AllThingsD reported in October that unnamed sources had pegged DoubleDown Casino’s daily revenue at $140,000. Those numbers are thought to be “much higher now,” Deutsche Bank Analyst William J. Lerner said on a conference call with IGT executives (IGT didn’t address the analyst’s revenue assertion directly).

Enell wouldn’t say how much Double Down is making now, and declined to answer when I asked if the 35 cents figure had held up with the app’s growth in daily active users. But Enell did point out that Facebook listed DoubleDown Casino as its No. 4 game of 2011, a ranking that took into account audience, revenue, and positive reviews from users. Those last two factors helped Double Down’s game come in ahead of other games with audiences two or three times larger, Enell notes.

“We believed in it and we wanted to control it and own it outright, and didn’t want to bring any significant external capital into it,” Enell says. “And we got lucky.”

Their next step could be even bigger. If the sale to IGT (NYSE: IGT) closes as expected, Double Down Interactive will lead its new parent company’s efforts in social games, which don’t put real money or prizes at stake because online gambling is still in a legal grey area in the U.S. But the ability to move into real-money wagering is a tantalizing one, particularly since the U.S. Justice Department recently dropped the legal basis for its previous objection to online gambling.

In a conference call discussing the Double Down purchase, IGT chief executive Patti Hart said there was money to be made either way—the quick rise of Facebook gaming leader Zynga into a money-generating machine is evidence of that.

“This acquisition was analyzed and entered into assuming no change in legislation in the U.S. around legalized online gaming, including poker,” Hart said, according to a transcript provided by SeekingAlpha.

“I don’t think the company would take a $500 million wager—no pun intended—on a change in U.S. law,” says Behnam Dayanim, a lawyer who specializes in Internet gambling regulations. “It has to be that they’ve determined that this makes sense regardless of what happens” with U.S. gambling regulations.

But at the same time, IGT sees a future where fake-money gambling exists alongside serious online wagering, and maybe some other business models. “The ability to come into your online gaming world and play with virtual currency, or real money, or playing a subscription model, is likely the model that will be successful going forward,” she said.

Double Down is happy to help make that kind of future a reality. The whole idea behind the company was that legalized online gambling was coming to the U.S. by 2014, Enell says, and that the first companies to amass a sizable audience on the Facebook platform would be the ones to reap the benefits.

“They have a tool here through our virtual currency system whereby we can aggregate a huge audience—arguably the largest gambling audience in the world. And then, as pockets of real-money [gambling] pop up, that audience can be essentially cross-sold into real money and be just incredibly valuable,” Enell says.

“We’re working with Facebook and hopeful that we can launch some Facebook real-money products that would be powered by IGT’s back end and our social front-end, if you will—kind of marrying our technologies to be able to go into real money gambling in Europe,” he says. “It’s a tremendous opportunity.”

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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