Brean Murray Comments
• 1Q08 – Freestyle should shine. Our research suggests downloads of Freestyle in China in late January/early February were strong as a result of successful co-promotions with the movie Kung Fu Dunk. The game was one of the top 10 downloaded games on 17173.com. Further, T2CN has added two servers to the Freestyle server base, taking it from 9 to 11 during 1Q08 and suggesting healthy server utilization. Further, even though the co-promotions have ended, T2CN has continued to look for ways to attract traffic. Concurrent with the upcoming release of the next version of Freestyle, the company entered a marketing agreement with Kobe Bryant, who will also be featured in the game. In addition, the company is exploring the strategy of holding offline basketball tournaments to promote Freestyle’s brand.
• 2Q08 – a low-risk and a high-risk play
- The making of a gambling platform – embedding casino games into poker. GigaMedia plans to embed already-existing casino games into its core poker offerings so that poker players will be able to play other games during their downtime and will see an option to go play casino games on the logout screen. The company has already tested embedding casino games into the logout screen, and it saw a meaningful attach rate. In addition, several of the company’s competitors,
such as Party Gaming, have already tested and validated this approach. We believe the evolution of the company’s poker site into more of a platform offering for online gambling is a low-risk move that will likely result in meaningful payback. We also note that a lot of new customers that GigaMedia and its competitors are acquiring in the poker business are casual players with relatively low revenue per
ADRC characteristics, and giving these customers additional recreational offerings will help improve monetization.
- Swinging for the fence – can you change consumer behavior in Japan? GigaMedia plans on introducing an online version of a Pachinko machine to address the Japanese market. Currently, there are no credible competitors in that market, and consumers are playing the game on real machines in Pachinko parlors. GigaMedia’s bet is that it can tap into the consumer that has limited time (e.g., 15 minute lunch break) and provide them an experience similar to the real Pachinko
machine. The Pachinko market in Japan is 27.5 trillion yen per year (~$250 billion per year). Assuming, GigaMedia can tap into 0.1% of that market per year, it could double the size of the company. However, we are mindful of the fact that Japanese consumers don’t play Pachinko online now, and counting on a change in behavior is inherently risky. We also note that while we are likely to see the introduction of the
Pachinko offering in late 2Q08, revenue from it is more relevant to late FY08 and even more to FY09.
• 3Q08 – proven play on increased monetization of players through sports betting. The company already stated it is actively exploring partnership and acquisition opportunities in the sports betting space. GigaMedia customer surveys
suggest about 30% of its target demographic both play poker and bet on sports.
Currently, the company is not capturing this money, while some of its competitors already have a successful integrated offering. Consequently, the move to add sports betting is a defensive move that will likely to deliver numeous benefits to the company. We note that since there is a significant overlap in demographic, the company could realize meaningful leverage on customer acquisition cost, thus making any acquisition accretive faster. Further, sports betting introduces another channel for customer acquisition. Moreover, while historically GigaMedia shied away from the crowded markets like the U.K., one could argue that a successful sports betting acquisition may prove a backdoor to enter them and minimize upfront brand building costs. Most importantly, GigaMedia’s FY08 financial plans don’t include any revenue contribution from sports betting. Separately, the company is working on a Mahjong offering that it will license to different operators and that may provide an additional revenue stream. However, since it is not really differentiated content, we have very modest expectations on its potential.
• 4Q08 – Online games should grow up. We are hearing that the company is close to licensing an important title for China, which could meaningfully improve GigaMedia’s visibility in that country. Further, if executed properly, it would prove
that the company can successfully operate large titles on the mainland and help in further licensing discussions. We would not be surprised if the title will be launched prior to 3Q08, but would think that its commercial launch and associated revenue ramp will be in late 4Q08. Further, GigaMedia has a number of important licenses (Hellgate: London, WarHammer, NBA Street Online, Holic, etc.) for Taiwan/Hong Kong/Macau. Our expectation is that at least one of those titles should contribute to 4Q08 results in those markets.
Long-shot catalyst – opening of the U.S. market. The U.S. online gambling market was made illegal in 2006. While the ban on online gambling damaged market leaders such as
PartyPoker, it created an opportunity for players such as Full Tilt and Poker Stars that are more aggressive in their interpretation of the legislation. For instance, according to Global Betting & Gambling Consultants (GBGC), within the current $2.9 billion online poker market, the U.S. accounts for $1.4 billion, suggesting that despite the enactment of the online gambling ban, the market remains large and very valuable for players that chose not to comply. We believe over time the U.S. should move from prohibition to regulation of online gambling, which opens a very significant market for GigaMedia. In April 2008, the House Financial Services Committee received proposed legislation to stop the
implementation of the antigambling regulations. Importantly, we believe GigaMedia’s Everest Poker brand should get significant exposure in the U.S. through its sponsorship of
the World Series of Poker. Our current forecasts do not assume any revenue from the U.S. market.