Investors in Glu Mobile (NASDAQ:GLUU) have been patiently waiting for the company to figure out a way to bring in more money than it spends for many years now. During this time Glu has been seeking to identify the most profitable and sustainable ventures in the hyper-competitive mobile gaming space, and Glu has undergone incredible transformations to adapt to the competitive environment in which it operates. Glu has shifted its focus entirely from feature phones to smartphones and has since honed in on creating mobile games with in-depth gameplay and impressive 3D graphics. The success of this transition can be seen when comparing 2010's smartphone revenues of $9.4 million to 2012 smartphone revenues, which totaled $75 million.
While Glu has been successful in generating sales as a result of this transition, those have not yet materialized into profits for investors. In response to this Glu is continuing to seek new ways to leverage the position and expertise within the mobile gaming market. Two of the ways Glu is seeking to do this is through introducing mobile real-money gambling games and establishing a Glu Publishing service for third party developers. Contrary to popular opinion, I believe that the key to Glu's profitability lies more within the publishing division than in real-money gambling, at least for the foreseeable future. Here's why:
While the size of the real money gambling market is what is often touted when looking at what Glu should focus its efforts towards, it is still a market wrought with uncertainty and excessive regulation. Glu has already launched its first real money gambling game in the U.K., and it has not generated any significant results for the company for several reasons. The first is that it is only available in the U.K., which Glu states is a "very small revenue generating market for real-money gambling." In addition to this Glu currently receives a minority of the revenue generated from its partnership with Probability PLC because Glu is allowing Probability to do almost all of the work in bringing these games to market. This agreement limits Glu's risk as well as upside and allows Glu to avoid the headache associated with the legal aspects of real-money gambling.
Most of what I read does not focus on where online gambling is already present, rather, on the potential that lies in the markets where it does not yet exists, namely in the United States. Certainly more and more states are considering allowing online gambling, but so far Nevada is the only state in which it can actually be done. Thus far online poker is the only means for online gambling allowed in Nevada. The law also states that people must be physically present in Nevada in order to access online gambling services. New Jersey and Delaware are working to pass laws that would allow online gambling, but these efforts and the following regulations have yet to materialize.
Not only is the future of online gambling in the United States still a big question mark, it will be an expensive venture for anyone attempting to enter the market. An online gambling license in Nevada alone costs $500,000- which may not seem that significant until it is realized that Nevada is only one state out of 50. A draft of proposed regulations in New Jersey has the cost for a license at $400,000 plus an additional $250,000 annual fee that would go toward problem gambling.
These costs are even more significant when they are added to the costs Glu would incur by stepping outside their core competency and into the real-money gambling sphere. It is important to remember that unlike Zynga (NASDAQ:ZNGA), or any other mobile developer with casino-based games, Glu is focused on creating engaging games with deep gameplay and impressive graphics. These core components of Glu's games do not transfer well, if at all, to the prospect of real-money gambling. In addition to this Glu would be competing against a variety of casinos and websites which already have a user base and expertise in the gambling industry, essentially meaning Glu would be little more than a bug among giants in the online gaming industry in these states.
Another factor that is commonly overlooked is the requirement to have a physical casino within the state of Nevada in order to obtain an online gambling license. This fact alone eliminates any potential Glu has of even entering the market unless it partners with a resort in Nevada. I believe it would be difficult for Glu to find a resort partner in Nevada because of the restriction which only allows online poker. There are far too many developers and websites that focus exclusively on poker for Glu, primarily a developer of FPS's and MMO's, to become a frontrunner for a major partnership in my opinion.
In conclusion, I think that it is not within Glu's best interest to focus its efforts on entering these real-money gambling markets until the risk-reward scenario is much clearer and more beneficial to Glu Mobile. There are still too many regulatory, cost and competitive challenges that stand in Glu's way before it will be able to realize profits from real-money gaming in the United States. It is for those reasons I believe Glu Publishing will generate returns for Glu far faster and more efficiently than gambling.
Glu Publishing is a service that Glu has begun offering to third party developers who have games that they want to introduce to new markets. Glu is offering to take successful games from predominantly Asian publishers and optimize them across languages and operating systems in order to reach the largest possible audience. Depending on the size of the publisher and the success of the game, Glu will pay a licensing fee or recoupable minimum guarantee and then share the new revenues from the games with the original developer. More specifically, Glu will accept titles that are "already live in the Chinese or Korean app stores and are already in the top 100 for growth."
This is an exciting opportunity for Glu because it allows them to use their pre-existing expertise that spans across languages and platforms in order to generate revenues without the excessive costs of researching and developing their own original content. Glu maintains marketing costs for these titles in the new markets but those costs are relatively minor compared to the research and development of new games. Glu has one team devoted to the publishing service, compared to 18 teams devoted to creating original content. This one team is set to release six 3rd party titles in the second half of 2013 alone and is expected to release at least one game per month in 2014. It is clear that if even some of the games this team releases are as successful as Glu's internally developed games then this one team will generate more returns than the other development teams, thus providing a relatively safe avenue through which Glu can profit.
Glu Publishing has already established one long-term agreement and two additional binding letters of intent with game developers that include two of China's leading mobile MMO's. The games will focus on games-as-a-service titles, which will further improve the synergies that Glu Publishing creates within Glu's whole organization.
I believe that, for the foreseeable future, online real money gambling is an area that has too many challenges and uncertainties to be a lucrative focus for Glu. It may become a more appealing market as the uncertainties are cleared up and regulatory barriers are broken down, but as of right now all of those factors represent big question marks and risks for the business as a whole. It is also virtually impossible for Glu to enter the market in the only state in which online gambling is currently legal without a large partner, which severely limits what Glu would be able to do even if it should push for an early entrance to the real-money gambling market.
I also believe that Glu Publishing will be a much more important factor in the success of Glu Mobile throughout 2014 than the advent of real-money gambling will be. It allows Glu to tap into the expertise that already exists within the organization and use that to generate greater returns than internally developed games and reduces the risk that Glu assumes when devoting the amount of resources it takes to develop and release an original game. Overall I think Glu Publishing will add a new and more leveraged dimension to Glu's business that could hold the key to profitability.
Disclosure: I am long GLUU, ZNGA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.