Q.& A. | Ken Arnold, Chairman of CyberArts

3/9/2009 by Jeanette Kozlowski

In 1995, at a time when gaming online was a new concept, Ken Arnold co-founded CyberArts. He shares his observations on software advancements and assess the market's future.

Ken Arnold established his first software company in 1981, the same year Konami released “Frogger” and Nintendo released “Donkey Kong.” Back then the idea of packaged software was just coming to fruition.

Instead heading straight into the gaming software market, Mr. Arnold took a 14-year detour. During that time, he served as chief executive of Datalogix International, one of the first companies to offer material requirements planning and enterprise resource planning software to the process manufacturing industry, and he co-founded Formation Systems Inc., a product lifecycle management company.

Then in 1995, at a time when gaming online was a new concept, he co-founded CyberArts. Their first product was graphical backgammon specifically tailored to the Internet.

How has the I-gaming software market changed through the years?

The entire gaming sector is undergoing a major transformation from an exclusively land-based activity to a more balanced source of entertainment that can be enjoyed from the consumer’s home or workplace via the Internet. For decades, “gaming” has entailed visits to casinos in Las Vegas, Atlantic City, Macau or other geographies around the world.

With the rising cost of travel and the current recession, an annual trip to Vegas has become a more expensive undertaking. The industry’s decision to morph from a low-cost gambling destination into a luxury tourist destination -- combined with higher transportation costs -- creates huge economic pressure on the land-based industry. The $39 hotel room and $5.99 prime rib buffet have been largely replaced by the $300 hotel room, upscale restaurant and $100 show ticket. The results have been devastating for the land-based industry and the current recession will only make this situation worse.

What changes do you anticipate in the next five years?

It is a given that people will not stop gambling, but they will surely seek a more cost-effective way to find their entertainment. Thus the online and server-based gambling industry anticipates a period of growth while the traditional land-based industry is set for significant contraction.

It was really interesting to read yesterday’s results from Paddy Power. They reported that 70 percent of their profits derived from online. Paddy Power was a traditional bookmaker with over 250 betting shops. Their venture into online was never supposed to totally transform the company but it has.

Another major area of interest is Asia. While we all wonder about the U.S. market, growth in Asia is a given. And, like anything in Asia, gaming will have to deal will huge populations and massive scale. Very few of the current generation of software systems are up to the task. CyberArts’ Foundation is designed to handle hundreds of thousands of simultaneous players, so we are particularly excited about the fit with Asian requirements.

Do you feel there is more competition now than ever between software providers? How so?

While we see many new players with attractive games, nobody else has taken the platform approach. CyberArts is built around our Foundation Platform, which is the only true universal gaming platform on the market today. Foundation allows us to add new games rapidly and at low cost. This makes CyberArts attractive to new, well-funded operators. Given the movement of the market towards “legal and regulated” online gaming, this is a good position for CyberArts.

There is a second key area of competition and innovation in gaming software, and that has nothing to do with the code, but rather with the business model.

CyberArts has had a lot of success in the Italian market recently. Tell me more about how you were able to overcome the stringent regulations of the Italian poker landscape.

It is a real privilege to work with the Gioco Digitale team, and it is a perfect example of the power of both the Foundation platform and the CyberArts business model. Certainly the credit for Gioco Digitale’s remarkable success goes to the GD team, which worked tirelessly to prepare for an early launch and first-mover advantage in the Italian market.

Today with 11 companies in the field, Gioco Digitale has 50 percent of the market with names like Playtech, PokerStars, Microgaming, Ongame and Boss splitting the other 50 percent. Part of Gioco Digitale’s plan was to work with an agile software company that could deliver a world-class product on time. And Gioco wanted a poker product that was tailored for the Italian market, which has a high percentage of novice players. Working together, we met the goal with months to spare.

Gioco Digitale would have been ready to launch in June, if the government systems had allowed that. Since then, the goal has been to grow faster than anyone imagined possible and to do that without any downtime. The Italian government has raised their estimate of the poker market from 400 million euros per year to 1.2 billion euros per year. At this time, that estimate looks far too conservative, and we are sure that GD’s software will be up to the challenge however large the Italian market grows.

CyberArts were exhibitors at G2E in 2008. Are you looking to enter in the land-based industry anytime soon?

The Foundation Platform is well-suited to server-based gaming. In fact, it offers advantages that put Foundation a couple of generations ahead of other SB platforms. So, we are interested in working with (video lottery terminal) manufacturers to power their next generation of equipment. We’ve had some good responses.

How does CyberArts’ business model differ from competitors?

Most gaming software developers provide their software for a low initial fee plus an ongoing share of the operator’s top-line revenue. Many charge fees that range from 12 percent to 30 percent of gross revenues and use burdensome contract tie-up provisions as a way to keep clients shackled to their products and services. I cannot think of any other industry that pays a technology supplier a big percentage of gross revenues.

CyberArts believes that these high percentage revenue-share models promote poor customer relationships and will be unacceptable to a new generation of large and well-financed players seeking entrance to new government regulated sectors within online gaming. We provide Foundation on a single-license fee plus annual support basis or a reduced-license fee with a manageable single digit revenue share. Thus CyberArts provides not only a more technically advanced software package but does so with economic considerations in mind, ultimately resulting in a clear choice of superiority for the industry.

How does CyberArts software continuously address the ever-changing needs of the market?

We are guided by customer requests and the software design talent of our chief executive and chief architect, Chris Derossi. Every CyberArts project is a one-off, built upon the Foundation platform, but then tailored to match the business vision of a specific client. This may require custom games, integration to other client-owned online properties, or just a unique interface. I’m always listening to clients and other operators and learning from them. Last week at AiG, I learned a few new things about what is working in Asia, and we will very quickly incorporate that knowledge in new code.

CyberArts' platform powers poker, backgammon, blackjack, 13-cards and other games of skill. Why did you choose this product mix?

Well, poker is certainly the most challenging technical problem for game developers, and it is CyberArts’ “premier product.” Our clients expect Foundation Poker to compete on equal footing with the proprietary brand of the industry leader and stay well ahead of the networked poker products. In support of that requirement, we recently upgraded our tournament architecture to a level where we can anticipate hosting 100,000 players in a single bracket.

We’re also continually adding new games. Bingo, baccarat and “Big2” have all been released within the past couple of months. CyberArts is building a suite of Asian games because Asia is where the player volumes will be the largest. Some Asian massively multiplayer online role-playing games (know has MMORPGs) boast 500,000 simultaneous players. Since Foundation’s hallmark is very large scalability, we are eager to play in that market.

What are CyberArts' goals both short term and long term?

Our mission is to be great technologists in support of great gaming marketers. Software development -- especially of large scale, multi-threaded servers, is tricky -- and it really makes no sense for an operator to write games in-house. Operators are starting to embrace that truth -- for instance, William Hill turned to Orbis and Playtech. However, we think that operators are much better served by the CyberArts business model and universal platform approach and look forward to pursuing these avenues to future success as the next wave of large operators look beyond “not invented here.”

Are there any innovations CyberArts have planned you can share with us?

We just launched a new partnership with Zest Gaming, one of the leaders in the video lottery terminal market in Italy. This partnership will be using Foundation as the center of a server-based network of 50,000 video lottery terminals. CyberArts and Zest demoed the new video lottery terminals at the International Gaming Expo a few weeks ago.