IGT made a few jaws drop wide open when it bought DoubleDown Interactive, a social casino game publisher, for $500 million in cash in January.

Following short on the heels of a U.S. Department of Justice decision in December that legalized online gambling with certain restrictions, the acquisition of DoubleDown was a triggering event for the investment craze in social casino games this year. As legal barriers between land-based casinos, online gambling firms, and social casino games melt away, investors are pouring money into startups like Playsino, Blitzoo, and Betable on the assumption that legalization will lead to huge profits.

But Glenn Walcott, president of DoubleDown, says that social casino games are a good business in their own right. They now account for about 13 percent of game playing on Facebook, which has 955 million monthly active users (MAU), about half of them game players.

But the market could turn out to be a bloody one. Big players like Zynga and rival Playtika-Caesars are out to steal audiences interested in social casino games. The card sharks are everywhere. But DoubleDown has a full suite of games within a single app, and it has 5.4 million monthly active users who are highly engaged. Three percent of them spend real money on virtual casino chips, and that’s enough to make a good business for DoubleDown.

We caught up with Walcott at the recent Casual Connect game conference in Seattle, where social casino games were a hot topic. Here’s an edited transcript of our interview.

GamesBeat: You guys are an interesting new player on the scene here. You have some history in this social casino game market that other people don’t.

Glenn Walcott: Yeah. It’s funny. People look at us and think — relative to the world of gaming, the Facebook world — it seems like we’re dinosaurs.

GamesBeat: How did you get started on Facebook?

Walcott: The three founders of the company had another game company before this. It was generally in the sweepstakes category. It was very successful. It printed money.

But they said, this is not what we want to do with the rest of our lives. They were spending time playing games on Facebook, especially Zynga Poker. They thought that it would be awesome to build a great casino-style game. They liked that style of game. But the problem with those games is: How do you monetize that style of game? It’s not like the download world, where there’s a great product that you can download for $5 to $20 dollars.

But Zynga was the first company to come out with a virtual currency for a casino-style game. It became so obvious. You just spend money to buy more chips. So they said, let’s go out there and do it.

We didn’t want to go right after Zynga Poker. That was the 800-pound gorilla. Zynga had a great product. Our founders said, let’s come out with a product that nobody else has come out with. Let’s do blackjack.

They came out with blackjack with a multiplayer engine because multiplayer is very difficult to build. That provides a major barrier to entry.

So we came out with blackjack, which launched in March of 2010. After that was successful, we moved on to another game that we liked, which was roulette. We launched a roulette game in the summer. Later that summer, we launched three slot games as well. So now we were on our way to really building a casino. We started ramping up the marketing of it on Facebook. We realized that our marketing dollars paid for themselves in about a month, which is a great return-on-investment (ROI) on a marketing investment. At that point in time, around October of 2010, we became a break-even company. We had eight people at the time.

Then we decided, hey, let’s go on a tear. Let’s think big. Let’s make this a really big company. We went on a hiring spree and spent tons of money on marketing. We had a product that monetized well. The casino-style genre monetizes well on Facebook. And we understand, anecdotally anyway, that we monetize very well within the casino genre. Because of that, our marketing dollars have been able to go further than many companies’ have.

Fortunately we’ve done a great job at continuing to launch innovative new products, all within the casino suite, and we’ve done a great job with the marketing to understand who our demo is and how to go after them. It’s not just acquisition marketing, but…how can we make sure that we get in front of people from a retention perspective? How do we continue to provide unique and incredible content to our customers? That’s the way we believe we’re going to retain them.

One of the things that’s unique about the DoubleDown Casino app versus many other apps that are out on Facebook is that we have one application, the Casino. It’s the only one. Whereas all these other companies — Zynga, Electronic Arts, other big companies — have multiple apps.

Every game, as you know, has a life cycle to it. It’s very successful for maybe up to three months of that life cycle, then it starts to go down, and you have to try to convert those users to another one of your applications. When you’re doing that, you hit another barrier to entry. You have to get someone to click an “allow” button to get access to that game. They have to give out more information. That’s just another reason for people to say no.

We’re just accumulating all these games into one spot, and we’ve found it to be very successful. It’s funny to us that we’re unique and that most people don’t like building the full casino. They’re just building blackjack or poker or slots, and if they do have other games, they’re putting them out as a different application. That’s one of the things we think has differentiated us.GamesBeat: Do you get all the usual benefits of having a suite, then? Do players hop from one game to another a lot?

Walcott: Oh, totally. Not that we care that much about what AppData says, but when you look at daily active users (DAU) for our company, you’re really seeing our DUU, our Daily Unique Users. Whereas if you’re looking at a Zynga and you see, oh, this says they have 240 million people who played their games this month — in reality, it’s maybe 150 million played their games this month.

With our app, our numbers look smaller relative to other companies that have multiple games. But our customers will end up playing maybe two-and-a-half to three games per day when they play our games. We’ve got 22 different slot games, three video poker games, roulette, blackjack, [and] three flavors of poker. We’ve got 30 games on our site right now. That’s the cool part about having a casino. You come to the DoubleDown Casino — we want you to feel like you’re in a Bellagio experience, a quick fix when you can’t get to Vegas. You’ve got all these opportunities to play any sort of games out there.

Probably one of the reasons we monetize better than others is that…if we had, say, one game — if we were just poker, for instance — if you wanted to give us $3 dollars to get 150,000 chips, you could only use them for the one game. With ours, you can use them on a bunch of different games. Let’s say you get bored with our 22 slot games. You know there’s going to be another slot game coming next month, and hopefully it’s going to be new and innovative and something that’s attractive to you. Even if you don’t use all your chips today, as we launch new games, there’s going to be another compelling reason for you to use those chips soon.

GamesBeat: And then IGT came along here?

Walcott: Yeah, they threw down a few coins [laughter]. It’s an interesting topic to talk about. My first day at the company was down in Vegas, back in November of 2010, meeting with different casino operators. The goal was to get the word out about who we were. Even though we weren’t for sale at the time, and we weren’t looking to raise an investment, we were getting our name out there so that when we were ready to look for an investment, people would be familiar with who we were and what we were trying to do. As we became more and more successful, we realized what a giant asset we had on our hands.

There were a lot of companies who were interested in us. The obvious players were the casino operators just because we had a very like-kind product. Also the games companies because we have an incredible user base, we have a great studio, and we know how to monetize our users. Then obviously companies like IGT, who are historically in the business-to-business space, who have an incredible amount of slot content or casino gaming content on their own.

We started talking to the guys at IGT in October of 2011, and we realized very quickly that there was a synergy that could happen there. In addition, they were very excited to find that we were profitable as a stand-alone company, so regardless of what the synergies were, a deal made sense.

IGT is an incredible developer of casino-style content. I don’t know the exact stats, but they have something like 50 percent market share in slot machines in the U.S. and, I think, 80 percent of video poker. The reason they have that is because they have incredible developers there that build great content. We just recently launched a game that was developed by the guys at IGT, and you’re going to see a couple more of those coming next month as well.

The first game we launched, which was Da Vinci Diamonds, did incredibly well on our site. Partly because it’s got a brand that’s been established for the last 10 years within the real casinos — it’s in every casino on the planet. It’s got mechanics that, fortunately, IGT has patented, so it’s a protected technology out there. People come to our site and see it, they say, oh, I like to play that game. The experience is very different, obviously. On our site it’s just virtual currency. There’s nothing you can win.

Like most social game companies, 97 percent of our users play for free their entire lives with us. Only 3 percent or so are paying money, and the reason they pay is to get the experience and the thrill of feeling like they’re a high roller. Being able to get the bigger zeroes. Instead of playing with 1,000 chips per spin, you get to play with a million chips per spin, and that’s fun.

It kind of goes back to the old days of pinball machines, where if you had three pinball machines that were exactly the same, one might let me score 100 points, but I’d way rather win 100,000 or a million points. But a trillion’s too many. There’s a sweet spot. It’s not just more zeroes…users understand what it feels like to be a millionaire, and there are billionaires in the world, too, so you can get up to a billion dollars. But if you’re making them a trillionaire, it just becomes a noise and a nuisance at that point. There is a sweet spot. We try to figure out the math of where the economy should be. That’s one thing we spend a lot of time on.GamesBeat: Were you surprised at how the value of the whole sector changed here since December or so? It was sort of off the map before then, and then it was suddenly on the map.

Walcott: As far as the valuations that are out there, you really heard about two. You heard about Playtika and their product, Slotomania, that got acquired by Caesar’s [editor’s note: for up to $90 million in May 2011]. That was reported on secondhand, generally, and so the valuations were never fully understood.

And then there was obviously our number, which was a big number that was out there. If you look at our valuation from a financial perspective, which is measured on a true profitable company, an EBITDA [earnings before income taxes, depreciation and amortization] number. It was a very fair multiple. IGT did a great job of structuring the earn-out to make sure that it’s a win-win for everybody. Over the three-year period, the valuation makes sense at any level. If we underperform, we get paid less. If we overperform, we get paid the full $500 million. We think it’s going to be a win for everybody.

But as to your question — was I surprised at the valuations? It wasn’t one company that we’d been talking to. We’d been talking to VCs [venture capitalists], private equity, and companies like IGT as well as the casino operators. The valuations were all in that range. And the market got super excited in December, too. The DOJ letter came out, and Facebook named us the number four most popular game. Those two things were a great Christmas present for us, happening the same week. I think that helped alert people to what was going on.

GamesBeat: Zynga gained something like $5 billion dollars in market cap? And then they lost it right back [laughs].

Walcott: Yeah. Well, as you know, market valuations are not about what you’ve done. They’re about what you’re going to do. The perception with Zynga is that they’re shrinking right now in terms of user base. And while in the short-term that may not be hurting their revenues, in the long-term it would impact their revenues. They can monetize their users more, but at some point that caps out and you need to have growth in users.

Zynga’s obviously a very different company. When you look at the demographic data, they have a much wider reach from an international perspective than we do. We’ve focused our efforts on growing in our core countries, the higher monetizing countries. That’s why our ARPDAU [average revenue per daily active user] is much bigger than someone like a Zynga. If you look at it, they have a lot of players from Asia who monetize a lot less. We’ve been focusing less on trying to grow that DAU or MAU number and really focusing on growing our quality user base. That’s why our revenues continue to grow.

GamesBeat: Kontagent [an analytics firm] showed that casino game demand on Facebook doubled. Six percent of all Facebook players played casino games in 2010. Then that grew to eight percent in 2011, and now it’s 13 percent in 2012. Have you seen that trend as well, where there’s just more people who want to play casino games?

Walcott: I chuckle, and here’s why. During our whirlwind tour with the investment bankers, a very common question I would get was: What do you think the casino-style market is on Facebook? I would chuckle and say, I’ll answer your question in a moment, but you’re asking the wrong question. The question isn’t, how big is the casino-style market on Facebook? The question is, how big is the entertainment market?

Let me put that into perspective. Three years ago, I don’t know how big the market was for slingshotting birds [laughs]. But I can tell you right now, it’s a giant industry, I’m addicted to it, and I can’t stop playing.

Really, the question is, how big is the entertainment industry? Five years ago, there wasn’t any gaming revenue on Facebook. Today social gaming is a $3 billion dollar industry. It didn’t steal that all from the casual gaming industry or the MMO industry. It stole some of it from those industries, but it also created a brand new industry.

I think what we’re seeing is that companies like us went on Facebook, developed an incredible social game, and it happened to be in the casino-style genre. We’ve created a new genre that’s been very successful. When I was back at Big Fish Games, we launched a game in 2005 called Mystery Case Files. I’m sure you’re familiar with it. Prior to that, there were no hidden-object games in the casual game market. We grew that to become the leaders among the hidden-object companies, and now those are among the most popular casual games in the world.

So am I surprised that this market, where it grew from zero to where it is today, has grown? Not at all. We’ve found that users like that type of mechanic, and so there’s lots of copycat developers who have said, oh, DoubleDown is doing really well, and we hear from Facebook that other companies are doing really well. Because Facebook was a giant evangelist of casino-style games. They went around pitching to everyone, oh my God, you have to build casino-style games, they do really well.

The reason Facebook did that is because they knew they were going public, and at some point, they were going to have to care about revenue and profits, so how could they monetize their users better? They could monetize them better with this type of game.

One of the reasons I believe that our games monetize better is that people understand the value proposition a little bit easier. When I say to you, hey, I’m going to sell you 150,000 chips for $3 dollars, you understand very clearly what the value is. You get 150,000 chips, you can bet 10,000 chips per spin if you want, or 100 chips per spin. You can see how the value works. But if I said, I want you to buy some seeds for your farm, and I’m going to charge you $3 dollars for 200 units of seed, you’d say, I have no idea what that means. People are more reluctant to do that.

So I think our monetization strategy is something people understand more clearly. It’s probably pretty obvious, but the more you spend on our site…for $3 dollars you get 150,000 chips, 50,000 chips per dollar. For $100 dollars you get 100 million chips, or a million chips per dollar. The more you spend on that, the bigger the value you get.

GamesBeat: One thing that’s harder to understand is this: These games have been around for so long — 100 years or more? — but they’ve shown a surge in popularity for the last year or two. It’s almost like the poker thing. The whole poker craze.

Walcott: These games have been around for 100 years in the brick-and-mortar world. How about this? What’s that series of hidden-object books…I Spy! The I Spy books have been around for years, but nobody brought them to the casual game market until Big Fish did it. And now that market’s skyrocketed.

Prior to Facebook, there were many stand-alone casino games, downloadable games that you could buy, that were somewhat uninspiring. You didn’t have that sense of winning and losing. You just had the experience of spinning a reel.

When you buy a downloadable game, you get a million chips. You play with them, eventually you lose them, and then it populates with another million chips again. So you don’t really have that sense of gain or loss because it’s just a fake number that keeps getting repopulated. On our site, a little bit of a difference is that every day, we’ll give you 20,000 or 50,000 chips for free when you show up. You can lose those, and then you can’t play the rest of the day. You have that sense of loss there. Or if you want to continue to play, then you can pay us as little as $3 dollars to continue to get more chips out there. You truly feel a sense of winning and losing out there, which is part of what entertainment is about.

Some of the games that we have are skill games. We’ve got the poker games that are more skill-based, blackjack is skill-based to an extent. Slots and roulette are the true games of chance out there. When I look at the games of chance, again, it’s an entertainment product. It’s like going to watch a movie, where you’re feeling the high and the low, the sadness or the excitement when you want that protagonist to win. That’s how we think of our slot machines. A lot of that plays into our math models, too. How do you make it so people get excited often enough that they’ll keep playing and want to come back?

GamesBeat: Where do you guys stand on the potential for legalization of online gambling?

Walcott: It’s funny. When I was at G2E [Global Gaming Expo conference] this year, I was supposed to be talking about social gaming. That was all the panel talked about. 100 percent. Where is legal poker going to go? I stopped and I said, look, every presentation in Vegas is about where online poker is going to go. You can speculate all day long. But let me tell you about social gaming and why you guys suck at it. And that was what I did. I walked through why they suck at social — not just social gaming but social initiatives they’ve had.

The DoubleDown Interactive team, which is 99 percent here in Seattle, is a social game company. We focus on free-to-play and virtual currency. It has nothing to do with whether or not there’s any real gambling. Our business model is not predicated on legalized gambling. We’re 100 percent focused on providing incredible game content to the social game user. IGT, our parent company, is obviously a real-world gaming company with gaming licenses in over 200 different jurisdictions. They’ve got people who understand and care about real gaming.

The latest news, I understand, about the U.S. legalizing poker puts it maybe two years down the road. For us, that’s so far in the future it’s not anywhere on our road map. We take somewhere between three months and nine months to build a game. When there’s more certainty as to what’s going to happen within that world, then we’ll spend some cycles focusing on that. Focus is one of the big things we preach in our executive team. Let’s focus on a few things and do them really well. If and when legalized gambling is something we should put within our purview, then at that point in time we will.

GamesBeat: If there’s this bubble of excitement because of your transaction and what the Justice Department is saying, how do you then stay on top of a world with 30 or 50 companies making this sort of game?

Walcott: Last I checked, there were over 100 applications on Facebook that had some sort of casino-style slant to them. You’ve got some of the best players in the gaming world. EA and PopCap Games launched their game a number of months ago, which is primarily a slot game. You’ve got WMS, which is a competitor to IGT, coming out with a co-branded slots product as well. There are a lot of companies with a lot of gaming experience and a lot of industry knowledge that are coming out on Facebook with products that compete with ours.

But none of them have been nearly as successful as we have. I think the closest one of those has maybe 200 to 250,000 DAU. It’s a hard business to be in.

We’ve got two years of learning about what works really well within our category. We’ve got a great strategy. We understand how to obtain users, and more importantly, how to retain those users. That’s not something that translates over from any game company. Our game mechanics so closely mirror — when you’re playing our slot game, the only thing that’s missing is the cocktail waitresses [laughs]. It feels like you’re in Vegas. We’ve mirrored those game mechanics very well. We have great developers, and we’re looking for tons more. We have more than 50 positions open.GamesBeat: Where do you think the market will be in, say, a year or so? What do you think is going to play out over the next year?

Walcott: I don’t think there’s anything obvious. For us, we’re going to continue to launch more great content out there. We’re going to position ourselves as a stronger player, as the leader with the best content. That’s what we’re focused on.

As far as how we’re going to grow — it’s not going to be with something that happens all of a sudden. It’ll be the hard work of developing games, improving our overall site’s gamification, and providing a compelling reason for people to keep coming back. I don’t see a big crazy breakthrough within any companies, other than perhaps M&A. Or Zynga’s such a giant powerhouse, what with the number of users they have. Potentially there’s some deal that those guys could do with another company that might be something interesting to write about.

One thing I am excited about is the different products with which Facebook allows us to communicate with users. I’ve always told Facebook, and I’ve told them this directly, I think they’re the world’s greatest gaming platform. It’s ubiquitous. As a consumer, you don’t have to pay money and buy a product to get on it. It’s very developer-friendly.

However, they’ve historically been very poor at being a games portal. It’s hard for people to find games on Facebook. Many people don’t know that they can play games from Facebook — other than maybe they’ve seen a post from one of their friends about the Ville games.

As you’re probably aware, Facebook is rolling out their App Center, which is finally a games portal. It’s pretty strong, and I think once they do a good job of promoting it…users can find the best games out there. They can find the games their friends are playing. They can read about games. They can find the top-grossing games. It’s a great way for Facebook to piggyback on the success of established game portals, including the App Store on Apple’s iPhones and other devices.

So that excites me because I think that’s going to be a very powerful way to drive traffic. If you think about Facebook — Facebook’s now a public company. We’re excited for that, and why? Because Facebook now has investors they have to report to. They have to hit earnings. If you’re one of the top monetizing applications on Facebook, from an ARPDAU perspective, you would expect Facebook to drive more traffic towards you.

GamesBeat: So you just passed 100 employees, right?

Walcott: We did. We’re all about celebrating milestones. Back in September, we had our one-million-DAU milestone. It was a goal we set for the entire company back in early 2011. When we hit it in September, we hired a mariachi band to come to the office, and we announced that we were taking the entire company and their families to Mexico. Literally, the entire company.

It was nuts. I’m sure we violated some rules about not having all the executives on one flight, but what are you going to do? It’s a reward to the employees, it makes them very happy, and it’s a reward to the folks who have to suffer the most for all their hard work: their spouses and their families. They get to realize, wow, this is a cool company you work for. They’re excited to be a part of it.

And just the other day, last week, we hired our hundredth employee. He’ll soon be an incredible mobile developer. His name is Brian Gershon. And so around the office, we had a bunch of posters made up that were puns on his name. Instead of Independence Day, it was IndeGershon Day [laughs].

We had 10 other posters like that. We hired the Ben & Jerry’s ice cream truck to hang out by the office. All of our employees got free ice cream cones and so did the entire neighborhood in Pioneer Square where we work.

The cool part about that was, again…how do you make your employees proud of who they work for? A lot of employees were getting texts and calls from their friends saying, hey, I just read about you guys on GeekWire that you’re doing this. It all makes us a fun place to work.

We have 50 positions open right now, and we’re continuing to hire. Today we have a good mobile product, but we need to make it a better mobile product. It has eight different slot machines on it, but our goal is to make it mimic the entire application we have on Facebook. It just requires time and development.

GamesBeat: That’s where the big investment is going?

Walcott: Yeah, it’s going towards mobile. Well, it’s going across the board. We’re literally hiring in every division. But as you would expect of a Facebook gaming company, we’re focusing on development, and in particular, on mobile development.