The Online Poker Industry’s Love Hate Relationship With Rakeback

There’s probably no single topic that divides the online poker industry more than rakeback [what is rakeback?].  Seriously, in many companies rakeback is a dirty word.  At one company I know it’s jokingly referred to as “The Unmentionable” by the poker staff because to even say the word rakeback generates a negative Pavlovian response within the organization.

Other sites publicly denounce rakeback but then offer promotions and/or bonuses that essentially amount to rakeback.  They might call it value, or commission, or fee but it’s still rewarding players for generating rake.

And lastly you have the rooms that use rakeback aggressively to acquire and retain players.   For them it’s a tool they use in order to compete against better-funded poker rooms that can buy up all the media in a market and shut them out of traditional marketing channels.

The affiliates are also in a similar battle over rakeback.  Traditional affiliates detest rakeback.  They spend a lot of money creating valuable content that they might not otherwise be able to produce if they had to give the lion’s share of their affiliate fees back to the players.

On the other end of the spectrum you have the rakeback affiliates who don’t mind working on slim margins because they can still make money on the sheer volume of players.  Also most rakeback affiliates don’t create expensive content (tournament coverage, actual journalists, etc) so they operate with far less overhead than the traditional affiliates.

Who are we forgetting here?  Oh yes, the players.  The players are a little less divided.  Either they know about rakeback and love it or they have no idea what it is and probably don’t even care.

Can’t we all just get along?

In reality, almost everyone has a valid argument.  The problem is that the online poker industry hasn’t really grasped the fact that one size doesn’t fit all.

A rakeback affiliate and a traditional affiliate provide two completely different types of functions.  A large poker news site is likely to have tons of content that rates highly in search engines and will attract newer players when they search for certain keywords or follow a link sent to them by a friend.  Yes, hardcore poker players also use their content but most don’t click on the affiliate links.

But the rakeback affiliate is also providing a function.  The rakeback affiliate is catering to a more sophisticated poker player.  The rakeback affiliate aggregates valuable (higher raking) players and provides them with customer support, specialized promotions (rake races, etc), and serves as a single interface for the poker room.

So on one side you have the traditional affiliate who can send a large volume of players but the traditional affiliate normally doesn’t even know who they are nor do they tend to have any sort of ongoing relationship with them.  On the other side you have the rakeback affiliate who sends fewer players but knows all of the players they send (to the degree that they have their contact info and pay them every month) and maintain an ongoing relationship with them.

Unfortunately, most poker rooms offer only one model of compensation.  Send us players and we give you a cut of the rake.

And the poker rooms are stuck in the middle.  They don’t want to anger their traditional affiliates by condoning rakeback but they don’t want to lose their best customers to competitors that do allow it.

And because there is no simple answer, poker rooms either take a hostile stance, shamelessly offer rakeback to anybody who asks, or try a middle ground that ends up being so convoluted that even David Sklansky can’t work out the math of how their system works.

So what’s the answer?

I’m not sure I have an answer.  I have some thoughts but not necessarily an answer that will work across the board.   It’s a difficult problem because you have to raise the switching cost for the players while still keeping the affiliates happy.

One of the other major problems comes out of the fact that most of the existing affiliate models originated from a different era and are outdated in today’s current landscape.  The affiliate model was devised at a time when the US was essentially the only market, rakeback was unheard of, the poker player community was rather immature and unorganized, and most sites didn’t have the capital to conduct large media campaigns.

All of those parameters have changed since the inception of affiliate programs but the poker rooms have yet to evolve.  If anything they find themselves being in the uncomfortable position of providing a commodity service.

With online poker rooms receiving anywhere from 20% – 50% of their new sign-ups from affiliates and the old 80/20 rule whereby a small percentage of affiliates send the majority of the traffic, the online poker sites really don’t have the leverage to change things on their own.

But by the same token, the traditional affiliates are going to have to come to grips with the fact that a player who they sent to XYZ Poker two years ago when he was a newbie to poker who is now 18 tabling small stakes games and raking $15,000 a month wants some of that rake back.  If the affiliate doesn’t cut him a rakeback deal then he’ll quit playing on the site and go to one where a rakeback affiliate will give him a deal.  So they can either have 5% of $15,000 or 100% of $0.

To be fair, many affiliates have seen the writing on the wall and are making just such a change to their business model.  Many of the coaching sites and educational sites require that you link up your account with them with your account on the poker room so they can track your progress and pay you out bonuses and such.  Some of those sites have either already implemented or have discussed offering incremental rakeback whereby players start off with zero rakeback and either as a function of time or MGR are offered a higher and higher percentage.

That does seem to be the model that makes the most sense as both an affiliate and the poker room spend most of their money trying to acquire players.  Once the player is in the door the longer they remain a customer the more profitable they become.

So where does that leave blogs, news sites, and everybody else who doesn’t have a one on one relationship with their players?

Well, as I mentioned, the 80/20 (probably more like 90/10 in most cases) rule is in effect when it comes to affiliates.  The overwhelming majority of affiliates simply don’t send enough players.  From a business perspective it would make sense if they ended MGR deals for any affiliate not generating X number of signups per month and then putting in some stringent rules that took any incentives out of trying to scam the room on the CPA deals.

As for the upper 10% or 20%, I think the poker rooms should just buy them out.  I know that sounds crazy but over the long run it would likely be cheaper than paying them out as affiliates.  I mean, listen, I see a lot of these affiliates around Gibraltar, Malta, and at conferences and many of them are doing quite well.  If there’s that much money in the value chain then as long as you can buy the company for a reasonable price then it’s a good investment.

Another alternative would be for the poker rooms to force a rakeback scheme on the traditional affiliates either by policy or via offering so many bonuses that went against MGR that the net effect was the same for the player and the affiliate.

I know some larger affiliates who read that might gasp a bit but as rakeback becomes more widespread within the poker world the players are going to force their hand eventually anyway.  When player attrition rates (churn) start increasing most affiliates are going to have to make a choice between making up for that by pumping more new customers through the door or conceding that they have to split some of the profits with the players.

Well, technically, there’s another option which is for the affiliates to hit the poker rooms up for a larger percentage to compensate them for the higher churn rates but sooner or later they’ll reach a point where the poker rooms can’t pay them a large enough percentage to compensate them for the churn losses.  Plus there’s the fact that the poker room will likely take note of the lifetime value of the players being sent and put their own throttle on how much they are willing to pay for similar caliber players.

Like I said earlier, there aren’t any easy answers.  The industry is maturing and like it or not rakeback will likely be here with us for awhile.  Love it or hate it players are going to increasingly demand rakeback.  It should be interesting to see how the industry responds.

photocred to adam*b