Well, it looks like eGaming Review has yet another online poker room saying that rakeback is bad for the business. The only problem is, I really don’t think his argument makes a whole lot of sense.
Danny Frishman, head of PlayTech (iPoker Network) had this to say, “Giving players linear percentages from the rake they are generating creates a price war, reduces the bottom line to a minimum and does not incentivise loyalty. It is killing the industry by taking money from developing better platforms and promotion.”
This is a fundamental misunderstanding of how businesses operate. First off, if the reason that rakeback [what is rakeback?] shouldn’t be offered to players is that it might reduce the bottom line then someone needs to examine whether the pricing model reflects the current market conditions.
Plus, it actually doesn’t reduce the bottom line. It was the poker operators that stupidly came up with an affiliate compensation system that gives affiliates a linear percentage of the rake. All rakeback is is the player getting the money instead of the affiliate. How does that reduce the bottom line if the poker operator was going to pay an affiliate the same amount anyway?
As I’ve said several times before, the problem with rakeback is that licensees within a network are incentivized to steal customers from each other. But that could be fixed if one were to penalize cross-room acquisitions. It’s a very simple fix. Just pay a room that acquires a player that already has an account on the network a drastically lower payout than for bringing in a new customer. Then they can’t offer rakeback. And the payout is so low that it incentivizes a room to acquire new customers rather than steal customers from competitors on the same network.
He went on to say, “Maybe it’s better for these players to leave more of this money for the industry to invest in penetrating new markets and getting new players, because those grinders that generate so much rake and get it back will then be making much more money from winning from other players than they actually make from rakeback. So it’s also in those players’ interest that poker keeps recruiting a lot of new faces.”
Players should forego rakeback or other monies so the rooms can invest in bringing in new players? I’m not even sure what to say about that statement.
It’s sort of the chicken and the egg scenario. Players aren’t going to willingly fund new player acquisition until they see that PlayTech can deliver the fish. That was one of the things Party used to have going for it back in the day. They spent so much on advertising and promotions that the fish pool was always stocked and players could make a lot more money than they could playing at a site with a bunch of rocks trying to get rakeback. But, truthfully, I don’t think the iPoker network is so fishy that it’s +EV for a player to give forego rakeback to play there.
And to be honest, I really don’t buy into this whole argument that rakeback is hurting the industry. PlayTech’s revenues were up 70% from a year ago. They’re obviously making money hand over fist. They’re the third largest poker operator. They could fund massive customer acquisition campaigns if they wanted to. There’s simply no reason for them to expect that players should be the ones who front the bill for building PlayTech’s business. Or if they’re so concerned about licensees having enough money to do promotions then cut the fees that PlayTech charges. I mean, that’s one of the biggest expenses a poker room has so if what’s killing the industry is the money not being spent on promoting new player acquisition then simply cut your fees so the rooms have more to spend.
The market is simply far too competitive these days to not offer rakeback or other player compensation schemes. Even when these poker rooms supposedly clamp down on rakeback they end up giving the money back in loyalty programs anyway. What’s so different between Party’s 40% rakeback equivalent loyalty program and getting 40% rakeback from a room that openly offers it? There’s no major difference. It’s just semantics.
Photocred to alainelorza
Hi David,
Yes, I did say “one of the biggest” which means that there can be bigger fees. 🙂
I was being somewhat sarcastic though since PlayTech thinks players should eat the fees of recruiting new players while they report huge profits.
But in the end, it’s somewhat of a bizarre argument to make. If the player came in via an affiliate then the licensee makes no more or less money if rakeback is being paid. The whole idea behind rakeback is that the room pays out 35% to an affiliate and the affiliate gives 32 or 33% back to the player. No money is saved by not saved having rakeback.
The problem for the networks is that they sign up some rouge licensee who decides that rather than investing in promotions and marketing, they try to steal customers from other licensees on the network. But that’s a 100% predictable behavior based on the current compensation system. And there are multiple ways the network could guard against it.
Let’s face it. Catching these licensees is pretty easy. The networks don’t do it though. Instead they declare all rakeback bad and try to scare their licensees into complying with the network rules. But this is big business. There are literally millions of dollars on the line so the hand slap $25K penalties for violators is a joke.
And even if you do go through the whole network licensee warning and punishment process and kick them off the network . . . they still have all the contact info for all of those customers! They just move them to a new network and keep raking in the profits.
The bottom line is that nobody is going to be able to stop rakeback. Networks that tie the hands of their operators are simply facilitating their own eventual doom. It’s a much better solution to prevent the thing that does make rakeback bad on a network which is the cannibalization.
Bill
Hey Bill,
You wrote that the network fee is one ofthe biggest costs for an operator. That is not true. Networks take less of your revenues than affiliates. I thought you knew that?
d
Are you a rakeback affiliate? I don’t know many rakeback affiliates who don’t offer high percentage under the table deals on ipoker, ongame etc. Most sites are smart enough to let affiliates do their dirty work and not offer rakeback directly themselves. What do you think of the cake style, one rakeback account per network, solution? The only problem with cake doing it is that they now have loads of exclusive tables on the skins that cannot be accessed from other skins, so players might want to change skins for legit reasons. It could work for other networks though, and ipoker could do a, one vip account per network, system.
Well, a big part of the rakeback problem doesn’t have anything to do with rakeback affiliates so that’s where I think the hole in the solution is. Right now they’re saying that nobody can offer rakeback. So anybody who is getting rakeback on iPoker probably isn’t going through an affiliate. They’re going directly to players and offering them juicy rakeback deals off the books.
It’s hard to police because the player has no incentive to rat out the room trying to recruit him and even if he does report the room to his favorite site all they can do is complain to the network who will ask the offending site what happened and they’ll claim that the reporting site just has a grudge.
Your suggestion really won’t stop that. That’s because it’s usually going to be much cheaper to steal high-raking customers and take a very small percentage of the revenue than it is to spend money on marketing. The only thing that stops this behavior is to make it fantastically unprofitable to do so. You remove the incentive by paying the room a much lower payout on players who already have accounts on the network. Then there isn’t any huge incentive to steal. It’s more profitable for them to concentrate on bringing in fresh, new players.
It doesn’t provide an incentive to not steal players, but it means that the poker sites will have to be imaginative enough to find a way to do it themselves, rather than simply relying on offering affiliates higher percentages, knowing full well that the extra money will be offered to customers. It’d make the sites work on customer satisfaction, making our jobs easier and retention better, and get rid of the current cut throat rakeback culture.
@James: Your idea is valid but it doesn’t really provide a incentive not to steal customers from competing sites on the same network. Then again, neither does the status quo or the William Hill/PlayTech solutions.
I’m sorry if i’m being far too simplistic, but wouldn’t the answer be for the networks to limit the amount of mgr that rooms can pay, rather than the onus always being put onto the affiliate. For example, if boss told it’s rooms that they could only offer affiliates 30% rakeback plus 15% gross for the affiliate, if the affiliate then chose to offer extra and make next to nothing, that’d be their call, and they wouldn’t last in the business for too long due to lack of earnings. In all honesty, when a room gives me 70%+ gross, of course i’m going to offer my customers extra incentives because i can, and still make a decent amount of profit.
** Edited to remove spammy link.
Yes, but I have also written that there are ways you can provide rakeback and discourage player migration which are totally in the powers of the network that they choose not to employ.
” the problem with rakeback is that licensees within a network are incentivized to steal customers from each other”
That’s what he just said, Bill. You misunderstand his comments. Rankeback hurts the bottom line of cardrooms. This is obvious and does not have anything to do with affiliate compensation.
Frishman’s comments are right on the money, and really nearly impossible to disagree with. Rakeback “reduces the bottom line to a minimum and does not incentivise loyalty.” Rakeback incentivises migration, and you have even written this yourself.