Nearly every week I read Poker Scout’s industry analysis and they triumph more and more growth. This month was better than last month and year over year the industry is growing at an amazing pace . . . but is it?
One of the big disadvantages we have in viewing the overall poker market is that every company that was publicly listed left the US market leaving only private companies competing for the American player base. So, we end up missing some very key data points when we are on the outside looking in. For instance, how much of the player growth is coming from the US market vs. international markets?
Nearly all the European operators are reporting very disappointing numbers in their poker products while Poker Scout claims the industry continues to expand.
PartyGaming reported overall revenues across all of their products was down 6.5%
CEO Jim Ryan attributed the drop to two key factors: the economy and the tough competition in the online poker market.
888 has seen poker revenue drop 35% in the first half of 2009. 888 attributes the decline to currency movements and the overall economic downturn.
I could keep on posting disappointing financial results from various poker sites but let’s just assume that most of the publicly traded companies where we can get a peek into their performance are reporting poor numbers. The only exception seems to be iPoker which is currently the third largest poker site and the largest poker network.
So, what exactly am I saying? Well, there are several different KPI’s (key performance indicators) that you can measure a poker room on. The one that Poker Scout and many in the industry focus on is the number of active players as counted by Poker Scout. But what does that really tell us about those players? Nothing. All of those players could be sitting at micro-limit tables folding every hand and never seeing a flop (thus no rake collected).
In fact, sites that run bad beat jackpots that have grown very large know this phenomenon well when they see their overall player numbers jump through the roof but revenues stay either flat or fall because everyone is jumping down to the lowest limit tables and playing as many tables as possible to increase their chances of winning the bad beat jackpot. Players have no incentive to play hands that won’t qualify for the bad beat jackpot so the number of raked hands (another KPI) and rake per raked hand (another KPI) falls.
Another important KPI to measure is your customer lifetime value (LTV). Your LTV, in theory, should be lower than your cost to acquire each customer (Cost of Acquisition – COA). That should make perfect sense to people. You can’t spend $100 to acquire a customer that only yields $50 in revenue. Or can you?
So here’s the part where I have my doubts about the online poker market being as healthy as sites like Poker Scout claim. It’s a well known secret within the industry that some of the companies still operating in the US are paying more to acquire European, LatAm, and Asian customers than the average LTV for a player in that market. They’re using the huge US LTV’s to finance the LTV/CoA gap in Europe and elsewhere.
Way back in the day, before anyone could ever imagine the crash of the dotcom bubble an industry colleague Rob Tercek who ran Sony’s online division told a panel “I could stand out on Hollywood Blvd and hand out hundred dollar bills and that would make me very popular. Unfortunately, it’s not much of a business model.” Of course, he was talking about all of the companies in the online entertainment space who were generating little or no revenue and were funding all of their projects with investor money. What they were doing was buying customers with little regard as to whether or not they could ever recover their costs.
Today things are a little different than they were during the dotcom glory days. I think there’s actually a strategy to overpaying for customers. More and more smaller poker rooms are finding themselves unable to compete in markets they previously owned. The US facing poker rooms are coming in and buying up all of the media and dangling juicy carrots in front of the affiliates in those markets. The smaller poker rooms who used to enjoy a comfortable position in that market are now in the position of having to pay more than the LTV of the customer or get out of the way.
That’s why you hear people like Party’s Jim Ryan constantly telling investors about the “tough competition” in the poker market as the reason for the declining revenues despite the fact that Poker Scout is reporting massive industry growth.
So how do you make money buying high and selling low? Just like Walmart. You squeeze the competition out of the market and then when you own that market you can change the value proposition to something allowing you to make a profit. In other words, it’s better to go in and shock and awe your competition into surrendering now incurring losses than to try to beat them over a longer period while turning a profit. If you can gain an insurmountable lead today the net cost of getting and maintaining that lead will be lower than fighting a protracted battle.
As an example, let’s say you are the leading poker room in Fantasy Land. You have a great brand in Fantasy Land and you’ve enjoyed several years of very minor competition. Suddenly a big US facing poker room comes to Fantasy Land and starts pumping money into all the media outlets. They fill the schedule with branded poker shows, put big splashy ads in all the relevant magazines, and offer your affiliates special deals that net them far more than you can afford to pay. They might even start raiding your best staff offering them substantial pay increases to jump ship. What are you going to do? They’re using the hundreds of millions they’re making in the US to fund the battle while you’re paying for it out of the profits you can make in only your market.
And as they eat more and more into your player base, your player numbers, and your profitability you eventually have to concede you can’t compete with them in a war of attrition. You can’t match their media spending. You can’t match their affiliate payouts.
Many rooms react to this threat by trying to hold onto their highest raking players. They invest everything into special rakeback or sponsorship deals. But this is just delaying the inevitable. Because they’re not marketing to new players and while they might be lengthening the attrition rate of some players the lack of new players will eventually catch up to them and even getting a huge rakeback deal or being sponsored won’t compensate players for the lack of fish.
Eventually the poker room concedes the market to the US facing poker site as it licks its wounds and tries to go after some other market that hasn’t caught the eye of the US poker rooms yet.
And that’s exactly the story the Poker Scout numbers tell us. The big keep getting bigger and the small get smaller. But let’s not assume that bigger means more profitable. Let’s not assume that the value of a US customer is the same as someone from Belarus. Rather than fixating over how quickly the number of players is increasing we should also look at where that growth is coming from and what value it has. That’s a far more accurate way to measure the health of the poker industry.
As I wrote in the post When is a Met Guarantee Still an Overlay? things are not always what they seem in the poker world. When you dig past the top layer of data you often come to a conclusion that is directly opposed to what the top level data told you.
Right now despite the rosy picture being painted by Poker Scout the market is tougher than it has ever been. More and more you’re going to see smaller online poker rooms give up. Even today, many are only scraping by.
You’re going to see companies like Party and 888 investing heavily in their casino and other non-poker businesses where many US facing companies have no presence. Since they can’t fight he battle head-on they’re going to pick their spots more carefully and try to avoid direct confrontations.
That might all sound a bit doom and gloomy but it’s not necessarily a bad thing. Eliminating the fly-by-night poker rooms and spammers is a good thing. It might also be good because hopefully it will inspire some innovative thinking. No longer will poker rooms be able to sit back and follow the ABC model to profits. If they want to have any hope of surviving they’re going to need to look under new rocks to find customers. They’re going to need to figure out more cost efficient ways of reaching out to players rather than relying on affiliates and cookie-cutter promotions. In other words, they’re actually going to have to fight for your business and that’s not a bad thing.
photocred to db*photography
About 30-40% of the whole net revenue of these operators usually comes from casino gambling (around 70% casino and poker, the rest sportsbetting, bingo etc.).
If you take a look at 888s AWFUL casino software, including sites that dont open and slotgames that look like 1995, to me it seems pretty obvious why they lost so much of their player base.
The whole company seems to be much too focused on that Dragonfish thing. I mean, B2B is of course a good thing, but 888 should then probably think about closing their unrentable loss-making brands and either concentrate on penetrating other markets with their business to business stuff.
just my two cents…
online poker will do fine for sure. even too many poker sites are on the rise, the number of online poker players are increasing as well.
When I was in law school, I remember we went over a famous white collar case where a criminal made a ton of money by stealing the fractions of a cent in computerized transactions.
No, that was actually the plot to the Superman movie with Richard Pryor.
Hi Dudek:
Yes, I do know that the paid reports show game breakdowns. I have seen those reports. Unfortunately that is a paid service and PS seems to only write their weekly reports based on the more general total number of players.
Bill
Hi Bill,
Very good article.
It should be noted that PokerScout breaks down player data by stakes and game types. Perhaps you could get this information from them to test your hypothesis that while there may be more players, they are playing at lower stakes and therefore generating less revenue per player.
Several years ago I was of the opinion (like many others) that there would be consolidation. This has indeed happened with smaller sites merging or being swallowed up by larger sites/networks. But it is true that the two large US facing sites have experienced explosive growth, on the back of effective marketing, and , frankly, because they offer a superior product.
Economy of scale was always going to be a key factor, as there are huge advantages to having a large player pool.
I can tell you another problem with the online sites and their future revenues: confidence in the legitimacy of the games. Everyone knows about the Absolute Poker and Ultimate Bet nonsense. And anyone who looked at the report from the recent “investigation” of the Ultimate Bet cheating scandal cannot have any confidence in the future of oversight. In those cases, the big games were ripped off and people complained because and spent them time going over the hand histories because there was a lot of money involved. I personally believe that there is a ton of cheating on a smaller scale, where the money is insignificant on its face but over time really adds up. Really, if I complained that I ripped of in an $11 sit-and-go, would anyone give a damn? No, of course not. That is why I do not play online poker for anything more than $1 sit and go for games I cannot play in a brick and mortar, i.e. razz, 2-7 lowball, stud, etc.
I should be a guy that online rooms are raking a nice chunk of change from a year, and they are not because I have no trust in them. It is not really the bad beats, but it is the decision-making in the hands that end up in bad beats, decisions that I have never seen, not once, in nearly 20 years of live play. For example, I am playing an $11 (or so) 10 person NLHE sit and go on a certain site about a year or so ago. We are down to 3 handed, all about even in chips. Top 2 get paid. I raise from the small blind with AdQd. Other two call. Flop comes three diamonds, only one I really recall is the 9 of diamonds. Small blind goes all-in immediately. With the nuts, I of course go all-in as well, and the button calls. They both turn over Q-9. As you can see, 3 queens are out and 3 nines are out. Only way I can lose is if turn and river are the case Q and case 9. And, of course, that is exactly what happens. They chop, and I am out. I watch the heads up, first hand there is a quick all-in and a call, both with garbage, one wins, and the tourney is over. I sat there stunned. Now, there is a case, albeit a small one, for the small blind shoving with a pair. There is no one one the planet that would fold in my position, holding the nut flush after the flop. There is absolutely NO case for the 3rd player calling. None. 2 get paid, and since the other 2 are about even at the end of the hand you are either going to end up making second and getting paid or the 3rd player left is going to be so short you will still almost assuredly get paid. The only way the 3rd “player” calls is if he knows the Q and the 9 are coming.
When I was in law school, I remember we went over a famous white collar case where a criminal made a ton of money by stealing the fractions of a cent in computerized transactions. To me, this feels like the same thing. The online poker sites, with so many low dollar sit and gos, can throw two bots in on certain games, make them win, and keep the entire $100 in play. And they only have to do it in a fraction of the high number of sit and gos they run daily, and the money will add up real fast. Sure it is not as quick as ripping off the big cash games, but, like i said earlier, who would listen to me complain about being ripped of $11? No one, and I would be ridiculed for even making the complaint. Plus, you can keep a scam like this going on for a long time by only taking a small portions of the games and making it so that everyone wins from time to time, just enough to keep them coming back and to say if they complain, “Are you also complaining that the ones you won were fixed too?”
I am convinced that something like what I explained above is going on, which is why I won’t put money into an online site. I would rather lose my money the old fashioned way, by knowing what the guy racking up my chips looks like.
@Yorkshire: Not sure what you mean about to be cracked. Setting up a poker room isn’t an overnight business. You have get a lot of things in place including hiring the staff to run it, payment processing, advertising and affiliates, etc, etc, etc. It sounds like Harrah’s is getting the ball rolling so everything is in place when/if the laws change.
It’s a relatively small investment for them to be 100% ready to take on US traffic if legalization comes and a horrible mistake for them to wait until everything is certain and then try to scramble to get ready.
That’s a pitty to see 777 with 39% drop.
Thanks for this Bill, very thought provoking indeed.
I can see a lot of the smaller networks consolodating and joining forces to take on the likes of Stars and Full Tilt otherwise we’ll have another load of Eurolinx type stories hitting the forums in the next year or so.
ON a slight tangent, do you reads anything into the Harrahs/888 deal? Could they UIGEA be about to be cracked?
@viktor: Technically, it’s always been the key. It’s just that it was so easy to mint money up to this point that nobody’s tried it. 🙂
@James: I don’t think there’s one reason. I think there are multiple reasons. One of them could be as you say but how would that explain continued growth in players at Stars and iPoker where rakeback isn’t allowed or even at Tilt which authorizes one of the lowest rakeback deals available?
So, I think that might be a factor some some players but certainly not the entire story. That might take a whole other post 🙂
Bill. Do you think the drop in profits for both party and 888 could be because players have become more savvy about rakeback and those rooms don’t offer it?