A Swing and a Miss AKA Bodog Network’s Rakeback Solution

So, tell me if this sounds like a good business model: The more money you spend with us the less we value your business.

If that sounds counterintuitive it’s because it is. It’s also the reason that Bodog Network’s supposed solution to the rakeback issue has me scratching my head.

According to eGaming Review:

Losing, casual players are the type of players poker networks want, but Odman says “the way the rake is currently split, winning players get a (too) large proportion of the rake” and skins on the network end up having to slash their margins to put the rakeback deals on the table needed to attract high-raking, winning players. This progressively erodes the money left in sites’ marketing budgets to spend on attracting losing, casual players, starving networks of the liquidity they need to grow in a sustainable manner.

Odman says his company will address this by allowing “operators who bring in losing players to make significantly more money than today. This will encourage them to market their poker product even more. Winning players, on the other hand, will be worth so little that there is no point competing for them”.

Odman added: “The new system will create a much better poker economy for all: operators, affiliates, and poker players”.

Sorry for the aggressive quoting but I think this sounds so bizarre that I wasn’t sure I could paraphrase it without losing something in the translation.

Anyway, Odman being quoted above is Jonas Odman the vice president of Bodog Network.

So, according to this strategy if you’re a high-raking winning player Bodog Network suggests that you are less valuable to them than the fish.

I sort of get the idea. Believe me, this is a concept that gets kicked around quite a bit within online poker companies. Basically you have net depositors and net redeemers (withdrawers). The net depositors are your losing players and it should come as no shocker that net redeemers are winning players.

Net redeemers extract value from the poker economy / ecosystem. Every dollar they withdraw is money no longer circulating in the poker economy of that site. But, as one might imagine, they generate lots of rake for the poker room and they also create liquidity because they usually multi-table for many hours every month.

Therein lies the problem. Most smaller rooms – like the ones who might be on a network – rely heavily on their high-raking winning players. Those are the bread and butter of the small poker rooms. If Bodog is going to make winning players “worth so little that there is no point competing for them” no matter how much Bodog thinks they can kick back to the licensee for marketing to more fish it’s not going to be enough.

Believe me, if smaller operators knew how to acquire net depositors in a cost effective manner they wouldn’t be falling all over themselves trying to snag high-raking winning players. I mean, most rooms are only making razor thin margins on these guys anyway. By the time you factor in network fees, rakeback (or under the table deal), bonuses, etc most network licensees are only seeing 5% – 10% of the rake generated. Hell, some are probably losing money on the deal (which often happens at rooms where territory/affiliate managers can cut deals but don’t have direct P&L responsibility so they strike deals that make their numbers look good but the site loses money).

So exactly how much of a haircut are they going to put on the winning players’ rake that they’ll discourage sites already only making 5%?

Or maybe they’re hoping that by paying out extra on losing players that the rooms will go after those players. That sounds good in theory but I’m not so sure it works well in practice. Like I said, if the sites knew how to do this they wouldn’t be stealing customers from each other.

One of the reasons it’s difficult is let’s say you get an uber-fish. He makes a deposit for $100 and gets pocket aces his first hand. He shoves and gets sucked out on. How much rake did that hand just generate? Maybe $3 (with a capped rake of $3).

On the other hand if you land someone semi-skilled they might deposit the same $100 and win another $100. But they likely generated far more than $3 in rake in doing so.

One could argue that that is a very unfair comparison but the vast majority of new customers are one-deposit wonders. They make a single deposit (usually the minimum) and the site never sees them again once they lose that money. Granted they don’t all lose it in one hand but they don’t tend to generate a lot of rake either.

So what Bodog is proposing is that the site put all its efforts into recruiting players where over 50% are never going to make a second deposit and if they do and eventually become winning players, Bodog is going to reduce your payout so drastically as to make the player worthless.

Overall, I think it’s a creative solution but fails in the sense that it is addressing the wrong problem. Some of the theory behind it is actually where poker rooms might go in the future but it will be to limit the cost of affiliate programs not to stop rakeback.

The problem with network rakeback has nothing to do with the value of the players. It has to do with rooms stealing players from each other. The solution to that problem is not to penalize a room for having winning players but to penalize them for stealing each other’s players. And this solution doesn’t really do that.

Believe me, Ongame has zero problem with a licensee stealing customers from an iPoker licensee. Are Stars and Tilt crying about the consolidation going on in the industry where players are leaving smaller network sites and playing on their site? No.

I don’t want anyone to get the impression that I’m unaware that winning players extract value out of the system. They do. But poker is a zero sum game (disregarding rake). If you attack today’s sharks then someone else simply rises up the food chain and becomes a shark. You will always have winning players and losing players unless all players are evenly skilled and then they just churn each other so that they all go broke to the rake.

The problem comes in when it’s more profitable for me to steal a player from another skin on the same network than it is for me to build a healthy poker ecosystem. On a network today, only a sucker would pay the high acquisition costs to bring in fish when they can simply steal high-raking customers from other skins on the same network and let them feast on the customers of the sucker who is spending the money to bring in the fish.

The way you make it less profitable to steal customers from other skins is to penalize that behavior. Bodog thinks it’s doing that by lowering the value of the winning players but it’s not really an optimal solution compared to other possible solutions.

For instance, why wouldn’t you just build a system that looks for unnatural player migration patterns? If you can write software that raises a red flag for chip dumping it shouldn’t be too difficult to write a program that identifies rooms that are just a little too successful at luring customers away from other rooms on the same network. Unlike the individual room who has no idea where their player went, the network operator knows when Bill Rini closes his account on Site A and starts playing on Site B.

Or, what if you lowered the payout to the acquiring room when a player transferred to another skin on the network such that almost any deal being offered would be unprofitable for the acquiring room? Granted, some people do switch rooms for legitimate reasons but let’s just take a look at an example of how this could work.

Scenario A: Network that has zero tolerance policy on rakeback.

Player switches from Room A to Room B

Room A has a loyalty program that equals approx 35% rakeback. Room B is offering a loyalty program that is equivalent to 40%.

At the end of the month you pay Room B 40% of the normal rate minus any bonus expenses that were available to all customers so they can break even on the loyalty program.

Month two you pay 45% and month three you pay 50% and so on and so on so that anybody who is stealing customers maliciously will have such a long break even on their investment that it will be unprofitable for them to do so because the player always has the option of leaving the network altogether.

Scenario B: Network that allows rooms to offer rakeback

Similar to Scenario A except you would simply publish a maximum rakeback percentage allowed by any room on the network. Let’s say you set the limit at 50%.

At the end of month one you pay Room B 50% of the normal rate, 55% in month two, etc, etc. Subtract bonus expenses and voila you basically have Scenario A but with rakeback.

Some might note that affiliate and other expenses haven’t been factored in but that’s as easy to add in as the bonus costs. Basically your aim is to leave zero profit for the acquiring poker room until they’ve established a long-term relationship with the customer.

Others might ask what impact this will have on bonus whoring across a network and at the risk of being bombarded with scorching emails and comments from bonus whores . . . bonus whores are unprofitable customers to being with. Most of the sites that don’t ban or penalize bonus whoring lack the sophistication to catch them.

So where does the rake that’s not paid out go? Well, one option might be to give it to the room losing the customer as compensation for having developed the customer initially. Another option might be to put it into a bonus pool that is paid out to skins that bring in the most fish. Where the money goes is far less important than establishing a system that penalizes behavior that harms the network.

No matter how you slice and dice this up these sorts of proposals do a far better job at promoting a healthy poker ecosystem than does penalizing people for being good at poker. The good players can still get paid appropriately and rooms that steal players from other rooms on the same network are penalized. And since the player theft is the problem that everyone is trying to avoid . . . that pretty much removes the problem.

I don’t want this post to sound like I’m attacking Bodog Network though. I actually applaud them for trying to come up with a creative solution. Unfortunately, I just don’t think it will produce the result they are hoping for. They’ve been claiming that they’ve come up with the ultimate rakeback solution when all this does is provide an alternate set of incentives that might actually produce a set of unintended consequences that they don’t fully realize.