What Online Poker Can Learn From The Dotcoms

The other night I was invited to get-together with some of my comrades from the old dotcom days.  It was good to catch up and see people I haven’t seen since HTML programmers with no formal education in software engineering thought nothing about asking for (and getting) $75K+ starting salary and a BMW signing bonus.

But it also forced me to reflect on the parallels between the old dotcom days and what’s going on in the poker world.  In many ways the similarities are not just striking but kick you in the junk striking.

For instance, I got involved in the dotcom craze back before people even called it dotcom.  Most companies barely had websites back then.  Nobody had cable or DSL because they either weren’t available or were so prohibitively expensive that most people surfed the cyberspace desert on a 9600 baud modem.

Somewhere along the way the venture capitalists got involved and they started throwing money at anything that involved “online.”  Soon this little niche industry started to go mainstream and it wasn’t long after that there were companies like Amazon, Yahoo, AOL, etc taking in millions upon millions of dollars.

You could go from doing bong-hits on your couch to multi-millionaire in months.  No idea was too absurd.  No business model was too retarded.  If you could sketch it on the back of a cocktail napkin you could probably find someone willing to give you $10 million.

But back around 1998 the bubble began to burst.  The venture capitalist money dried up almost overnight.  Companies that just months ago were hosting million dollar website launch parties and buying employees $700 office chairs were suddenly bankrupt (as they should be).

Many of the old, traditional companies had stayed mostly on the sidelines during the dotcom boom.    The dotcom folks called them dinosaurs and spoke of a world where these old-school companies would be mere memories that our children would learn about in history books.

But the old-school companies knew there was no long-term potential in spending $300 to acquire a customer that would only spend $100.  When the bubble burst they jumped in and cleaned up.  They bought dotcom companies for pennies on the dollar and/or launched their own websites having learned what not to do from all of the dotcoms.

Some dotcoms survived but most didn’t.  Darwinism weeded out the weak and only the best of the best dotcoms survived.  And the dotcoms no longer resembled dotcoms.  They got serious about cash flow, fulfilment, strategic planning, marketing, logistics, and all of the other stuff that they mocked the old-school dinosaurs for being too focused on.

In the end, the dinosaurs became more agile as they adopted the best practices that emerged from the dotcoms and the dotcoms that survived became more like the dinosaurs paying more attention to running a real business rather than pouring all of their available cash into Superbowl ads.

Black Friday was the online poker industry’s dotcom crash.  Technically, I guess the UIGEA was the real beginning but Black Friday has become the historical marker stone that most of us will, in coming years, define as the turning point.

The UIGEA started to weed out some of the stupid money.  The Reefer Pokers and other companies who had no unique selling points nor particular brilliance in running a poker room began to die off after the UIGEA.  Many others are in walking-dead mode hoping that some external event will save them from eventually having to shut their doors.

Black Friday was the other shoe to drop.  It put a massive, massive dent in the amount of stupid money being thrown around.  Full Tilt and PokerStars were the only two companies who had the cash flow to compete against each other while everyone else more or less just tried to stay out of their way.  Now with Tilt out of the picture and Stars unable to throw cash at the US market a lot of stupid money has dried up.

And just like the old dotcom days, the big dinosaurs are lumbering out of the jungle to come feast on the carcases left lying around after the Black Friday apocalypse.  The brick and mortar casinos are starting up free poker sites and placing big bets on legalized poker in the US.

Some of the online poker sites will make it through this but the dinosaurs, the brick and mortar casinos, will be playing a much bigger role in the future of online poker than anybody would have imagined a few years ago when the players and the industry just assumed that Stars and Tilt would continue to grow forever.

The new world order will not be run by companies flying by the seat of their pants.  Gambling will become a serious business just like it is in Vegas and Macau.  Instead of having some frat-boy running an online gaming site down in Costa Rica while snorting the profits off some prostitute’s breasts, you’ll need to have some serious business credentials under your belt before you can even get a gaming license.

The next phase in the business cycle is far more sober.

But being more sober doesn’t mean boring.  The industry will be just as fast and just as exciting as it is today but there will be a lot more people with grey hair running things.

Look at the dotcom industry.  Look at where things were back in 1998 – 2000 when the dotcom bubble burst and where things are today.  Internet usage has skyrocketed from 350 million users in 2000 to over 2 billion in 2011.  We are far more connected on our mobile phones, tablet computers, and other various always-connected devices than we were at the height of the dotcom boom.

What’s different is that that previously mentioned HTML programmer now makes $30K a year, you can get a website built on eLance for a couple hundred bucks instead of a couple hundred thousand, and most companies don’t blow all of their start-up cash financing a rock star lifestyle for the twenty-something CEO.

Online poker will make a similar transition.  Obviously, the growth will be less dramatic than the overall internet but as countries slowly come to grips with online gaming and how to regulate it the number of players will continue to grow in fits and starts.  Costs will come down as online poker sites realize that they don’t need to shell out such a large percentage of their profits to affiliates.  And the entire emphasis of the business will shift towards creating a long-term sustainable business.

In 10 or 20 years we’ll look back at this period and laugh.  It will be unimaginable that people used to Western Union cash to Panama to be picked up by some lady named Senorita Lopez, and this was considered a viable payment option to deposit money on an online poker site.    We’ll wonder in amazement at how people played on sites where the software was not regularly audited by a government approved third-party.

The next phase in the online poker industry business lifecycle will bring us debit cards linked directly to our online poker accounts and will be able to withdraw cash from our accounts at any ATM.  We’ll earn airline miles instead of FPP’s.  Your play will be continuously evaluated and you’ll receive promotions that apply specifically to the types of games you play, your average reload amount, and how often you play.

You’ll be able to walk into a McDonald’s and get a scratch off card with a chance to win a seat to a WPT or WSOP event.  Hell, it might even be the McDonald’s or Coca Cola WSOP just like we have Allstate Sugar Bowl and Tostitos Fiesta Bowl today.

There’s still a bright future ahead for online poker.  However it will take on a very different type of growth than how we got to where we are today.  Just like the dotcom crash did not spell the end of innovation in the online world, today’s issues will not be the end of growth in online poker.

 

24 thoughts on “What Online Poker Can Learn From The Dotcoms”

  1. I look forward to the day when our online poker accounts are linked to our ATM cards and we’ll be able to withdraw instantly on any machine. No more 2 weeks waiting time. That will be the day. Deposit and withdrawals through PayPal? I wait for that day too. Maybe it will take longer for these things to happen, but maybe that day will come soon.

  2. @Yoboo: Yes, but the reason they needed so many house bots was the lack of customers. Sort of the chicken and the egg. 🙂

    The bottom line was they didn’t have enough cash to finance a marketing campaign to bring in new players. The only people who were aware of them were rake-averse grinders who heard about it on 2+2. But even they didn’t want to play with no fish and so the site has slowly sunk into obscurity.

  3. “WSEX tried rake-free poker. Failed.”

    I should probably point out that the reason that WSEX failed was because the entire site was populated with house bots, and it was obvious to everyone.

  4. AMEN!!!
    Spot on Bill. Unfortunately most online rakeback grinders live in their own personal “Distortion Field”. Like the $1/2 grinders at a BM poker room they way over state their importance to the bottom line of the industry. Online and Live poker rooms make their money off of recreational players not the nits. Regardless what anyone thinks the industry was already headed towards consolidation pre-Black Friday with the MGM-Party, Harrahs-WSOP.com, Wynn-Pokerstars and FTP-Station deals already inked.
    When online poker returns to the US the rewards system will be more like TOTAL REWARDS than BLACK CARDS/SUPERNOVA ELITES.

  5. @Adam: You and a few other affiliates “get it” but the vast majority don’t. They really believe they’re building these poker rooms. Look no further than the PAL message boards when Full Tilt makes a tweak to their affiliate program. They’re up in arms talking about boycotting FTP, blah, blah, blah.

    I wrote a whole post about this back in Feb of 2010.

    http://www.billrini.com/2010/02/25/sky-falling-affiliates/

    Nothing that I said in that article has changed much.

    And I wrote the following waaaaay back in 2005 before I even worked in the industry. You know it’s bad when even as a player, people recognize that the affiliate model is massively flawed.

    What about marketing you say? I think most of the major online poker rooms have really screwed up the marketing aspect of the business. Yes, sites like Party have grown into massive cash cows but one could also argue that if they were smarter about it they would be even more profitable. Right now, the growth of the entire industry is helping mask the problems created by dotcom-like marketing schemes that rely mostly on giving away lots of money.

    Offering bonuses is an effective marketing tool. I’m sure the conversion rate for new players is much higher with bonuses than it is without. However, creating an environment where people are earning more on the bonuses than they are at the tables is fiscally irresponsible. Empire has over-reacted and is closing down accounts but a more effective strategy might have been to just create a system that only offer re-load bonuses to certain players. Bonus whores would not be on that list and would either move on themselves or would realize that the Party skins are so fishy that it’s in their best interest to suck it up and play there.

    Rakeback [what is rakeback?] is another area getting a lot of attention these days. It’s also another disaster created by the poker rooms themselves. On one side they’ve created a cottage industry of affiliates who expect to be paid for life on every player they bring in and on the other side you have players who are generating serious rake and want some of it back.

    It’s not going to be an easy problem to solve but I think the online poker rooms are going to need to eliminate the lifetime affiliate payouts. The acquisition costs are simply way too high. It would be far better for the poker rooms to channel those funds back into loyalty programs for players than trying to keep affiliates happy. I’m wouldn’t suggest cutting out all affiliate programs but perhaps a 6 or 12 month payout rather than lifetime would make more sense. For instance, let’s say XYZ Poker decides to pay out to affiliates for 6 months and then channel that into a loyalty program. Months 1 – 6 the affiliate gets 20% of the MGR. On month 7 the player is then eligable for getting part of his rake back. Here’s a sample tiered program:

    7 – 12 months as a customer OR $2000 a month in rake = 10% rakeback.

    12 – 18 months as a customer OR $5000 a month in rake = 15% rakeback.

    18+ months as a customer OR $10,000 a month in rake = 20% rakeback.

    These numbers are totally made up but they illustrate that the poker room can assure a lower churn rate by pumping this money they were paying to affiliates back into loyalty programs.

    Will the affiliates go for it? Not sure but once one major site does it, the rest will follow suit. It might mean some angry affiliates but how long were these guys really expecting to make a living off of simply getting people to use a referral code?

    And as much as bonus whores and affiliates hate hearing the above, I’m not advocating it, I’m predicting it. Businesses have certain pressures and the cold hard truth is that bonus whores cost poker rooms money and as poker becomes more and more mainstream (and perhaps even legal at some point) the value proposition offered by affiliates is going to decrease.

    http://www.billrini.com/2005/05/18/designing-the-perfect-online-poker-room/

  6. Good points all around. Continuing on that, it seems a bit disingenuous that as poker sites invest huge amounts of money in product improvements and offline marketing to attract fish, that they’d then have to shell out 40% or whatever of the yield increase on their current players to affiliates who sent those players long ago. That said the “player value” determinations for CPA’s in this industry are also ridiculous. Everything is geared towards how many hands someone plays at the table in the first few months after they join. This would seem to imply that if a site that’s just getting going receives 5,000 RMP’s from an affiliate who get their games jump started but maybe don’t play an absolute ton because of the lack of liquidity that this is somehow less valuable than sending 5,000 RMP’s to a site that has huge liquidity already. Not to mention that the poker sites that derive the most value out of new RMP’s are the ones who can least afford to shell out appropriate CPA’s for that value – hence all the 60% revenue sharing deals that seem to be out there.

    I think that if affiliate business is going to survive in the future US market, there will need to be some major studies done as to how to properly compensate them. Some traditional models just don’t seem to work, such as temporary rev shares (x% for the first 3 months they’re a customer). One time payments certainly seem the way to go, but managing that is awfully tough since 1) the lifetime of a customer is so insanely variable and 2) it’s so difficult to determine how much of your bottom line can actually be attributed to that player. Clearly lifetime revenue sharing SHOULD be out, given that all it has done to this point is encourage affiliates, skins, training sites and whomever else to try and bring in a bunch of nits.

  7. @Adam: I have run into situations numerous times where we wanted to offer a specific promotion or incentive to players but we couldn’t because players who came via affiliates on rev share deals would have made the promotion unprofitable for us.

    You simply can’t pay the affiliate 40% and give back serious value to the player. That is why the poker room with the most respected loyalty program, Stars, doesn’t do rev share and their CPA is one of the worst in the industry. They give that money back to the players because they have the money to give back to the players.

  8. My personal opinion is that Stars started offering large cash rewards because they knew it was to their advantage from a marketing perspective to have big and successful players regularly playing on their site. I’ve heard from inside sources at Stars that they actually lose money on most SuperNova Elites for example. These are their highest raking customers of course – they mostly generate several hundred thousand dollars a year in rake (based on the dealt method, which is controversial) and get most of that back in rewards, tournament buy ins and other gifts. On top of that, just about anyone raking that much is likely to be a huge winner. So factor in that they’re generally huge net withdrawers, AND PokerStars is paying them huge rewards on top of their winnings. From a revenue-generation perspective, these players add no value to PokerStars – they take away from the money pool, and they take away more than just about anyone else.

    What Stars gets out of these guys is loyalty and a ton of promotion. A lot of them are basically unpaid pro team members. They go to all the events wearing PokerStars gear, and the rest of the time hundreds or even thousands of players sit around railing their tables online. If some new beginner is going to get into online poker and he’s watching on TV all the time, what’s a better marketing too than having some friend of this guy tell him that the guy he’s watching on TV is playing all day long at PokerStars and that he can watch? Guy downloads the software and starts watching all these big ballers in the big games. Eventually he makes a deposit and starts playing, much lower of course. But SO many fish enter this way. I came in this way when I started with online poker. My first PokerStars download back in 2004 was to watch the WCOOP Main Event winding down because a big player we knew from another site was there. I’d never even thought about PokerStars before that. Their big events and big money games draw huge amounts of interest, and you’ve gotta keep all those players happy and loyal in order to have that constant marketing tool.

    I do believe that the US companies will offer very significant rewards programs, but it’s just not going to be what a lot of players are used to. There won’t be flat rakeback paid daily or monthly or whatever. There may be some cash rewards, but they’d almost certainly be bonuses you’d have to clear through play on the site. I’ve thought for years they’d focus on rewards that bring people into their casinos, such as free weekends with a suite at the hotel and a $100 gift certificate for betting at the casino or for using their spa or something like that. Buy ins to the big tournaments at their casino will be another, which again will serve as a means of getting others into those tournaments. They’re just going to be a lot more clever than the poker sites have been up to this point, because the poker sites up to this point have in some ways had to bend to a lot of unfair and generally kamikaze-like competitors who for a variety of reasons aren’t incentivized or aren’t funded to make good business decisions.

  9. But Stars, Party and FT all offer substantial loyalty rewards, including points (which is de facto rakeback) bonus offers and many other promotions.

  10. @Bill

    Thanks again for the reply. I really appreciate that you take your time to so.

    I strongly disagree that eToys had a healthy business model. And they definitely didn’t have excellent margins. I actually think eToys made several huge mistakes. For example spending ~$36M in marketing in 1999 and again in 2000. Amazon cut their expenses in the same period to ~$10M. But I digress.

    One thing missing in your analysis is the international perspective. Yes. Online poker is dead in the US (for now). But look at the world. When I log in at PokerStars there is still ~28k real money players online (~100k-200k total). Every day. Plus ~3.6k real money players in Italy and France. The “poker” dotcom bubble didn’t burst in Europe, South America, Australia etc.

    I think the industry needs change / regulation. External audits, safe payment methods, mainstream sponsors. You are right. And hope that it goes there. But the current problem are not made by the industry. It was not Full Tilts decision that they can’t accept bank wire, credit card. It’s not poker industries fault that McDonalds and Nike are not sponsoring poker tournaments. You say that “companies can become more innovative, more competitive etc.” after a catastrophic event. I disagree. They will be “more innovative, more competitive” because regulation will finally allow them to be that way.

    If it was just “lessons learned”. Then why are these “new, competitive companies” not already attacking the rest of the world? Why are they not offering already as of today that “better product” in Germany, South America, Russia?

    Btw. I agree with your conclusions on the affiliate market.

  11. @Ryan: You’re entitled to believe what you want but I’m just reporting what I’m hearing as feedback from people working for existing operators. Most people don’t want to deal with affiliates. They made sense back in 2000 but the vast, vast majority of affiliates are not worth the cost today.

    That doesn’t mean that there will be no PokerNews, PokerStrategy, Deuces Cracked, or other affiliates but if you think you can set up a review site or SEO the hell out of someone’s brand with terms like “WSOP bonus code” you’re going to be in for a surprise when nobody wants to buy your traffic.

    I really can’t address your examples because they’re based on hypotheticals I don’t believe will be true. I don’t believe any of the large land-based casinos will offer rakeback. They don’t need to. Just like PokerStars didn’t need to and just like Party didn’t need to (pre-UIGEA). Even Tilt only gave the worst rakeback percentage in the industry and did all sorts of financial wizardry on the backend in terms of recoverable costs so the real rakeback they were paying out was probably only around 15 – 20%.

    Your second example has been tried and has failed not just once but multiple times. WSEX tried rake-free poker. Failed. Many other sites have tried to offer insane amounts of rakeback and none of them became anything close to a market leader. Nobody wants to play on a site full of other rakeback grinders. You can’t even run break-even against a table full of nits with or without rake.

    IMHO, the fundamental misunderstanding is that you believe that I’m trying to win your business. If there is one thing that has been proven again, and again, and again, and again it’s that players go where the liquidity is. If MGM, Harrah’s, and the other big players are bringing in all of the fish the sharks will follow. It happened at Party, it’s happened at Stars, and it will continue to happen in a legislated US market. There’s no need to try to attract people with rakeback or offer some affiliate an insane percentage of your gross revenue in order for them to send you players who will come and play on your site anyway.

  12. Hey Bill,

    I took a look at your past articles and any others I could find on the subject here on your blog.

    I think you’re points about PokerStars and FullTilt and how they we’re changing the way they cut in affiliates was spot on.

    However, I don’t think that will apply to a fresh US market where everyone has to start from scratch. It took years and years of spending millions of dollars sponsoring shows, players, athletes, tournaments along with good luck like party poker withdrawing from the USA for those sites to establish their brand and dominance.

    Granted, most people will know the name MGM or Trump or WSOP but that doesn’t mean they are established as online rooms.

    I have to also refer back to your article about affiliates ingenuity in driving traffic through long term keywords, social media and other ways poker rooms even big ones like tilt and stars were unable to do in the past. No matter the budgets of the major casinos I don’t think they will bring the massive SEO team to the table that could accomplish what affiliates could.

    Here’s two scenarios that I hope showcase my point:

    1.) Brand A does not allow affiliates or offers them say 5% to 10% MGR and Brand B offers 30% MGR. No matter how much Brand A advertises on TV or sponsors players many people will end up Googling poker room reviews, strategy, bonuses, rakeback and Brand A will get torpedoed in all of those venues. If affiliates wanted to then between the thousands of sites they control they could demolish Brand A’s reputation. If affiliates got organized they could even “Santorum” Brand A and make their first result in the search engines be a negative thrashing.

    2.) Imagine one of the smaller casino’s like South Point Poker (who has already started a freeroll site giving away main event seats) decided to offer the same deal as Full Tilt use to have with 35% mgr and let you implement a 27% rakeback. Clearly South Point won’t have the mass marketing budget of an MGM, Harrah’s or Wynn. However, if they are the only one to offer a significant MGR to affiliates and or rakeback then they could be quickly turned into a market leader.

    Affiliates literally have thousands of media web-sites with followers and high rankings in Google whose sole reason for existing is to sign up poker players. sites that have exitsted for up to a decade and can dominate the SERPS compared to a new site no matter their budget. When you combine that with the long term player base who is going to be looking for the site with the best incentives and or rakeback then you have a duo who could seriously set the tone for where games are played.

    In conclusion, I think that if one or two rooms offer good deals to affiliates then the rest will have to get in line until the market leaders emerge. At that point I think you are right that affiliates will begin to get phased out but I think their is so much value as establishing yourself as the premiere brand in the US market that cutting affiliates out off the bat is too much of a risk. At least that’s my hope.

  13. @Palikari: I gotta disagree that all dotcoms with solid business models survived. I worked for eToys and we had a business model that was bringing in $300 million a year with excellent margins. eToys fell victim to a cash flow issue. They became over-extended building out fulfillment capacity that they had planned on paying for with a secondary stock offering. When the dotcom market imploded nobody wanted to touch them with a 10 foot pole and nobody was going to give them a dime. So, the cost of all of the growth commitments they made ate all of the cash flow and forced them into bankruptcy.

    You’re correct about it not being a direct analogy. But my post was not intended to prove a 100% correlation. There are huge similarities though. The ones I’m most focused on are the ones that demonstrate how companies can become even more innovative, more focused, and more competitive even after a catastrophic event.

    The online gaming market has simply gone through one phase and there are many phases ahead of it. Viewing the phases within the context of history gives us a better perspective on where we’re going next.

  14. @Adam Small: Thanks. I think you and I see eye to eye on a lot of issues and this is one of them. As a big player in the affiliate market it’s good to hear your perspective. Especially concerning high value vs. low value affiliates/websites. I couldn’t agree more.

  15. @Ryan: Thanks for the kind words.

    Unfortunately, I don’t think affiliates will play much of a role. I’ve spoken with a few people in the industry about this and it’s nearly unanimous from people who work for online poker sites that in a regulated US market there is little or no need for affiliates. Or if there is an affiliate market it will look a lot more like Amazon.com’s affiliate program rather than what we know affiliate programs in online gaming to be today.

    When affiliate program in gaming first started nobody was really making big money. Poker sites paid affiliates to do what they didn’t have the resources to do. In a regulated US market most of the players will be well-financed and thus would have no need to give away 40% – 60% of the MGR to affiliates for slapping banner ads on a website.

    There are a scant few affiliates who provide real value to the players and I think there’s room for them but the vast majority don’t provide value equal to what they’re paid. And I think that most poker rooms will just buy those affiliates that provide value and let the rest go.

    Here are some other posts I’ve written on the subject:

    http://www.billrini.com/2011/04/21/affiliates/

    http://www.billrini.com/2010/02/25/sky-falling-affiliates/

  16. Thank you for your reply.

    I think there is one big difference between the dotcom era and the current poker market.

    All companies with a healthy business plan survived the dotcom era. They are the big guns now: amazon, ebay, google, expedia etc.

    The companies that failed and crashed either ran their business badly and just burned through their venture capital or has no business plan in the first place that would ever work (kozmo, Flooz, digiscents etc.). Some companies because they came too early too.

    I don’t doubt that there are a lot of unsuccessful, doomed-to-fail businesses in the poker market. But the difference between the dotcom era and the pokermarket is that even the healthy ones (Stars, Party) get driven out of business in the US. The only reason why a competitor (like Harrahs or any other casino) will probably “clean up” after them is because they won’t be allowed back in. There is no analogy to this in the dotcom era.

    Where some dotcom businesses made idiotic business decision (“We’ll deliver a DVD and a bag of chips in under an hour to any household in this city at normal price with no delivery fee”) the iPoker market was forced to make those decisions (“Please send your money with Western Union to Senorita Lopez in Costa Rica.”)

    Anyway. Thanks for the reply! I’m a long time subscriber of your blog and enjoy it a lot.

  17. Bill,

    Excellent blog post – though that’s the norm for this blog. But this one I definitely enjoyed quite a bit. It seems that the vast majority of people who have been loosely or even tightly involved in the online gaming industry at this point are very set in some very incorrect ways. The % of people with new ideas has certainly gone up in the last 2 or 3 years, but it’s still low. Most of the people and companies in the industry are still only seeing the short term angles and are still thinking strictly in terms of how they can make as much money as possible without investing anything. We’ve been, up to this point, in an industry where very few companies do *anything* with their product to separate themselves from their competition.

    This is all obviously going to change as more and more countries regulate the industry, and particularly when the US is in play. The main factor is going to be, like you said, that the companies involved are going to have serious money to throw around on acquisitions and will be able to advertise in the mainstream. They won’t have to rely on a bunch of affiliates just trying to outplay each other with whatever new sleazy SEO scheme or incentive deal. I think we all agree that at least one of the main reasons, if not THE main reason, that FTP and Stars were so much bigger at the end than everyone else is that they were just all over mainstream marketing, to the extent they could be. Imagine how it will be for these big companies with well established international brands who don’t have to send people to a play money .net site or take deposits through fly-by-night processors.

    Regarding the 6th comment, I think it has the potential to be a good time for a really good poker-related website. As in a website that has genuine pull with its users and enthralling content. New online poker rooms will want to work with that type of site. But if anyone thinks that just any random dude will be able to sign up as an affiliate and make big commissions off SEO traffic or PMing people on 2+2 or whatever, they have another thing coming. These serious companies are going to be a lot more selective about their partners

  18. Hey Bill,

    Just stumbled on the blog for the first time, great stuff! I was wondering if you could elaborate either in these comments or in a different post about the role you think affiliates will play in the US market if poker is legalized.

    Here’s my thoughts:

    On-site traffic is king and players want to be where they can sit down and play there game of choice 24/7. Once one or two sites establish they have that traffic and market share other players will follow!

    I can’t tell you how many poker players I’ve heard over the years say the games are soft at Cake or Bodog or Doyle’s Room but I’m thinking of moving my roll over to stars/tilt because of the traffic and games available.

    If legislation passes, than all the big casino companies will literally be entering the real money market at the exact same time. It’s going to be an all out fight to try and establish market dominance and I think this should be very favorable for affiliates.

    I can’t say how many well backed casino companies will enter the market but it has to be at a minimum of 10 and only 3 or 4 at the most will be able to assert themselves as the major players.

    This leads me to think that they will be offering affiliates very good deals out of the gate. For instance, say MGM offers 35 or 40% mgr and Caesars is offering only 20% or a flat CPA. The deluge of additional traffic MGM will get from the thousands of affiliates would surely help them push out front as a market leader.

    I think you made some very valid points in this article about the long term picture for affiliates. That being said, I think it’s going to be so competitive between the major casino companies out of the gate that it might be the best time ever to be an affiliate.

  19. I liked your article. As a United States citizen living abroad and working for an online gaming company in Malta, I feel that it is only a matter of time until the US legalizes online gambling. But will the players be happy to deposit knowing that the government is once again getting their slice of the pie? What about trust? You paint a very promising and colorful scenario for the future ( 10 or 20 years though?) of online gaming in the States, but I have to wonder to myself about the rules and regulations that will be put in place to ‘protect’ the players. I have a gut feeling that the ‘government players’ will just end up raising the ante so no one will want to play.

  20. @Palikari: I agree that some companies have no natural competition. eBay, Amazon, etc all got out there first, held off the competition, and have become the new dinosaurs in their respective areas.

    However, look at Time Warner with AOL (not a great financial decision but that is mostly due to AOL being a POS), Disney, Walmart, etc. Most of these companies sat on the sidelines or did very little during the boom years. After the crash they jumped into the market and, in many cases, gobbled up the same exact competitors that were supposed to put them out of business.

    And I really don’t agree with you on the point that the existing poker market is healthy. See my comments to Liam. The whole affiliate strategy is majorly flawed. The loyalty systems are horrific. I could go on and name off several other things that are holdovers from when most of these companies didn’t have two dimes to rub together.

    Even the network model, as it currently exists, is majorly flawed. Outside of a few leaders in the online poker market, the rest are network skins. That should tell you exactly how healthy the industry is. The vast majority of companies operating poker rooms are barely keeping their head above water.

    And your argument only extends to a certain level of the food chain. Party, Stars, Tilt and (before BF). Everyone else is basically just hanging on hoping to be bought out or for US legislation. They’re the “walking dead” I referred to. For many of them, they can’t even get an offer on their client list because nobody wants it.

    So just like the dotcom crash, I think we’ll see the folks who sat on the sidelines come to the market with a lot of lessons learned the hard way by those who won’t survive. They’ve been thinking 2 or 3 steps ahead for awhile now.

    Sure, companies like Party and Stars might survive. They might even eventually thrive. But they’re the Amazons and eBays. There will still be a lot of Pets.com, eToys, etc. that people will barely remember in a decade.

  21. @Liam: From an operators perspective there is no reason to offer rakeback. Rakeback and fat affiliates deals are a remnant of classical mistakes made by the poker industry in its infancy.

    The poker rooms came to rely on affiliates and competed on payouts to affiliates because they were under-financed. They couldn’t afford to bring in their own customers so they farmed the job out to affiliates.

    However, affiliates are horrible for your bottom line. But it’s sort of like people who get into credit card debt. You put it on credit because you couldn’t afford it. Pretty soon the interest payments plus the original amount of the loan can be suffocating.

    That’s where many online poker sites (especially the smaller ones) are today. They’re barely scraping by. They can barely afford to pay the affiliates but they can’t afford to stop taking players from affiliates because they’re not making enough profit on their other players sent by affiliates to launch their own marketing and player acquisition plans.

    Going forward, instead of companies with a few million in the bank, the new leaders in online poker will be companies that have access to billions. The need for affiliates will decline dramatically.

    I doubt many rooms will offer any sort of rakeback. It’s really a silly concept in some ways. And, again, it is another mistake made by early card rooms in terms of chasing short-term revenue by acquiring high-volume players that better funded poker rooms don’t need to do.

  22. I disagree with your analogy.

    I experienced the dotcom era first hand here in Germany. Crazy IPO parties with free cuban cigars and all. The dotcom crash killed all businesses that had no healthy business plan at all. The healthy ones survived and became the new big players: amazon, ebay, google (since 1998) etc. The “dinosaurs” that sat on the sidelines were not able to “clean” up. A lot of them got hurt pretty badly by not entering the market early enough. (There is no a single “dinosaur” competitor to Amazon or ebay in Germany. Newspapers got hit very hard because they didnt get their “ads”-business online etc.)

    This situation is not comparable to companies like Party Poker, Pokerstars and Full Tilt. Their business model always worked. (As long as it was run like a true business, which in FT case it obv wasn’t.) It was just made complicated and illegal by the government. The example you give that someone needs/needed to send money via Western Union to some shady person is not part of any reputable Poker site’s business plan. It was a necessity that was forced onto the sites.

    The reason why “the dinosaurs” can now come in and “clean up” the market is not because they made the better decisions. They will probably be the only ones that will be allowed to acquire a license. That’s a HUGE difference to the dotcom crash.

    Look at Pokerstars. It seems to me that they are run like a “real” business. Their numbers since BF are down by ~20%. If they don’t encounter more black fridays in Germany, Russia, South America etc. They’ll continue dominating the market. But will they ever be allowed back into the US? Probably not. That is an artifical “crash” not a real “crash”.

    But I agree with your outlook into the future. IMO a regulated poker market will be the best thing. And we will ask us how we could have accepted the shady situation that we have been in for so long.

  23. Only found your website a few weeks ago. Very well written. I subscribed to the RSS feed right away. You have a new regular reader 🙂

    You briefly touch on the subject I was thinking about the other day in regards to VIP/rakeback deals.

    After things get regulated and these brick and mortar companies enter the online space, how do you think this will affect these deals? Do you think it will be better or worse for players? Obviously more competition is better for the end user, but will there be a gentlemen’s agreement to limit ‘rakeback’ or whatever it will be? I know it only takes 1 company to spoil it for other companies, but where do you see the rakeback space going?

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