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