The Death of Poker

‘The online poker boom is dead.’ This was the bold statement from poker tracking site PokerScout in an editorial published at the beginning of October. It claimed there was a deeper malaise in play than the mere end of the boom times. Poker it seemed to be suggesting was in some form of structural decline. ‘To be more specific, traffic data shows that the seasonal uptick expected at this time of year, which has happened with regularity for years, is not happening this year. In the last few years, the seasonal increase has ranged from 3% to 10%. This year has seen a 7% drop instead.’ 

The site put this down to two factors, oversaturation and the poker fad having run its course, which essentially added up to the same point. Poker is just not cool anymore. Times are tough in the major markets such as the UK, Scandinavia and Canada and judging by the results of the publicly-listed companies practically nobody is seeing any growth, with margins continuously squeezed. Even those sites showing substantial growth in player activity are seeing modest growth in revenues. 

Ladbrokes continued their dismal performance in poker in 2011 with net revenue down 12.5% and active players down 14.0% the previous year. Amazingly the firm drew some positives from this saying the results represented ‘an improvement in the trend seen in H1’ where Ladbrokes was down 30%. The firm’s CEO had previously stated poker was not a priority for the one time European market leader, and it seems Ladbrokes are content to hold on to whatever small revenues they can from poker. 

At a time when major operators are bogged down with regulatory issues the likes of Ladbrokes could be missing an enormous opportunity to grow their market share due to the death of Full Tilt. But they are not alone. While operators are keen to throw money at new regulated markets, where profits are hard to extract, they seem less keen to reinvest in poker’s core territories. They seem to agree with PokerScout’s analysis that the fad is over, and now is simply about holding on to what you have and managing decline. So that’s it for poker then? Well not exactly.

Overall the poker market has hit its peak and is declining slowly around the world, with some smaller markets showing growth and more mature ones showing decline. But does that mean poker is in a state of structural decline? Or is it simply that poker sites have stopped innovating and improving the product and customers have simply tired of the game as a result.

What has been perhaps most surprising is the collapse of Full Tilt has seen so little growth from the chasing pack. This was a huge opportunity to capitalise, but firms stuck in their groove with little marketing money to spend simply let it pass them by. In the latest bwin.party results the firm noted that since the suspension of Full Tilt’s licence at the end of June it had seen a rise in poker revenues, which were up 4% on Q2 in August. A 4% rise following the removal of the second largest site that was more than double its size? Amazing.

It can surely be no coincidence that one of the sites leading the innovation, PokerStars, appears to be the one that benefitted most from the failure of Full Tilt. Granted PokerStars has the advantage of huge revenues, but liquidity is not and should not be given as the only reason players with existing Ladbrokes sports betting accounts are so reluctant to play at Ladbrokes and prefer to play at PokerStars.

One firm showing growth is 888, although to what extent that can be attributed to smart affiliate deals with the likes of PokerStrategy and how much can be put down to a marketing and technology push is hard to say. Nonetheless 888 has invested in technology, attempted to do something a little different and has been rewarded. Revenue from poker in the last published results was up 22% to US$24 million (H1 2010: US$20 million) with a 90% surge in active players.

It’s tempting to draw the conclusion that the surge in liquidity has effectively seen 888 buying in players at a high cost. But there has been some significant investment in technology at the firm, and a major marketing spend. They took a risk and it paid off. Compare this to PartyPoker’s last major overhaul where they simply tried to make the site look like PokerStars. Like everyone else it seems they are waiting for the US market to come save us all. But how realistic is this plan?

  

There are certainly far more positive signs than ever before, with the American Gaming Association (AGA) coming strongly out in favour of online poker legislation. And various parties from MGM to South Point Casino to Donald Trump have thrown their hats in the ring as potential licensees in a regulated environment. Meanwhile bwin.party co-CEO Jim Ryan has been spending time in America attempting to tie up deals in advance of a bill.

Donald Trump’s agreement to partner with Avenue Capital, if and when, poker legislation passes can be taken with a pinch of salt. But the launch of South Point Casino’s freeplay online poker site was a clear line in the sand for the US poker market. Here was a land-based casino operator with no previous interest in online gambling showing its intent to offer real-money online poker as soon as it was available. Sources at South Point were optimistic it there could be real money poker as soon as 2012. Certainly the money invested in freeplay will have been made with an expectation of some return on investment in the short-to-medium term. This won’t be a five year plan.

The backing from the AGA is by far the most significant move, however. Far from being cautious about their stance, the land-based casino lobbying group now has an online poker section on its website and is pushing hard for poker legislation as soon as possible. They are by far the most powerful group pushing for a poker bill, and with Harry Reid potentially on their side this could be the best chance online poker has stood so far. 

The AGA was yet to release the bill it endorses at the time of writing, and according to an article in US political magazine Politico Joe Barton and Barney Frank might beat them to the punch. The two men, who have both pushed forward bills to regulate online gambling, were joining forces to get online poker legislation added to the deficit reduction plan Congress was discussing as a matter of urgency. A Super Committee of 12 Democrats and Republicans are working towards identifying $1.5 trillion in savings and new revenue streams by a 23 November deadline. 

‘Several of us are trying to get it into the Super Committee,’ Frank told Politico. ‘It would create $40 billion [in revenue] over 10 years.’ He added it was being taken seriously, but a lot would rest on the views of Senators Jon Kyl and Harry Reid. Kyl has long been one of online gambling’s biggest critics and was instrumental in the introduction of the UIGEA. Since then there have been suggestions his stance on online gambling has softened a little but he would still be an unlikely ally for online poker. And his approval is considered vital to the chances of any bill making it to the final stages.

Harry Reid, the Senator for Nevada and the majority leader, is the most important man in the mix. How much he will support any bill that does not have the full support of the AGA remains to be seen and he has said publicly online gambling is ‘at the back of my mind’ at the moment. But he remains online poker’s best hope. Meanwhile a separate House committee is to debate the issue of online gambling. It’s a veritable frenzy of activity of late.

Whatever the fate of Barton and Frank’s efforts, or indeed any AGA-endorsed bill, it seems the political climate has changed considerably. Politico noted there was a ‘stunning breadth’ of support for online gambling in Congress and the proponents seem to outweigh the dissenters for arguably the first time ever. But all this positivity is looking out from within the online poker bubble. We still remain some way off a legalised online poker sector in the US. Even if legislation were to pass tomorrow, setting up a licensing framework, allowing time for submissions and putting the law into practice would suggest 2013 as the earliest date for the market to be in place. Standing back and looking at the wider picture there are so many more important and significant issues for the US congress to deal with. 

A congress that is so divided and divisive, and an issue as contentious as online gambling does not seem a happy mixture for proponents of online gambling. That is not to write off the chances of introducing an online poker bill in the short term, and by the time this magazine comes out it may even have made it through the Super Committee intact. But it remains an odds against possibility, and more importantly it is far from certain the opening of the US market would be the global panacea everyone hopes for.

  

It would seem unlikely that online poker legislation in the US would impact on the rest of the global market to anything like the degree it did pre-UIGEA or even pre-Black Friday. A closed liquidity pool would seem the most likely scenario and the major beneficiaries are going to be the land-based casino groups with few interests in Europe. Caesars may invest more in its European WSOP websites, and we may see more launches in Europe in the three-to-five year term. But the net effect on Europe and the rest of the world is likely to be minimally positive or even negative as resources and investment gets diverted away from a market that is ironically now significantly larger than the US.

PokerScout was dismissive of US legislation solving all the problems currently facing online poker. ‘It is entirely possible that legalisation will be followed by a mini-boom lasting weeks or months, not years, after which will come a continuation of the slow decline as the games get tougher and the public moves on to a new fad,’ it said. But perhaps the ‘boom’ or otherwise from a regulated US market is irrelevant to the problems facing the rest of the world.

Culturally the US has always been the home of poker, and any licensed and regulated market there is going to be a long-term success. It will no doubt go through a boom period before peaking and dropping back to a long-term sustainable level. To what extent that model applies to global poker, where culturally the game is not so embedded is less certain. Taking Italy as an example, there has been a somewhat alarming drop in poker activity during 2011. Following a huge boom time following regulation. Italy has since seen a 15% drop in online poker tournament revenues in 2011. For the summer months the decline was as high as 60% year-on-year. The decline was put down to the drop off in marketing in advance of cash games. 

Since the launch of cash games the total amount being wagered on tournaments has fallen from around €250m a month in September 2010 to €102m in September 2011 with the rake dropping from nearly €30m to just €11.7m. The reason for this was the move from tournaments to cash games, which posted rake of around €24m. In essence the total rake rose from €29.4m in September 2010 to €34.6m in September 2011. Not quite the enormous leap forward the market was hoping for, but a significant rise when the global poker market is stagnating. 

But while this is clearly a great boost for the Italian industry in revenue terms the uptick in player activity is a little underwhelming with money simply moving from a less profitable vertical to a more profitable vertical. It will be interesting to see if operators are keen to move players away from poker and onto the holy grail of online casino and what effect that has on the long-term health of the market in Italy. If Italy was supposed to be the showcase of the potential for sustained growth and revenues in a regulated market it must be a concern that revenues are already slowing and underperforming expectations.

Poker may have first appeared like a licence to print money to greedy operators back in 2004, but it is proving a tough battle to retain players and revenues in 2011. And many have seemingly given up with even the likes of bwin.party seemingly content to focus on newly regulated markets with little marketing activity in the UK for example. Only PokerStars can be said to be a true global operator. 

The US is unlikely to be a game changer for all but a handful of operators and even then it may only be as a lower margin technology partner. Perhaps it’s not online poker itself that is in decline, but the major operators that have built the industry around it. A decline in innovation, risk taking and marketing spend has left poker looking in a worrying state. Some new ideas are desperately overdue. But instead there seems to be more of an attitude of crossing fingers and hoping for US regulation.