Reasons and excuses

There are gloomy faces across the continent thanks to falling revenues, and everyone is agreed where to point the finger of blame. At PartyGaming Q2 revenue was strong in all product verticals except poker which fell dramatically. Similarly, Ladbrokes, Unibet and 888 have all posted falls in poker revenue compared to 2009, with the World Cup put forward as a reason for 'softening' revenues, but the main culprit remains the 'competitive environment'. If you believe everything you read then operators around the world seemingly only have one major problem at the present time, and that is PokerStars.

The widely accepted reason for falling poker revenues is the 'unfair' competition from sites with US revenues, namely Full Tilt and PokerStars. it is a curious comment for two reasons, firstly the reasoning has become so accepted within the industry it has become its own buzzphrase - challenging environment. Secondly, and more interesting, is that some of the sites have never accepted US customers. During its heyday as the largest European-facing poker room Ladbrokes faced the twin behemoths of PartyPoker and Paradise Poker, both of whom had liquidity that eclipsed it.

Battling US-facing sites is nothing new. Indeed, this is how the poker market has always been since its inception, with a couple of operators comprising the majority of the liquidity. The difference now, compared to 2005 when PartyPoker was over 50% of the industry, is the increased focus on Europe by the US-facing operators. The majority of PokerStars players now come from outside of the US, and that is a very different scenario than when PartyPoker ruled the roost.

THE BIGGER PICTURE

But is this just one factor at play? While there is no doubt of the impact the huge marketing budgets of PokerStars and Full Tilt have on other operators there are also issues such as the rakeback wars, a major cutback in brand advertising, a reliance on affiliate and online acquisitions and a loss of focus on poker by some sports betting focused operators.

It's also notable that few sites offer a clear differentiated offering beyond PKR, either in terms of technology or brand positioning. When PartyPoker did a major software overhaul its final product bore more than a passing resemblance to PokerStars. And while there are some fantastic brands, such as PartyPoker, in the poker sector, the marketing has shifted more to pricing, bonuses and promotions than brand positioning.

In a price war, those with the biggest budgets will win out. Unibet is one firm who have tried to offer something different with a lower stakes European tour, where events are designed to create a fun, entertaining experience. The tour has proved a big hit with players, and is growing rapidly, with 460 players in the first event of 2010, but it has also seen poker revenues slump.

PROBLEMS FOR ALL

It is without question an industry-wide problem, and it is frustrating for operators unable to tap into the huge US market. Even bwin, one of the few firms to show an increase in revenue in 2009, posted a drop in revenues in Q1 2010. Excluding Gioco Digitale - the Italian poker site bwin bought in 2009 - gross revenues from its poker segment declined 17.3% to €25.8 million compared to Q1 2009.

The firm put the drop down in part to delays to implementing new features on its new poker software platform and the distraction of preparing for launching in France. But the blame was also laid at PokerStars' door. 'The decline was [partly] attributable to increased competition from companies still offering real money poker in the US. This gives them significant unfair advantages in terms of size with respect to player liquidity and free cash flow generation,' a bwin statement said.

There is little doubt the reasoning is beginning to sound a bit like an excuse, but Mitch Garber, chief executive officer of Harrah's Interactive, thinks that is simply a factor of repetition. 'I don't think it's an excuse. It sounds like a crutch because there has been four years of it,' Garber adds. 'Liquidity in poker is probably the single most important component of what attracts people to play and being at such a disadvantage is not an excuse it is very real.'

Garber knows from his time as chief executive of PartyGaming what a difference the US market makes to a firm. 'The PartyGamings of this world lost 80% of their revenue and 80% of their marketing spend when companies taking bets from the US increased their marketing spend by at least 80%. I was at PartyGaming and I experienced it and I read comments from Jim Ryan and Gigi Levy and I know there is fact behind what they say and it's not an excuse.'

But is this really all there is to the story? Dominik Kofert, chief executive of Pokerstrategy.com, has a slightly different view. He agrees the advantage the US-facing sites have is very real, but points to a lack of innovation in the poker market both in software and in brand building. 'Operators have failed to turn their products into experiences for their customer. The fact everyone always says it's unfair they are taking US players is all true, but that doesn't mean they did the best they could. I'm not saying they can overtake PokerStars and Full Tilt, but there is no reason for resignation or passivity.'

Interestingly in PartyGaming's latest results they pointed to an increasingly casual user base as a reason for the 52% slide in poker profits. The site is still managing to recruit a huge number of new players (263,500 in H1 2010), but the player value is declining substantially with average daily yields at a record low of €6.7. As a result daily revenue is down 10% despite player numbers rising by 5% in the same period. Again this fall was blamed on the competitive environment.

But with bonus rates now representing 25% of gross revenue at Party and the firm turning to lower value markets such as Eastern Europe for new players there is an impression as Kofert noted there is still little focus on innovation or customer experience. This is not to single out PartyGaming, as other firms have suffered much more severe decline. It seems the industry as a whole has an issue with holding on to players who treat their products as a 'casual' gaming experience. But what is less obvious is what the firms are doing in response to this problem beyond focusing on new players to fill the gap left by customers who have tired of a commoditised online poker experience.