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Lessons for Casinos from the Brief History of Online Poker

Publish Date
November 26, 2012
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Lessons for Casinos from the Brief History of Online Poker

By Chris Grove

Online poker is preparing for another seismic shift, this time from impending regulation in the United States. Once regulated, brick-and-mortar casinos will naturally begin to evaluate the business opportunity of starting, acquiring or managing their own online poker room. However, casino management would be wise to first sift through online poker’s history to glean valuable lessons for thriving as an online poker operator. To that end, here are five mistakes and missed opportunities I recommend keeping in mind when developing an online poker room for the regulated U.S. market.

1. Embrace Online Poker as a Data Bonanza
Much of the hype surrounding the regulation of online poker in the United States focuses on revenue potential. Less frequently mentioned is how regulation will unlock a deluge of player data. Such data could end up being the most valuable byproduct of online poker.

Regulated online poker offers casinos two paths to player data: passive and active. The passive path involves actions like linking online players’ accounts to land-based loyalty programs. Casinos could then add online play to a customer’s master data profile. Many casinos likely have plans already in place for executing this strategy. Those who don’t would be well-served to develop at least a basic framework for acquiring and integrating data from online poker play into their player loyalty programs.

The active path offers casinos unique marketing opportunities to capture valuable player data. For example, poker operators can offer players small incentives to complete surveys, volunteer detailed demographic information, and provide other feedback. Such requests can be deployed creatively (e.g., as mini games or goal-driven promotions), increasing player engagement while mining data that can be used to fine tune promotions, generate intensely personalized marketing campaigns and blaze new paths to player retention.

Operators can also use similar methods to funnel online poker players through social casino properties, and in turn, players will provide casinos with detailed blueprints for successful games one bet at a time.

There’s money to be made in regulated online poker, but smart operators will recognize that rake alone isn’t enough. Treat rake and player data as similar priorities, and you’ll develop an online poker room that contributes more robustly to the company at large.

2. Link Fewer Player Rewards Directly to the Rake
Rake-based rewards have merits, so I’m not suggesting that operators should abandon such promotions and bonuses entirely. What I believe is that poker rooms risk serious problems when too much of the player rewards pie is distributed based on the amount of rake a player pays.

Who benefits the most from rake-based rewards? High-volume players who generally withdraw more than they deposit. These players are, by definition, in the best position to maximize the value of rake-based rewards, an effect amplified by tiered systems (like PokerStars’ VIP Program) that grant the highest-raking players inflated rewards. The inevitable complexity of such rewards schemes shifts even more value away from casual players, who have little interest in constructing a spreadsheet to analyze an online poker promotion.

The effective outcome: high-volume players are paid a handsome rate by the room to uncover the optimal strategy for extracting maximum value from minimum participation. These players are the equivalent of the guy who plays blackjack only when the pit boss is looking or when the waitress shows up.

To me, that sounds like a failed player rewards philosophy that partially echoes the match play coupon dilemma Bill Zender outlined in CEM’s October 2012 issue. It’s also contrary to the goals online poker rewards should be designed to accomplish, which are:

1. Motivate additional deposits
2. Provide a buffer against variance and poker’s learning curve for the bankrolls of casual players.

I want to talk more about the second goal, because I think it will be uniquely significant in a post-regulation U.S. market. I recently surveyed 1,500 Americans via Google Consumer Surveys, asking them who they would trust most to run a fair and secure online poker room after online poker is regulated. Nearly 70 percent chose “none of the above.” Land-based casinos ranked last, below PokerStars, state lottery agencies and Zynga.

Survey aside, it’s obvious why a mainstream consumer would have, at best, a skeptical attitude toward online poker. That skepticism is likely to depress the amounts players are willing to deposit. A quick loss of that deposit, made more likely by the artificially depressed deposit amount, will only feed their skepticism about the whole enterprise. Rooms will need to exert a special effort to keep casual players from going broke too soon, and rewards are a prime channel for doing so. Rake-based rewards, however, simply aren’t built for the job.

3. Keep Player Deposits On Site
Deposits are the heart and soul of an online poker room. Experienced operators know to maintain a strong buffer of positive net deposits to protect against unexpected dips caused by competition and the unforeseen. That’s why it’s so critical for casinos to think very carefully before acting to encourage (or force) player deposits to move off of the website.

One common deposit leak for online poker rooms is satellites to land-based tournament events. While certainly popular, their value must be weighed against the often extraordinary amount of player deposits such promotions ship off the site. Those funds must be replenished by additional deposits just to maintain a room’s deposit buffer, and player deposits aren’t always that easy to come by.

A related, but more subtle, leak resides in the tournament lobby. When online poker rooms focus on massive prize pools for their tournaments, they’re also increasing volatility in their net deposit balance. How? Satellites trap some players into effectively entering tournaments they can’t afford, increasing the chance that they bust too soon. Top-heavy tournament payout structures shift large chunks of deposits from the accounts of thousands into the accounts of only a few. Repeat that process enough, and you’ll find a significant amount of your total deposits held by a small slice of players, a condition that promotes greater volatility.

A third leak is purely hypothetical, but I could see it coming up after regulation. Some operators will face pressure to squeeze every possible dollar from poker and may respond by attempting to raid player balances—not via theft, of course, but through various commercial pitches (“book your room from your player balance with just one click!”). It’s hard enough to get players to deposit. At least initially, casinos should avoid adding to the challenge by treating player accounts as off limits for anything but poker. Again, the focus needs to be on keeping the player’s account positive for as long as possible.

These threats all obviously recede as the size of a room’s player base increases. Large, stable rooms have a margin of error and can afford to push the envelope. But for new and developing poker rooms, these are very real dangers that shouldn’t be taken lightly.

4. Reject the Network Model
The poker network model, whereby several poker sites with unique identities (also called “skins”) feed into one central room, is tempting for obvious reasons, such as revenue from license fees and player liquidity boosts. But despite that surface appeal, the network model is one of the great cautionary tales in the brief history of the online poker industry.

Here are just a few glaring flaws of the network model:

- It triggers a promotional “race to the bottom” and unscrupulous behavior among skin operators. Current examples abound at networks like Merge, Microgaming and iPoker.
- New skin launches inevitably cannibalize traffic from existing skins, upsetting partners.
- It dilutes the main brand and introduces artificial competition.
- It adds a new layer of compliance and security risk.
- It causes confusion among inexperienced players. Which online poker room are they really playing at? Who is ultimately responsible for the games and their funds?
- Larger skins inevitably wield their player base as negotiating leverage, introducing unwanted volatility to your player pool.

There are certainly some network or network-esque opportunities that can make sense for specific operators, like the recent deal between Zynga and bwin.party, but even in these exceptional cases, casinos should strongly prefer a clearly co-branded approach.
I also understand that regulation in the U.S. may play out so as to effectively force operators into partnerships. In that scenario, there’s little to do but carefully examine the well-chronicled failings of online poker networks to-date and structure agreements accordingly.

5. Don’t Give “Regs” Disproportionate Influence
“Regs” is the common shorthand in the online poker community for “regular players.” Regs, who are not always winning players, generate higher-than-average rake and tend to be far more vocal and organized than their casual counterparts.

These two characteristics have allowed regs to accumulate what many consider to be a disproportionate influence on the direction of the online poker industry. PokerStars has “player reps” elected on TwoPlusTwo, the gold standard for online poker forums, who fly out to Stars’ headquarters for policy meetings. Regs circulate petitions, boycott rooms, shift from site to site in large blocs, and are generally willing—some would say eager—to wield their power when a room enacts a policy that appears unfavorable to their interests.

Regs are collectively self-interested—they are the equivalent to the card-counters at a blackjack table. Their primary interests are to pay as little rake as possible, cash out as much as possible, and maximize their win with the smallest amount of risk. These goals are all in varying levels of conflict with the aims of a healthy online poker room.

The appeal of this class of player from a casino’s perspective is that they provide liquidity and drive game creation. Casinos can’t simply disregard regular players, but they should develop an operating philosophy designed to subtly, but persistently, push back against the demands and influence of regular players. Or, as Kim Lund at Infinite Edge Gaming put it in a recent post, “You don’t spend a dime more than necessary on retaining a specific shark player,” and “You take full control of the means players employ to increase their edge.”

In the beginning, operators will be potentially desperate for liquidity. For the sake of the long-term stability of the room and the industry at large, it’s critical that all operators, casino or otherwise, resist the urge to hand regular players the keys to the castle in exchange for a temporary fix.


Chris Grove is an independent gaming industry analyst who monitors online poker industry trends, legislation and the movements of major players in the market. Grove has written many articles and blogs about online poker industry news, trends and analysis. He is a member of the National Forensic Association Hall of Fame and three-time National Public Speaking Champion. He can reached at Chris[at]OnlinePokerReport.com or on Twitter at @OPReport.