Cycles
Bill Rini again provides a provocative look at the online poker business. Well, provocative may overstate. But, Bill’s voice is rather unique. It comes as a tangent from the business side of poker. We players avoid that for the most part. Riggstad recognizes the business aspect. But, most posts about it are intermittent – save Bill’s blog.
Bill’s current link above is what the in group call a link dump. It cites a number of articles and recaps significant point. But, I can go as black as Bill paints the scene.
There is a wild card that is the repeal of the UIGEA. How that plays out isn’t a given. It will tilt the playing field but just how has been determined. Companies like Harrahs certainly have a plan. But, that plan isn’t far from the status quo. It just turns the points into their rewards package and that’s something their better at than the current market provides. But, with it comes even greater emphasis on the bottom line. Change here won’t be dramatic.
While Bill shows data that makes things look grim for the small networks, it really doesn’t add a lot to the discussion. Party looks crippled but it still has serious assets and is position to move rapidly back into the market. It still owns viable, respected branding.
Small networks are likely acquisition candidates. It will be discounted but the big corporates are used to such acquisitions based on the cost benefit. New rooms can use this to hit the ground running.
Stars and Tilt are in a state of flux. How they can or will transition is clouded at best. But, they will not go peaceful into that good night. Tilt in particular is owned by gamblers that understand hardball and will be as hard to dislodge as the old Vegas crowd.
But, this article is really about cycles – business cycles. And, even with all the politics, these cycles always play out. The UIGEA started the consolidation and the repeal will allow to proceed to completion. The UIGEA actually made it look like the consolidation had occurred. Consolidation reduces competition, increases profits, leads to overreaching exemplified by price fixing and shady activity between the survivors.
But consolidation puts a target on those companies. Often they can maintain it because the cost to develop a competitor is huge. Little companies cluster around the trough but only a little of the slop drops to their level. But online poker is different. The initial cost are low. This was obvious in the glory days where skins and networks appeared at Internet speeds.
While the start up phase, came to an early, legislated halt, it never really played out. That would indicate that we’ve experienced a false consolidation that will be difficult to maintain. I think Bill misses or discounts that.
Where we are isn’t well defined in terms of the business cycle. But, it is unlikely that the business cycle will skip easily into its traditional role. And that means result that we can’t forecast or even define.
There is an obvious one-ton gorilla cash cow running across the landscape. With modest startup cost and large profits avaiable. You’ve a collection of new business plans that will run the gamut and attract investment banking. They’ll be a lot more attractive than a package of underwater mortgages.
What my guess is will be that Harrahs is making assumption based on historic operations that won’t be static. The very thing that attracts them, easy profits will get attacked in ways they aren’t anticipating. It is going to be a cut-throat, reactive business that carries little overhead. Rather than consolidation completing successfully, it is likely to get closer to the start-up bubble we experienced in the internet and then biotechnology.
While Bill’s description of fallout is accurate, it doesn’t seem to cover what the future holds. One thing is certain, it will be fun to watch for gamblers of a variety of stripes.
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Ken,
I always enjoy your take on things but in this particular instance I'm somewhat confused as to how what I wrote plays into your thesis.
What I was saying is that it doesn't matter if the US gets legalized gambling. The point is that in a universe of approx 600 poker rooms only a very few have any chance of surviving.
I'm tired of reading that cliche phrase "competitive pressures" in corporate earning statements. It basically means that they're losing market share due to the fact that they're playing a pricing game with someone who has economies of scale on their side. And bonuses, promotions, rakeback, etc are all forms of setting prices.
Unless these companies are willing to change the game they are doomed to lose. You can't outspend the big boys. You can't underprice them. If you don't find something that you can do better than them then it's time to just pack things up and move on to a different business.
And I don't believe it's all doom and gloom. I think there are a lot of things companies could be doing. But they aren't. That was my point. I was trying to say "Wake UP!!!! If you keep doing the same things you're going to eventually drive your business into bankruptcy."
This industry needs innovation right now. Unfortunately, it's an industry of lemmings. Out of the universe of 600 or so poker rooms the vast majority have no idea what they're doing. They just opened up poker rooms for the easy money or to cross sell their sports books or casinos.
It doesn't matter who the competitive pressure is. If it's Harrah's a year from now or PokerStars today. It could be Sega, Google, or someone out of left field. That still doesn't change the basic flaw at most smaller poker rooms. My premise was that to continue playing a head-on pricing game with people 50x or 100x your size is irresponsible. And if you can't come up with a better way to compete you've already lost the war.
Bill
I think what you’ve just said is that Walmart always wins. That’s big picture accurate. But relatively, niche markets are always more profitable. Those markets take some thought to be winners. You have to really differentiate your product and client attractiveness.
My background was the grocery industry which is what Walmart embraced. Poker rooms don’t resemble it in any way. And that makes them as vulnerable to a Walmart coming in as the old corner grocery or hardware or whatever. When that occur, there will still be the convenience stores and delis garnering a share.
We both understand there is a lot to play out. But, I’m loathed to say the outcome is anywhere close to determined. We’re both looking for the innovation that is lacking. We just see differing path to the end game.
I look at the rake from my perspective of a low margin with very controlled costs. Current online shops are really a continuation of those ma & pa operations that were pressured by the Walmart business plan. As I mentioned, niche marketing provides a very attractive net and gross. It was reliable business planning until the big box idea came along. Nobody in the poker industry sees that or considers the competitive potential of a new structure.
You interestingly mentioned Google as a player. That’s a company that recognizes the business plan I outlined. The idea is to make a little bit a lot of times. They’ve killed a lot of cash cows along the way with it. Should that occur, then the niche markets will also return as always happens.
Ken,
I think you and I are saying very similar things. I'm not necessarily disagreeing with you as much as pointing out that I'm only discussing one piece of the puzzle. There is certainly a bigger picture too and I've written about it and will continue to write about it.
I'm not saying to close up shop because you're small. I'm saying that you should close up shop if you don't have a strategy to stay relevant. I've talked to enough poker rooms in my time to realize that most have no clue what they're doing. They just follow whatever Stars or Tilt are doing. They run the same promotions (albeit on a smaller scale), the same tournaments (albeit on a smaller scale), etc. They do absolutely nothing to differentiate themselves from the competition.
Worse is, they're clueless. The reason they follow Stars and Tilt is because the people running things don't know any other way. They can't even imagine of another way.
Bill
Well we’re coming at it from different angles but we’re likely to reach common ground.
In the grocery business I worked for one of the earliest companies to use computer data. It was pretty primitive with punch cards and sorting but it printed reports that were ahead of almost everyone. We could analyze and make anything its own profit center. You recognize the advantage. Now, with capability through the roof, I don’t see any innovation occur — as you say.
The only originality I experienced from a room was PokerRoom. They managed to create a sense of community that got them a lot for very little. They had a chat lobby and forums. They were even clever enough to sell it just before the UIGEA. Of course their support sucked as bad as all the others. But even there, you could bitch in their forums and get a legitimate resolution. They started off heavily moderating but lowered that a lot. They had a couple of guys two or three levels up that really played merchandising the forums for profit and it worked.
That was a pretty primitive time but you could tell they were looking at things and working the market.