Buyers Beware!

Posted on | October 24, 2011 | 3 Comments

The online poker industry is buzzing with activity. And all eyes are on the US. As major suppliers here in Europe continue to report stagnating revenues from online poker, the coming regulation of the US market is seen as a blessing. Granted, European outlets may have to settle for a place “lower in the food chain” as Jim Ryan, the co-CEO of bwin.party, put it in a recent interview with Forbes Magazine. But establishing a foothold and grabbing a piece of the US market may be absolutely crucial for some European suppliers if they are to survive long-term.

On the other side of the pond, the frontline market players are moving in to position. First mover advantage, while somewhat questionable based on industry history (I’ll question it in a later piece), is a powerful card to play.

So the fact that the two sides are meeting up somewhere around where the Titanic went down to shake some hands, pad some backs and sign some papers is perfectly natural. European companies have technology and operational experience. US companies have strong corporate backing, access to a highly attractive market and the right to operate in it. Several deals have already been inked others are in the pipe. Some through partnerships like the deal Sciplay (itself a joint venture between Scientific Games and Playtech) struck with COPA – California Online Poker Association. Some through acquisitions like IGT’s purchase of B2B supplier Entraction.

But I would like to sound a note of caution. While I do not belong to the exclusive club of consultants who get invited to fancy e-gaming meet-ups, the rumor mill does grind its way down to me. What I am hearing merits a warning. The entire situation, in fact, merits a warning. I ship this warning hoping it somehow manages to make it to shores of Atlantic City, the lake sides of Chicago, the fountains of Las Vegas and along ancient streams of tribal lands.

I know you’re eager to get up and running. But before you finalize your strategies and go hunting for a software platform to license or an entire operation to acquire, there are important  facts to consider.

I may be taking a huge risk in writing this. So be it. It needs to be said. If it hasn’t been said at those fancy gatherings already. If so, then I know why I’m not invited. And if it hasn’t been said I guess I might know why I will not be invited in the future.

The crux of the matter is this: the European poker industry is, to a significant extent, not a healthy market. It’s been poisoned by us who work in it. It is structurally flawed. As a result, a lot of the associated technology is too. I’m not saying it is not good. But it is… peculiar. So in order to find the best partner to join up with or the best target for acquisition, you need to know EXACTLY what you’re looking for – and not looking for.

Avoid expensive and poisonous deals

SHOPPING ADVICE

Few of the market leaders in the online poker space can relate their success primarily to technology – at least not if we look at technology that is not specific to a regulatory regime. For networks, the key to success can be found in fortunate licensing partnerships and, as a consequence, attractive player liquidity. For B2C operations success has been derived from smart strategic positioning, branding, access to off-limits markets (like the US), the avoidance of some of the pitfalls that have dragged others down and in certain cases broad gaming portfolios. Not even for Pokerstars, widely considered to be operating the best poker software on the market, has software played the starring role. Supporting definitely. But not starring.

You can choose to interpret this two ways.

• Technology/software is not that important
• If technology is vital in order to obtain a leading position in the market, I need to look twice.

Both have merit, but the game is changing towards the latter. The game has to change.  The importance of technology will continue to grow. For regulatory reasons. For social media reasons. For game design reasons, for marketing reasons and for competitive reasons.

And the reasons why the obvious technology choices in Europe may not be so obvious are many:

The fear of migration
One factor that has kept the pace of technology development down is the widespread fear of player migration. As a ballpark figure, online poker operators expect to lose roughly 20% of their revenue every time they migrate players from one system to another. This alongside contracts often stretching over many years and allowing little room to wiggle has created at market in Europe that is less mobile that it should be. Or even wants to be. Hence it is difficult for competitors with potentially superior technology to gain a foothold which hurts the evolution of technology overall.

Premature technology shift
The technology shift that did take place almost across the board some years ago – as growth slowed enough to motivate it – came… too early. I, and others, have tried to establish a new business approach, mentality and mindset with deep-reaching consequences on development for years. Unfortunately it is not until fairly recently that our views have been adopted and become established industry truths. They were adopted too late for the resulting changes in prioritization and design principles to affect the platforms and the end-user products during the shift. Some leading European operators will outright acknowledge that the latest generation of their poker tech is not what it would have been had they built it today. But they’ve invested too much to redo it from scratch. So they’re stuck. For now.

One of the bigger companies that left it late and thus managed to adapt, 888, is also the one who’ve made the most significant strides in terms of quality and market relevance of their poker product. And their growth, as a result (arguable!), is currently unmatched.

Regulated market focus
A third factor to consider is the fact that leading suppliers have spent a lot of resources on adapting their technology to the regulated markets in France and Italy. The regulatory frameworks of these two markets have strained platforms and back-ends through sets of requirements that I don’t think anyone ever considered might come into play.

If the US ends up with a similarly fragmented and complex regulatory regime; then Mr. Fantastic type system flexibility is of course a huge plus. If not, then you have to wonder what the rest were doing while some were dancing to the tunes of ARJEL in France and the AAMS in Italy.

Toxicity
Outside of my realm of competence, but as I understand it, asset toxicity may be an issue. Either due to companies having previously done business in the US (pre UIEGA even) or by having a less than clean sheet elsewhere. Again, I know only what I have been told by others and do struggle with the notion that a line of code (not just the corporate entity who owns it or the brand it is executed under) can be toxic. Maybe someone can bring some light on the matter.

Purpose built for immature markets
Up until very recently, Europe has been an acquisition driven market. Although regulation will always open up the game to new segments of players an established market like the US (even more established than the French was when it regulated) will not see the explosive growth that initially drove for example the Italian market after launch. So focus has to shift towards retaining (entertaining) instead of attaining (attracting) players. With few exceptions, PKR being one, online poker development here in Europe has been driven by the needs of acquisition stakeholders leaving retention stakeholders to work with what they already have. And even on the acquisition side, decisions have been made that do not look so good in retrospect. The most obvious one being the dedication to unrestricted affiliation.

Limited business model flexibility
If you want be amongst the first ones out of the gate, it is probably wise to consider offering an alternative to the traditional rake-driven real money site. Even under current US regulations, legit alternatives are possible. The Sciplay/COPA partnership has launched calsharks.com – a freeplay site – and there are numerous subscription model alternatives already on the market like Club WPT and Rise Poker. You will not find these models in play in Europe. As a result, they’re not automatically supported by leading gaming technology suppliers either. Calsharks.com for example, despite Playtech being involved, does not actually use Playtech’s poker platform. Big deal? Maybe. For some suppliers this is an easy “fix”. For others, you’d be asking them to remodel half their systems.

Under the right conditions, with the right strategy in place and barring legal obstacles, I see a lot of synergies resulting from cross-Atlantic partnerships ,mergers and acquisitons. The game will be better off on both sides. But not all matches fit. Marrying the right strategy to the wrong technology will spell disaster. And if it something this industry does not need right now it’s more dramatic and public breakups.

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