Note 2015:  Since this post has re-surfaced lately I’ve made minor clarifying edits here and there. Language is still not up to par. Hopefully the quality of the  arguments  makes up for it. 

Surprise! The online poker industry is in bad shape if you’re not Pokerstars. This stunning news was delivered two days ago by Jeff @RivalSchoolX Hwang in a piece called “Sorry, Mr. Online Poker. Nobody Cares About You” on The Motley Fool.

PPA’s Rich Muny called it “thought provoking” on twitter. It has caused quite a stir.
Why I wonder as I search for the world’s biggest bullhorn and a more powerful amplifier.

Don’t get me wrong. Jeff Hwang’s piece is competent. It’s well researched and mostly on point. Definitely a must read. But its main message is one that can’t stun anyone who claims to keep an ear to this industry’s tracks. And, more importantly, it follows a long tradition of misguided analysis of why the industry is suffering.

Jeff mentions a number of the most frequently cited reasons for poker’s structural decline – like fragmented regulated markets and excessive (?) taxation – before honing in on one possible cause that many of the industry’s pundits nowadays recognize as the real culprit.

“There’s another aspect of online poker that is often overlooked in these types of discussions, and that is an increasing skill gap problem.”

I have three goals with this piece:

  • a) Refute the skill gap problem
  • b) Introduce the story gap problem
  • c) Share a somewhat alternative view on poker ecology and player liquidity

Right on the surface

Jeff’s analysis of the industry’s woes gets off to a solid start:

“We have an industry plagued by rising player acquisition costs and marketing costs as a percentage of revenues. Things like sign-up bonuses, rakeback programs, and affiliate programs used to acquire new players and drive traffic to a given site are expensive marketing tools that I am pretty sure have slim to negative value…”

I’ve written about the flaws of rakeback, the risks associated with losing power over players to affiliates and fellow consultant Yair @urikaduri Panet contributed with this guest post on loyalty programs.

These issues can be attributed to several relevant failings. Like targeting the wrong player demographics (recruit all the regs!), devastating incentivization schemes, using rake as a player valuation metric (and consequently as a base for all retention schemes), uncoordinated market launches where SEO teams, marketing teams and affiliate teams end up driving up the acquisition cost of the same player and more.

Just like the issue of fragmented markets, taxation and possible pricing issues these contribute to poker’s falling margins and drop in play time.

But they don’t cut to the heart of the problem. And neither does the skill gap problem.

Deconstructing the skill gap argument

While Jeff’s explanation of the “skill gap” is excellent and needs no further clarification (I think), here’s my attempt at a summary:

Online poker has been around for a while now. And those who have a genuine talent for playing it have had plenty of time to become very good at it. So the average skill level of play in the space is much higher now than six years ago.

This makes games unattractive to said players who’ll find it harder to win. At the same time it will be hard for new players to get into the game because the skill gap is so wide. They will be crushed.

Since there are no revenues without deposits, in order to turn poker back on a profitable path, this skill gap must be fought so that new players can stand a chance again. When they come back, the active players that generate all that rake will also return.

This definition of the skill gap problem suffers from a logical fallacy. It’s a problem statement drawn up by someone who understands the math of poker but not the psychology of games. Who regards online poker primarily as a potentially profitable venture and who makes very bold assumptions regarding the rationality of people who play games.

If you agree with how the skill gap problem is formulated, you will also realize that you can’t ever solve it. You’ll reach a dead end concluding, as Jeff does, that:

“Poker is a self-defeating game where the most valuable players are also the ones killing it.”

Ina reply to the Motley Fool article, Chris Grove, whose opinion I value highly, presents four methods for closing the skill gap.

In short they are.

  • • Restrict play volume of “skilled” players by limiting the amount of games a player can play.
  • • Match players when seating them according to their “skill” level.
  • • Equalize the information advantage of advanced players by providing basic analysis tools to everyone.
  • • Base loyalty rewards on losses instead of rake.

While I’d implement some of these solutions differently than Chris suggests, he is right on all four counts. All four solutions would close the skill gap. Or at least reduce the impact of the skill gap. But if you apply the same player rationale applied when formulating the problem, the more you close the gap, the more you recreate the same problem.
Artificially close it by player pooling based on skill level and the “professionals” will bail leaving the door wide open for others to fill their shoes.Focus on redistributing loyalty rewards and the novice players will still be crushed.

This does not mean that the measures Chris propose are not important ways to rejuvenate online poker. It is just not within the context of a “skill game problem” they must be considered.

The skill gap is a natural consequence of the mechanics of poker. It impacts the play experience. But it it is not the only impact. It is only one of the many aspects of the game one must balance in order to design it to do what really matters. And that is to tell a compelling story. In order to “fight” the skill gap, one must first design a story where doing so makes sense. If you think like Jeff appears to do. You can’t.

Even fairy tales need sequels

Games are primarily emotional and not rational experiences.
Just like any other game, online poker is dependent on a good story that players enjoy interacting with and being a part of. That narrative of the game is what creates stickiness.

You don’t release anything because your business intelligence unit has told you that you’d make more money if you close the skill gap (which is what happens). You do it because your operational staff and your game designers tell you it is required in order to tailor the play experience to the all-important story.

The more powerful the story, the more engaging the manner in which a player interacts with it (like playing or being an active member of an associated community) is, the better the player’s experience can be monetized.

The reason why online poker became such a massive success is because it perfected a recipe based on the above formula. And the basis for that recipe was the following story:

“Practice and you’ll become better, practice enough and you’ll win, play a little more and you could be world champion.”

A solid story that no online gambling game had told before. And it turned into a masterpiece once players like Chris Moneymaker proved it wasn’t just a fairy tale.

This story pulled thousands and thousands of players eager to give the poker dream and the alluring Las Vegas lifestyle (a sub plot) a shot.

It’s a successful story because it effectively utilizes the genius way in which the rules and mechanics of poker pit skill and luck against each other.
Unfortunately it has been so successful that people forgot that even great stories eventually need a sequel. Especially when the first one so seldom delivers a happy ending. When 80% of the players reach the tragic end of your great story we have nothing to tell them but “rinse and repeat sir. Experience the same story again! Maybe it will end differently.

If  people fall out of love with your story and you don’t tell them a new one – or change the old one for them – you have a serious story gap problem.
Losing isn’t a pleasant experience. And losing too much too fast will ultimately drive a player from the tables. But as long as the losing occurs within the context of an intriguing story, it makes sense to do it.

 A piston does not make an engine

In his Motley Fool piece, Jeff Whang claims:

“…the professionals and other regulars in online poker space (called “regs” by online poker players) are generally the most valuable players. On any given site. This is because these players put in the longest hours, and often play four, eight, or even 16 or more tables at a time.”

This is not true. And Jeff should know that.  Using generated play alone to measure a player’s worth is not a good idea.The value of the depositing player – also referred to as the recreational or casual player (I try and and avoid using these three labels interchangeably since they represent different player types to me) is recognized industry wide. For it is he who supplies all the money.

But claiming that the depositing player is the most important player because he feeds the eco-system is also wrong.

It is a bit is like declaring that the piston or fuel is the most important part of an engine.

An online poker room is a dynamic economic entity. There is a reason why I make the comparison to an engine. It’s full of inter dependencies and cause-and-effect relationships. Each individual component is important, but it is the blueprint (story!) that makes it work.

People familiar with my writing know that I despise the use of terms like “fish” and “shark” to describe certain customers. Firstly I do so because I oppose the use of terminology with a derogatory origin to describe a customer. Secondly because classifying players along a skill and experiences axis leads to a view of the ecosystem as a system of fixed states.
This is a problem because it is the constant story driven fluctuations and flow within the poker ecology that generates all the value.

If anything, the most important players in online poker are not the regs and not the newbs. It is the explorers.

The explorers are the customers who bought into the story and are playing the game as a part of experiencing that story. They advance, they reach goals, they fail, they try new game variations, they win a tournament for the first time, they move up in stakes, they lose it all again, they eagerly try and qualify for a live event. One day “fish”. One day “shark”. Every day determined to explore the grand story.

“Practice and I’ll become better, practice enough and I’ll win, play a little more and I could be world champion.”

Their motivation to play the game and engage  with the poker world is derived from their love of the story. It’s the story that makes them get back up when they get knocked down.

Every player in the eco-system whose actions within the game begin to take on a very repetitive form with consistent results  is merely playing a supporting role in the explorer’s journey through the story.

Some players reach the the end of the journey and settle in as profit-making grinders. The make sure there is action. Many realize that they’ve been sold a dubious plot where their role is to be the sucker henchman killed midway through. They will return once in a while with a small check to see if they can change the ending. Others, like me, fall forever in love with the game, return to it on a regular basis to watch snippets of the extended DVD release, and long for expansion packs. Or a sequel. We supply liquidity in tournaments. We try new things. We chat. We take exactly as many punches as we deliver.

A game like World of Warcraft can seriously monetize the skilled gamer’s grind. Because the ecology of our game traditionally (it doesn’t have to) means that one player’s activities affect other players’ spending willingness, we really can’t.

In the end, there are really only three types of players that can be monetized in a sustainable way in a traditional real money online poker room. The Friday night gambler. The addicted player who like villain guard  nr 5 falls to his death over and over again. And the explorers.

Since I’m going to pretend online gaming companies genuinely don’t seek to monetize people losing their life savings, the amount of revenue made boils down to (a) how many and how well players buy into the story and stay with it (b) how efficiently the chosen monetization method ( in this case rake) is at extracting revenue from explorers’ experiences and (c) how many players end up not getting burned enough by the story to keep the flame flickering.

We are in structural decline because we’re selling a story with such a bad bad-to-happy ending ratio that we we are no longer able to tell it to more new players than the number of player who stop believing in it.

The story isn’t being monetized as well as it should. That is true. And the skill gap is partly at fault.  But the larger  issue is the fact that we’re a one-story-wonder industry.

We simply need a new story, a new narrative through which the same story can be told or be better at fleshing the old story out.

More flesh, more juice

It is impossible to discuss the structural decline of online poker without taking into account the contradictory fact that Pokerstars appears largely unaffected and that thanks to social poker, more players than ever are enjoying the game online.

Is the idea of a structural decline just a mirage to cover up the fact that many companies have simply failed to match the product and services of Zynga and Pokerstars?

Zynga Poker tells a different story. A simpler story that can be monetized in a reach and accessibility advantageous manner. Unfortunately their story coupled with that form of monetization makes a dark alliance. Without purposely and actively triggering psychological mechanisms tied closely with addiction it too runs into structural decline.

In effect, the case of Zynga Poker is an example of the potential of understanding the story gap and working towards fixing it. But not the example I’d be inspired by.

In the case of Pokerstars, they have outclassed everyone (albeit in a Lance Armstrong like manner sometimes). Better products. Better services. And they’ve made far fewer of the marketing mistakes discussed earlier. Hence they are not sharing their revenue in Several Wrong Places and can monetize the same story better as a result. They also flesh out the story really well. Not by rewriting it. But by constantly adding sub plots.

On such example is their string of “world record” tournaments. They drew a crowd of 200 000 players when they set a participation record in December of last year. Some might argue that this is solely because everyone was attracted by the proposition of turning $1 into a six figure prize (part of the story) and figured that the event would draw an unusually weak field which made the ROI potential of the tournament higher than usual (part of the skill gap mindset). I just think people like me saw that as fun opportunity to get back in the game. Playing in (and hopefully beating) the biggest field ever was a new twist that appealed to us.

WCOOP. Same thing. Rationally, the WCOOP tournaments are not unique either in prize pool, format of participation. Still it draws a crowd beyond the normal. Because it adds a pinch of recognition to the recipe.

Pokerstars rule the industry because they’ve mastered and exploited the golden story better than anyone else. But in the end, they too rely primarily on selling the same basic narrative. They tool feel the pressure from the story gap.

Over the last twelve months I have published numerous blogs and articles addressing this vital topic. The concept of the story gap is new to my arsenal, but I and others with me have been contemplating how deal with the fundamental weaknesses of our industry’s success story for years.

Problems like the skill gap definitely factor into the equation. But until one is willing to discard the rational in-it-to-win-it mentality that dominates the industry (maybe because so many the industry’s pundits have a history of being successful players) and look at the game as an entertainment product , one can never properly understand the customer, analyse the industry or find deep-reaching solutions.

Lose your calculators, people. Pick up your books. The money is in the story.