Eye on the Industry | Incest in the Poker Room

11 May 2009
Welcome to IGamingNews' newest series of semi-regular op-ed articles, Eye on the Industry. Here, we'll feature incisive pieces -- penned by executives, analysts, lawyers, researchers, the occasional anonymous source, mainstream media journalists, fellow e-gaming scribes and a professional gambler or two -- which examine a particular issue.

This article was written by an executive in the online poker industry who requested anonymity.

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Attracting new players is key to building a successful Internet-based gambling business. However, when the underlying technology and methods used to grow a player base result in rapid disintegration of top-line revenues, operators need to reconsider their approach.

Today, online gaming software is commonly based on what is known as the White Label Network Model (WLNM). With a white label network, multiple operators bring in customers under their own label into an aggregated network of players all running on a single, centralized server. Client interfaces are “reskinned” to lead players into believing they are playing on a unique platform when in fact clients are shared by all skin operators on the site. Branding differentiation between operators is extremely limited and poker room management, including table stakes and tournament schedules, are out of an operator’s control.

While white label networks do enable operators to enter the online gambling business without the upfront costs of installing a data center, they do so only at the expense of future profits. Consider that to be a part of a white label network, each skin operator must pay a percentage of top-line revenue to the network operator. In addition, to grow their player base skin operators hire affiliates to actively recruit players.

With no way to differentiate themselves in the product they offer to new players, operators must compete by cutting price. What tends to happen is that new poker players are recruited with incentives. However, when new players are treated better than long-term players -- through sign-up bonuses, promotions, rake back and other incentives -- even loyal players will consider changing platforms.

The reality is that many new customers to a skin operator are in fact already existing customers, at least to the network operator. And as the skin operators cannibalize each others' player bases, it is the network operator (who takes 12 to 30 percent of top line revenues) and the affiliates (who receive a hefty flat fee or lifetime cut on the order of 25 percent) who make money. The most profitable online poker rooms are PokerStars and Full Tilt, each of whom runs their own standalone room. The network operators also do very well.

The companies that settle for WLNM skins face a different fate.

Individual operators are left with decreasing profits and contracts that lock them into continuing to generate guaranteed revenue for their partners but not themselves. Attempts have been made to secure agreement between skin operators not to actively recruit each others' player bases. However, the ones who typically make out best in this sort of arrangement are those who ignore the embargo and continue to recruit. In the end, operators are forced to compete in a “race to the bottom,” cutting profit margins to support larger incentives for players and affiliates.

Sustainability through Control

To survive cannibalism and build a sustainable online operation, operators need to be able to differentiate themselves from their competition in a way that both attracts and retains newly acquired players without undercutting top-line revenues. With white label networks, however, the network operator is a layer between the poker operators and their players, leaving operators little influence over important elements like tournament schedule, range of games, number of tables at each stake and even when downtime maintenance occurs.

This lack of control extends from the look and action of the poker room out to how the platform will evolve and the release of new features or games. Network operators are forced to take a “least-common-denominator” approach, resulting in a platform that is less than ideal for individual skin operators. All game play, interfaces and even tournaments are exactly the same as other operators within the same network. Other than perhaps their logo, there is little else to differentiate skin operators from each other.

To a player, then, there’s no real difference between two skins operating on the same network. As a consequence, it should be no real surprise that players have little, if any, loyalty to a particular operator, especially when there are valuable incentives to switch -- like $500 bonuses.

It is only by running their own poker rooms that operators gain direct control over the player experience and to exploit technology to their full advantage. By differentiating their platform through their particular mix of games, tournaments, and software features, operators can give players the experience they want in a unique way they can’t get anywhere else. This level of control also enables the operator to eliminate revenue sharing with a network operator, substantially bolstering profits. In addition, internal player attrition within the site is completely eliminated.

Building Trust

The changing technological climate requires that operators also consider their long-term viability beyond just bottom-line profitability. For example, according to a U.K. study released in February 2009, only one-eighth of players believe that existing sites are fair and provide good service. Operators who can offer the same level of player confidence as commercial banks enjoy will have a clear advantage over the majority of WLNM-based sites operating today.

Specifically, the lack of direct operator control in white label networks weakens an operator’s ability to detect undesirable collusion between players or prevent customer identities from being compromised. There is no way to increase player confidence because there is no way for an individual operator to guarantee that all operators within the network are complying with even rudimentary security and anti-collusion measures.

This lack of trust pervades the entire WLNM revenue chain. For example, a key concern for investors is the difficulty of accurately assigning revenues for a particular platform when many operators are pooled together. This concern extends all the way up to government entities -- including those of Sweden, France, Ireland, Canada, Italy and the United States -- who see Internet gaming as a source of new revenues and taxation as a means for regulating the market. Without consistent revenue reporting, however, regulation will prove unreliable and prone to manipulation.

These countries have a vested interest in the success of Internet gaming, and avoiding scandal is a matter of survival for continued support and expansion of online venues. Rather than struggle to figure out how to reliably monitor and tax white label networks, these government entities instead are designing regulations that will force operators to adapt their networks in significant ways.

For example, under Italian law, gaming servers must be located within the country and every tournament approved by the government. Operators must also monitor that payments are taken from appropriate jurisdictions. Many jurisdictions are imposing similar regulations to facilitate more thorough revenue tracking than is possible with white label networks.

To comply with gaming initiatives for these jurisdictions, each operator must have the ability to monitor and control the player environment. Current problems, like handling identity questions that arise from lax registration procedures, accurately tracking revenue, and managing collusion across operators will no longer be a concern. This is only possible when a single operator controls the network.

The Wild West days of Internet-based gaming are coming to an end as government entities begin to take more interest in taxing online gambling. Traditional Internet gaming networks that aggregate multiple operators are simply not appropriate for governmentally licensed operators as new regulations are introduced that dictate server placement within a country’s borders and require accurate revenue tracking. The existing white label network model and the incestuous race it provokes to degrade profit margins for operators -- through burdensome revenue sharing on the order of 30 percent or more of top-line revenue going to network operators and affiliates -- is simply not a sustainable business model.

In order to free themselves of margin contraction, operators must be in full control of their platform, their brand and their profits. Rather than to continue to pay WLNM top-line revenues indefinitely, investors are realizing it is more advantageous for them to protect future profits by acquiring technology licenses outright. By basing Internet gaming platforms on a firm foundation of centralized control that preserves profits, agile and secure technology that inspires player trust, and a reliable platform that meets the requirements of pending regulation, operators will be able to fully exploit the tremendous opportunity online gaming presents.

The IGN staff continually troll the wires, foreign papers, corporate news alert services and other dark, dusty corners of the Web to bring you the very latest industry news.