Online Gaming Splinters into National Markets

15 October 2007

It's been nearly a year since the Unlawful Internet Gambling Enforcement Act was signed into law, and the online gaming industry is still adjusting to the turmoil caused by its passage.

The effect of the legislation was felt immediately when PartyGaming and 888 Holdings officially abandoned the U.S. market on Friday, October 13--the day President Bush signed the UIGEA into law. Most publicly traded online gaming companies followed suit, and stock prices tumbled. In January, NETeller pulled out of the U.S. market following the arrests of its co-founders. Today payment processing is the single greatest challenge facing American players and the operators that serve them.

Online Gaming Industry Split

After the UIGEA became law, Casino City intensified its monitoring of the more than 2,500 online gaming sites listed in its database to track policy changes regarding the acceptance of Americans and other gamblers. In August 2006, a total of 1,955 sites allowed U.S. players from every state to gamble online. By September 2007, the number of sites accepting players from every state dropped by 45 percent to 1,079 (Figure 1).

The change among poker sites was even more pronounced. In August 2006, a total of 476 poker sites accepted all American players. By September 2007, that number dropped by 64 percent to 172 sites. Since the success of online poker rooms depends on player liquidity, the impact on poker rooms was greater than that experienced by other types of online gaming sites. In addition, the decisions of poker network operators affected all the poker sites using their networks.

The online gaming industry, once dominated by a huge U.S. marketplace, is now split into operators that continue to offer online gambling services to a smaller audience of remaining American players and operators that do not.

Turmoil in the Online Poker Marketplace

Casino City operates highly sophisticated monitoring software created to track the level of activity on the major online poker networks. Figure 2 shows the dramatic drop we measured in the average daily peak number of ring-game players on the PartyPoker network after its withdrawal from the U.S. market. But strong player liquidity, even without American players, allowed the PartyPoker network to survive.

PartyPoker's ring-game players showed steady growth due to heavy promotion in Europe during the beginning of 2007. With fewer players, smaller Paradise Poker did not fair as well. After experiencing similar player losses they lacked sufficient player liquidity to continue operating as an independent platform and joined the Boss network.

The European OnGame poker network experienced significant growth in 2007, as shown in Figure 4. The average number of ring-game players doubled to 5,000 during the first few months of the year. In late April the number of ring-game players tripled to 15,000. At the same time the number of PartyPoker players began to decline. Further growth in the OnGame network in August raised the average peak number of players to 25,000.

The rise and fall of the average daily peak in the number of ring-game players on the PartyPoker network is mirrored by PartyGaming's stock price (Figure 3). The stock price dropped 75 percent to 26 pence the month after passage of the UIGEA and the number of ring-game players declined 60 percent from 18,000 to 7,000. Over the next several months, the number of ring-game players grew 60 percent reaching 11,000 before peaking in March 2007. One month later, the stock price peaked at 57 and 3/4 pence, a 122 percent increase. Following the March peak, the number of ring-game players declined 27 percent to 8,000 before bottoming out in July. A month later, the stock price began to rebound after dropping 59 percent to a low of 23 and 3/4 pence.

The U.S. poker marketplace has undergone tremendous change since the departure of PartyPoker. Today PokerStars dominates the U.S. marketplace with an average daily peak of 12,000 ring-game players (Figure 5). Full Tilt Poker is also a major player (Figure 6), having grown from fewer than 4,000 ring-game players before passage of the UIGEA to over 8,000 today. Bodog Poker grew from 1,000 peak players a year ago to a peak of 4,000 players at the end of 2006. After scaling back their marketing this year, they've dropped down to 2,000 ring-game players (Figure 7).

A Strong European Market Focus

The focus of gambling operators' marketing efforts can be observed by monitoring the demographics of their Web site traffic. Casino City tracks the demographics of the traffic to all online gaming sites. Figure 8 shows aggregated information for the source of visitors to online gambling sites for April/May 2007 and Figure 9 shows the same information for June/July 2007.

These figures show the European market is increasingly where customer acquisition efforts are focused. Over this short period of a few months the share of European visitors increased to over two-thirds of all visitors. And the share of North American visitors was halved to just over 8 percent. This is in sharp contrast to a year ago when the majority of visitors to online gambling sites were from the United States.

Affiliates operating gambling portal sites know the realities of the online gambling marketplace have changed. In a GPWA poll taken late last year, 76 percent of the respondents indicated they were making changes to their sites in response to the UIGEA. However, most of the changes being made were to help U.S. players. Only a third of the webmasters planned to add foreign-language content to their sites, and only a fifth planned to geo-target advertisements based on visitor location.

The demographics of visitors to gaming portal sites do reflect a strong shift away from the North American market. Historically traffic to portal sites was dominated by U.S. traffic, but as shown in Figure 10, all North American traffic was just over 40 percent in the second quarter of 2007. The biggest issue for portal operators is the lack of European traffic on their sites. Less than a quarter of traffic on portal sites is from Europe--the traffic most valued by gaming operators.

A Split Online Gaming Marketplace Becomes Splintered

When growth in online gaming was driven by the economics of the U.S. marketplace solid English-language support was sufficient to operate a growing online gaming business. Today that is no longer the case. The split into operators accepting U.S. players and operators not accepting U.S. players is only one aspect of the way the marketplace has evolved. As the online gambling marketplace matures, solid localized products and marketing plans are required to successfully compete in each national market. The online gaming marketplace is now splintered into national markets.