When William Hill considered merging with Amaya, whose primary asset is PokerStars, some of William Hill’s top investors openly questioned the wisdom of the deal, believing the vertical’s best days are behind it.
The question first raised its head when William Hill’s largest shareholder, Parvus Asset Management, said the deal would have “limited strategic logic” in a letter to shareholders, first reported by Reuters. The investment firm didn’t hold back in its assessment.
“We strongly encourage that the board and management stops wasting valuable time and shareholder resources pursuing this value-destroying deal,” Parvus wrote to investors.
“It shouldn’t take more than five minutes of the board’s time to realize this deal doesn’t pass the smell test,” Parvus co-founder Mads Eg Gensmann told Reuters. Gensmann called Amaya’s online poker business “the least attractive segment in online gambling and that the deal favored Amaya investors.”
“Effectively, you’re buying an overvalued asset using an undervalued currency,” Gensmann said.
Not everyone agreed with Gensmann’s and Parvus’ negative assessment of online poker, specifically the when it comes to PokerStars, which has a 70 percent market share and doesn’t fit into the conventional online poker box.
"Parvus said the Canadian firm's core business of online poker was the least-attractive segment within online gambling"
— Adam Krejcik (@akrejcik) October 13, 2016
"Effectively, you're buying an overvalued asset using an undervalued currency," he said, citing moves in the value of the Canadian dollar
— Adam Krejcik (@akrejcik) October 13, 2016
I think this is true, but only to a degree. Spin N' Go = example of how Stars player base will head en masse to casino if product is right https://t.co/PyY2BgMdTW
— Chris Grove (@OPReport) October 13, 2016
— Jason N. Ader (@JasonAder) October 13, 2016
When the deal was finally nixed, PokerStars decided to chime in by refuting Parvus’ negative assessment of the vertical.
Poker is not on the decline
“It is simply not true to say that poker is a mature or declining market based upon certain public data which under-reports the size and growth of the poker market,” Amaya’s Head of Corporate Communications Eric Hollreiser said in post on the company’s corporate blog.
Hollreiser pointed out the company’s recent earnings reports, as well as the positive changes it’s seen since making difficult, but needed changes to its VIP rewards program and rake structures.
Hollreiser went on to explain how traditional metrics are no longer reliable ways to measure a poker site’s worth. Hollreiser singled out cash-game traffic, long a staple way of measuring a site’s health:
“For instance, PokerScout data, which tracks average ring game players not tournament play, is widely used for measuring poker player traffic, but increasingly only shows a small piece of the pie as it does not capture the continuing customer trend towards tournaments. Tournaments, comprising multi-table tournaments, sit-and-go’s and spin-and-go’s, contributes the majority of Amaya’s online poker revenue, which has been growing on a constant currency basis in the full year 2015 and in the second quarter of 2016.”
Poker players aren’t one trick ponies
Hollreiser also pushed back against another of Parvus’ criticisms: the idea it will be difficult to cross-sell casino and sports products to poker players.
“There is no factual basis for stating that it is inherently difficult to cross-sell poker players other online gaming products as it relates to Amaya,” Hollresier said.
“In fact, Amaya has seen success in cross-selling its online casino and sports betting products while increasing the lifetime values of cross-sold customers. Through cross-sell alone, Amaya estimates that its online casino currently has one of the largest casino player bases among its competitors. We have never said and do not believe that there was a backlash against any cross-sell push.
“More specifically, an independently-conducted survey of Amaya players shows approximately 35% of poker players play online casino products with Amaya or our competitors and approximately 40% of poker players play online sports with Amaya or our competitors.”
On the surface, online poker appears to be on the decline, continually ceding ground to online casinos and sports betting, with companies deciding to shift more of their focus away from online poker to their other online gaming offerings.
Still, we know what online poker is capable of, and had it not been for extenuating circumstances, online poker would likely still be growing.
It’s easy to say, “Look at the numbers. Online poker is on the decline.” But this is lazy. To get a clear picture of the situation, look at the causes of the decline, and whether it can be reversed.
In effect, an investor or business leader needs to look at the current online poker landscape and ask, “Will this change, and/or can I change it?”
The US chokepoint
First and foremost, let’s not lose sight of the fact online poker was kneecapped by Congress in 2006 when UIGEA was passed and many online poker operators left the market. And it was further hamstrung when the US Department of Justice cracked down on the remaining online poker operators on April 15, 2011 – Black Friday.
With its original and largest player base cut off (approximately 40 percent of the market in 2006), online poker has struggled, but soldiered on thanks to the game’s rising popularity in virtually every corner of the globe. Currently, poker’s popularity is at an all-time high in Europe and South America, and is starting to spread in Asia and Africa, but these gains have been offset by the loss of the US.
Regulation leads to ring-fenced markets
The US wasn’t the only obstacle placed in online poker’s path.
Often overlooked was how legalization across Europe and beyond has led to the balkanization of the global online poker market. This led to operators having greater, and sometimes redundant costs, as well as fractured liquidity pools.
US reopening and fences coming down
Fortunately, both of these problems are starting to disappear.
Legalization efforts in the US are progressing (albeit slowly) and France and other European countries have begun the process of opening their online poker borders. Both of these factors will help grow the online poker market in the coming years and reduce costs on operators.
The positives and negatives of online poker
There are several other concerning factors with online poker.
Of the big three — casino, sports, and poker — online poker has proven to be the most fickle and frustrating for operators.
- Its player base is overly discerning.
- It requires liquidity.
- The slightest change to games or structures can have the unintended consequence of radically altering player behaviors.
On the other hand, there are plenty of ways online poker can be beneficial, even in the current climate:
- It can be marketed and sold as a game of skill.
- Poker has a TV and pop culture presence.
- Online poker players tend to be more loyal.
- Revenue is consistent; there are no jackpots or bad sports results.
- The customers are one of its best marketing tools.
- Most importantly, online poker appeals to millennials.
It’s the millennials, stupid!
The first five bullet points above are pretty straightforward, and have been discussed by me and others ad nauseam. For the purposes of this column, the last bullet point will be the focus.
Online poker is the only proven gambling product that attracts the enigmatic millennial demographic and leads them to other products.
From 2003 to 2011, young men (and an increasing number of young women) were flocking to online poker tables, and by extension poker tables at land-based casinos. If, as some argue, these players are turning to other products, doesn’t it stand to reason that online poker is a gateway of sorts? It’s a way to grab the attention of younger players, even if they eventually migrate to other products.
I look at online poker as the ultimate attractant. The game is the carnival barker of gambling. Players can sit down and play for hours with just a couple of dollars, and there is a “leveling up” aspect to online poker as players become more and more skilled.
For no other reason than its ability to attract younger players, online poker is an extremely undervalued vertical.
As PokerStars noted, “Amaya’s strength in poker has enabled us to become one of the largest casino sites in the world in terms of active customers in less than two years with no external marketing.”
One final point
Let’s not lose sight of how young an industry online poker is.
Mistakes were certainly made by online poker operators as they battled for market share, and the changes that PokerStars and other operators are currently instituting are issues plenty of people have been sounding alarm bells about for years. These aren’t going to be quick, overnight fixes. In fact, even though I feel they will be beneficial, I predicted they would lead to a short-term decline.
After years of being decimated by sharks, and watching poker devolve into an unentertaining and overly strategic game, online poker operators need to reengage with the players who grew bored, frustrated and disillusioned with poker, and market the game to the next generation.
It’s going to take time for people to realize the ecosystem has changed, and to recognize that online poker sites are working on raising the entertainment level.
It will take time for players to realize sites have increased the short-term luck and variance with some of their changes, including lottery Sit & Go’s, devaluing volume play, and raising the rake at certain levels to dissuade sharks from settling in at what should be recreational-friendly stakes.