Consolidation and Liquidity in Online Poker

Jonas Ödman, Vice President of Bodog Network, has taken a different view on the death of the shared network model that he’s shared on the Calvin Ayre website titled Balkanization Not Consolidation?

Jonas says:

Player liquidity and consolidation have been two key words in the online poker industry for a number of years now. Player liquidity has been the ultimate goal and driving force for many companies, and it has been repeated so many times that is has become a “truth” nobody challenges. Another similar buzz word is consolidation. For how many years have we heard that consolidation of the online gaming industry is around the corner? In a way the two are related—consolidation is a very effective way to create big player liquidity quickly.

I think the industry is now heading in the opposite direction. We will have balkanization instead of consolidation, and player liquidity will no longer be viewed as the key to success.

So before we can go on, we need to make sure we understand the meaning of balkanization. According to Wikipedia:

Balkanization, or Balkanisation, is a pejorative geopolitical term originally used to describe the process of fragmentation or division of a region or state into smaller regions or states that are often hostile or non-cooperative with each other.

Using that definition of balkanisation I’m hard pressed to find evidence of it in today’s current marketplace. All you have to do is be able to read PokerScout’s weekly numbers and it’s easy to see the exactly the opposite of balkanisation is going on. The small keep getting smaller and the big keep getting bigger. That is pretty much the definition of consolidation.

Jonas goes on to say:

The PWin merger is, of course, big news in the industry but I do not see that as the start of a consolidation phase. As Steven Stradbrooke pointed out in his analysis of the merger, there are a number of question marks around how successful this merger will be and the driving forces behind it. More recently, the stock market has given its verdict.

Actually, I found Stradbrooke’s (who writes for Calvin Ayre) analysis to be somewhat lacking as it seemed paint a picture as if BWin Poker and Ongame were the only assets being acquired. Obviously, for Party, this was more about building a massive sports book and casino business as both of those areas have been driving more and more of Party’s growth while poker, like nearly every other online poker site not named PokerStars or Full Tilt Poker, has been languishing.

Striving for player liquidity has been a way of catering for the winning players. Remember, that before Bodog opened up the debate about depositing players versus winning ones, these winning players were considered “high rakers” and everyone was competing for them. It feels like a long time ago now but it was actually less than two years ago. Having a large pool of net depositing players was a way of competing for these winning players, but the user experience of the net depositing players was not seen as important.

I strongly disagree with this assessment. Striving for player liquidity is not something you do just for your winning players. Liquidity equals revenue. You do it because it’s profitable.

And the market has been constantly proving Jonas’ assertion wrong for several years now. Stars and Full Tilt do not necessarily offer the best value for the money to either players or affiliates yet players are moving there and affiliates keep promoting them.

And thing thing is, liquidity matters to the players as well. For instance, when I first started playing online poker at Paradise, who was supposedly the largest room at the time, I slowly played my way up from .25/50 limit poker to playing at the $3/$6 level. I wasn’t some natural or anything. I made mistakes. I made money, lost money, and broke even. But I kept working at it and slowly my bankroll started to build up and I moved up to the next limit and got my ass handed to me and I moved down again and worked my way back up until I eventually could make a decent little win rate at $3/$6.

But even at $3/$6 I was playing against the same bunch of people every night. I was playing four tables and almost half of every table was the same players on my other tables. We were all of similar skill levels so basically we pushed chips back and forth and prayed that some suckers would come in and sit down so we could clean them out.

And when I was ready to move on to $5/$10 Paradise couldn’t even spread 2 tables. So what was I to do? I asked around and people recommended Party Poker to me because they had a lot more players.

I guess Jonas could argue that I was one of the winning players he was talking about but even if I was a fish at $3/$6 I would get pretty tired of losing to the same 5 or 6 guys every night. I would want a change of competition because, you know, I’m not losing because I suck but because those guys play crazy and get lucky, right? :-) Seriously, nobody wants to sit there and lose to the same screen names every night. So you provide liquidity so that your players can move from one table to the next and not run into the same exact players. It’s not a good experience for either the good players or the net depositors.

As a natural consequence of the focus on player liquidity everyone has expected the online poker industry to enter a consolidation phase. However, Patrik Selin challenged the consolidation issue more than a year ago and did Kim Lund, an e-gaming analyst, wrote a series of articles on liquidity in October 2010.

Sure, to run a successful poker room you need a critical mass to keep the games going, but after you have achieved that level of players, liquidity is not key anymore. The battlefield of the future in my view is entertainment and since different players have different ideas of what is entertainment is we will for the first time in the short history of online poker start to see differentiation in poker rooms.

Some players may find it important to be able to chat in their own language, others may want a user experience close to what you can get playing a video game. Some players may find tournaments with huge fields more entertaining than small fields. For those players, player liquidity will continue to be an important entertainment factor, but for the majority of players, liquidity has a small part to play of the total entertainment package.

While I agree that the online poker industry needs differentiation (and I’ve written about it quite extensively in the past), it’s quite easy to say that liquidity doesn’t matter when you don’t have any.

First off, the two people Jonas references are Patrik Selin, Bodog’s CEO, and Kim Lund who was formerly at BWin. Both of these guys are heavily invested in the network model. So, there is some bias. It doesn’t mean that they don’t have interesting theories but they’re going to paint the situation from what they know best.

Okay, first off, in the Selin article that Jonas references where a case is made for why liquidity doesn’t matter the entire argument is based off the fact that there’s still a lot of gaming that isn’t online yet.

But today still only about 8% of the total gambling market is online, with the rest taking place in kiosks or casinos. We know that the online market will grow its market share. The question is more, will it be 50 %, 60 % or some other figure of future gambling that will be online?

Nobody is arguing about total gaming. But, my guess is, more poker gets played online than in casino so this whole argument is very weak if we’re talking about online poker. Like I said, I’ll give you the benefit of the doubt on the entire gaming sector but most big online gaming operators aren’t complaining about their casino and sports business like they are about poker. Part of that is you don’t need liquidity in a casino. You can have five huge whales and make a mint. And companies like Party report strong earning based on their casino and sports book while continuously reporting disappointing numbers in poker.

Selin goes on to say in the article:

The online poker market, for instance, has grown 17% since the Summer, according to PokerScout, and PokerStars has had 150,000 poker players starting in the same poker tournament in December, up from its previous record of 65,000 in July.

Of course growth is up from the summer. Summer is the slowest period for online poker. That’s like saying heating fuel consumption is up 40% since July and then implying that this is a long-term trend. The same source he references, PokerScout indicates that overall player growth on an annual basis is only up 1% - 3%. You don’t take the bottom point in a cyclical business and compare it to a another point in the year and call that growth. Compare last summer to this summer or year over year. That’s a relevant comparison.

And the part that Selin doesn’t seem to see is that he’s making the counter-argument. Why did he reference the tournament at Stars? Because Stars is the net beneficiary of the market consolidation that both he and Jonas claim isn’t happening. Why didn’t he pick Bodog for example? Or Party? Or any of the other sites that have been losing players to Full Tilt and PokerStars?

And if you read Kim Lund’s post, he makes some interesting points but I think he arrives at a flawed conclusion as well (IMHO). Part of that is he ends up wrapping all of his thoughts around this line of thinking:

This fright is a borderline illusion. While the market has grown substantially year on year, playing habits have stayed more or less the same. Small stakes no limit hold’em totally dominated the market in 2005 and, if anything, that dominance has increased since. So the limited range of tables you had to spread in order to satisfy the needs of the majority of the players in 2005, is roughly the same limited range required today. Only noticeable difference being the increased need for micro stakes games due to the poker buzz hitting Eastern Europe.

But that’s IS the problem. I started playing long before 2005 but I started playing at Paradise when it was still the largest poker room around. But by the time I was able to graduate to $3/$6 limit Paradise didn’t have enough liquidity to spread enough tables for me. So even though the liquidity at Paradise may not have changed (I don’t think anybody was really tracking numbers closely at the time, or at least I wasn’t) my needs from the poker room did. Even if I was playing small-stakes NL I would have run into the same barrier.

Lund goes on to say:

But if you study the Pokersitescout.com rankings (reliable enough in this case) there are sites in the 20s and even 30s who might not be toppling Pokerstars any time soon, but are offering steady action (their numbers are not dropping even on a 12 month horizon). And, presumably, doing solid business. A fact that would be impossible had they not reached critical mass

I really wish he would have listed who those rooms are because I’m willing to bet that most of those rooms owe their success to operating in a niche market. But more to the point, look who’s in the 30’s and look at their numbers and I don’t think anybody would be falling over themselves to get into their business. I know Lund wrote this back in October of 2010 but today the best numbers for any rooms in the 30’s that aren’t a bigger room’s .fr or .it regulated market spinoff are International.ca with a 7-day average of 151 players and a 24 hour peak of 298. At their peak they’re spreading 30 tables 10-handed, 34 tables 9-handed, or 49 tables 6-handed. And I don’t even know if those numbers are stable because PokerScout doesn’t have any info on when the numbers were last updated.

Is that really an example that “critical mass” can sustain a poker room?

BTW, type in international.ca and it’s a parked domain (I wish I would have checked first before writing all of the above - lol) so I guess critical mass couldn’t sustain them.

And even when you look in the 20’s you’ve got networks in there like Everleaf (#26) with over 100 skins. So their 24 hour peak number is 906 players. That means that, on average, each skin is sending 10 players. Really? You can run a poker business where you’ve got 10 players? Even if you use the 80-20 rule and say that the top 20% of skins are sending 80% of the players, what is that, 36 players from each of the top 20 skins on the network?

The bottom line is that Bodog is making the same argument that small retailers make whenever Walmart or some superstore enters their market. It’s about the personal touch, to them you’re just a number, we care about you, yadda, yadda, yadda. But it’s quite obvious from their success that Walmart does indeed have a huge impact on local economies. If you sell the same stuff that Walmart is selling economies of scale make it difficult for you to compete on price or selection.

Yes, you can carve out small niches and yes a certain amount of critical mass can keep a niche site in business but when people are talking about liquidity and consolidation they’re not talking about these niches. Both Bodog and someone like BWin need liquidity. They aren’t small niche operators who can have 2 or 3 staff and peak players of 100 - 300.

How many of Everleaf’s 100+ skins can survive? How many have already shut their doors but they’re still listed on PokerScout? I mean, there was international.ca but they don’t seem to be around anymore. How many of the hundreds of other sites out there will be around in another year or two?

Yes there are small niches left. Nobody is saying that the entire poker world will come down to 3 or 4 rooms. It’s just that most of these niche sites will be hammering out maybe $1 mil - $2 mil a year in revenue and will not be on most people’s radar. But will it be a balkanization? Hardly. The entire idea behind a niche is that it has very little competition. It may be in a competitive market but it has carved out a specialty that nobody else is doing.

And you can carve out larger niches too. For instance, a company like Party could give up competing against Stars and Tilt and decide to just focus on one aspect of poker and totally kick ass doing it. Focus on one sliver but be the best at it. For instance, SnG’s. Anybody in the top 10 or 20 rooms could quit competing with Stars and Tilt across the board and become a SnG specialist. Have the best SnG software, the best bonuses for SnG players, the best everything. Or do like Everest and really focus in on the micro-stakes. Be the best micro-stakes room out there.

That’s how you differentiate yourself. That might amount to some balkanization. But I don’t really see anybody doing that at the moment. As more consolidation occurs and people become desperate you might see sites finally waking up to the fact that they can’t go toe-to-toe with the big guys. But other than Everest with micro-stakes and maybe some very small skins nobody is really looking at this or if they are they aren’t going after it with much gusto. Okay, maybe ReeferPoker and some adult sites but these guys aren’t really carving out any real niche.

All of this talk that industry isn’t consolidating and about how liquidity doesn’t matter sounds good on paper but doesn’t seem to be working in real life. The industry is consolidating and the players are voting with their feet on liquidity.