October 02, 2015

PokerStars in New Jersey—Back to the Silver Age of Poker?

"Here I come to save the day!"

~ Mighty Mouse

American comic books have followed an interesting historical arc. The "Golden Age" spanned the era from the Great Depression through the post-World War II days, and saw the debuts of classic clean-cut All-American heroes like Superman and Captain America. After a period of decline for traditional comics, the "Silver Age" and "Bronze Age" of comics marked a resurgence of classic comic heroes and story lines. A turn in the mid-1980s toward darker and more dystopian themes and the rise of more conflicted heroes and anti-heroes marked the beginning of the "Modern Age" of comics.

Online poker has followed a strikingly similar course. The Golden Age of online poker ran from the rise of sites like Paradise Poker and Party Poker in the late 1990s and early 2000s through the passage of UIGEA in 2006. The Silver Age of online poker saw the rise of PokerStars and Full Tilt as the new heroes for poker players, and came to an end when Black Friday destroyed online poker in the U.S. in 2011. After enduring a Dark Age with no online poker, the Modern Age of online poker began with the rise of regulated online poker in a handful of states, set against a bleak landscape of poker prohibition, populated by a gallery of newly reinvented and rebooted heroes—Party Poker and 888 are back from exile, Caesars has been transformed from super-villain to crusading hero, Full Tilt is an ally of its former archenemy PokerStars, and everyone is threatened by a new cyborg super-villain named "SH3LD0N".

Online poker's historical arc came to mind this week when, after months of speculation and anticipation, the online poker world finally received some transformative news—as first reported by Dustin Gouker at Online Poker Report, PokerStars has been approved by New Jersey gaming regulators to operate an online poker site. But does this key development mark a return to the Silver Age of online poker, or is it another step forward into the Modern Age?


Market Expansion or Cannibalization?

The literally million dollar question is less whether PokerStars will be a major player in the New Jersey online poker market and more where PokerStars' market share will come from. PokerStars will inevitably draw players away from its established competitors. And many in the poker community seem to hold as an article of faith that PokerStars' entry into the market will create a new poker boom, greatly expanding the player base. Respected poker industry insider Nolan Dalla expresses what seems to be the prevalent view that PokerStars will cannibalize little of its player base from established competitors, and that PokerStars will significantly expand the market. But are these presumptions reasonable? Color me skeptical.

When regulated online poker launched in New Jersey, there was an initial surge of play, fueled by a combination of pent-up consumer demand from former online players and a wave of marketing recruiting new players to the pool. That surge, however, quickly subsided. During the heady post-launch days, online poker in New Jersey generated revenues exceeding $2.5 million per month over the first five months, with three months exceeding $3 million in revenue. Yet by six months post-launch, revenues settled into a rate of roughly $2 million per month, plus or minus 10% depending on seasonal variance. As we approach the two-year mark, those revenues are at best stable, and possibly in a slow decline when viewed on a year-over-year basis.

The bullish case for robust market expansion—summarized nicely by Steve Ruddock at Online Poker Report—forecasts PokerStars will expand the market and increase revenues to $3-$4 million per month. That would be an increase of 50% to 100% over current revenues. This optimistic vision is predicated on a combination of PokerStars' established branding and reputation within the poker community combined with an aggressive marketing campaign drawing in new players.

This rose-colored scenario seems implausible. Although the PokerStars brand remains strong among established poker players, those players are almost certainly already playing online on one of the existing poker sites. Even if PokerStars wins over many of these established players, they will be cannibalizing the market, not expanding it. Certainly a PokerStars marketing campaign could attract new players. But nearly two years post-legalization, it is questionable how large a pool there is of people in New Jersey who want to play online poker and who, for whatever reason, have not started playing on one of the existing sites. And, there is the problem of retaining new players once the initial marketing surge is past, a problem reflected in the sharp decline in online poker revenues mere months following legalization.

Ruddock and Dalla both assert that large numbers of New Jersey residents are unaware they can legally gamble online. According to Dalla:
"A recent poll in New Jersey revealed some staggering statistics that about 60 percent of the residents of the Garden State still are not aware that online poker/gambling is legal. Despite numerous marketing campaigns and a flood of advertising, a majority of citizens have no idea they can play poker legally on their computer. One expects that given PokerStars immense success cultivating and growing immature markets in numerous foreign countries over the past decade, with such vast resources they should have little trouble jump starting New Jersey’s online poker market into overdrive."
First off, Dalla doesn't specify or link to the survey he is citing. The only survey with results tracking Dalla's claims I could find dates back to November 2013, when online gaming was just beginning to launch. If this is the survey Dalla relies on, the results are understandable and irrelevant to the current state of the New Jersey market. But even if a more recent survey shows a high percentage of consumer confusion regarding online gaming, it is a mistake to conflate poker and casino gaming in this context. Online poker in New Jersey is most certainly not an "immature market". Online poker was available and heavily advertised for the better part of a decade prior to Black Friday, and has been available again and advertised again over the past two years. Online casino gaming, however, is in its infancy. So, while public knowledge of and comfort with online casino gaming may be low, there is no reason to assume that the same holds true for online poker.

Measuring PokerStars' success may well be a matter of managing expectations. There is nothing wrong with being bullish on PokerStars' impact on the New Jersey market; PokerStars has been the long-term industry leader for a reason. But, nobody should be shocked if the bulk of PokerStars' customers are cannibalized from the existing sites. This is not inherently a bad result, as healthy competition among the poker sites should benefit players. Further, in light of the currently stagnant-to-declining market, success for PokerStars might realistically mean expanding the New Jersey online poker market by 10% in the first year (average monthly revenues of $2.2 million/month), and 25% over three years ($2.5 million/month). Increasing the market by 50%—up to the $3 million in monthly revenues experienced immediately after legalized poker launched—should be considered a home run. Expecting PokerStars to double the market is setting everyone up for disappointment.


Will Regulation Change PokerStars?

Poker players expecting the same online experience at the new PokerStars as they had with the Silver Age PokerStars are likely to be disappointed (Chris Grove, editor of Online Poker Report, highlights many of the key issues facing PokerStars). Between being purchased by a publicly traded company (Amaya Inc.) and being licensed by New Jersey to offer online gaming, PokerStars is now subject to a host of regulations which will inevitably change how it operates. Some of the more obvious changes:
  • Ring-fencing and liquidity:  The most obvious change from the Silver Age is that players will not have access to PokerStars' global network of players. For that matter, players won't even have access to the broader U.S. market. Being limited to an in-state pool means PokerStars will likely not offer the same broad array of cash games and tournaments as in the Silver Age.
  • Age verification:  In the Silver Age, PokerStars nominally had a minimum age for players of 18, though the age requirement seemed more a guideline than a rule. The current regulatory environment means strict enforcement of the minimum age of 21 for players, which will require PokerStars to shift from those parts of its prior marketing models directed at younger players. Frankly, the age 21 requirement will make it more difficult for PokerStars to attract new players on a long-term basis, as potential players are exposed to competing games such as e-sports and daily fantasy sports which do not have the same minimum age requirements.
  • Payment processing:  Operating in a regulated environment will make moving money onto and off of PokerStars easier and more secure than in the Silver Age. But, PokerStars will have to comply with anti-money laundering and tax reporting regulations which may affect players used to the previous shadow economy of the unregulated Silver Age poker world.
  • Speed to market:  Deployment of new software and innovative games (e.g., Rush Poker, and Spin 'N Go Tournaments) may be delayed by the regulatory approval process.
  • Financial market pressures:  PokerStars' new owner, Amaya, will face pressure from its shareholders to meet certain financial benchmarks for revenues and earnings. This will impose limits on the amounts PokerStars will be able to invest in marketing campaigns, tournament guarantees, and player rewards. This is true even if PokerStars views New Jersey as worth running short-term losses to establish a strong market presence, and even if spillover effects such as improving its standing in other states are factored into the equation. At some point, even PokerStars has to worry about return on equity from its New Jersey operation.
Of course, in the regulated New Jersey market, every poker site will have to contend with the same set of regulatory issues. There is no reason to think PokerStars will have trouble adjusting to the new market conditions. But players expecting a return to the Silver Age may be unhappy about some aspects of the regulated version of PokerStars.


End of the Line for "Bad Actor" Laws?

One important effect of the New Jersey decision to approve PokerStars is that the "bad actor" debate may finally be put to rest. Immediately after Black Friday, there were strong policy reasons for legislators to cite in support of keeping PokerStars out of the U.S. market. After all, PokerStars had arguably (unquestionably, outside the poker community echo chamber) offered unlicensed gaming in violation of many state and federal laws, and had allegedly engaged in legally questionable practices in processing player fund deposits, all of which gave it an unfair advantage over companies which had followed the law strictly and stayed out of the U.S. market.

Nearly five years post-Black Friday, those arguments are obsolete, having been overtaken by events. PokerStars' competitors have enjoyed a two-year advantage in establishing a presence in the New Jersey market. More importantly, the sale of PokerStars to Amaya marked the exodus of indicted PokerStars founder Isai Scheinberg and other top executives. Consistent with how Nevada and New Jersey regulators have treated other gaming licensees with connections to individuals with sketchy legal issues, Amaya's clean record should make PokerStars a suitable operator in every state ... but for the impact of politics.

The bad actor (and related "tainted assets" provisions) have been incorporated into Nevada law and have most recently played a pivotal role in blocking passage of an online poker legalization bill in California. Such provisions have rightly been criticized as being economic protectionism for brick-and-mortar and tribal gaming interests dressed up in consumer protection and suitability clothing. But such arguments carried the veneer of legitimacy so long as the company founder remained under federal indictment. Now, with a respected state gaming board having investigated and given its stamp of approval to the new Amaya version of PokerStars, the bad actor bluff has effectively been called. The bad actor issue has always been more a political than a legal issue, but those seeking bad actor provisions will find it difficult to continue to argue that PokerStars is unsuitable in the face of the New Jersey DGE licensing decision.


Conclusion

The return of PokerStars to the United States market is unquestionably good for poker. Yet, PokerStars is burdened with the unrealistic expectation of returning online poker to the Silver Age, when million dollar tournament guarantees fell like manna from heaven, and rakeback flowed like milk and honey. It's simply unfair to saddle PokerStars with such a fevered vision. Far better to appreciate the return of PokerStars for what it is—an important step forward as online poker moves into the Modern Age as a regulated, legitimate, and accepted part of the American gaming experience.

1 comment:

  1. I think this is huge. PokerStars in New Jersey gives them a beachhead from which they can demonstrate to other jurisdictions that they, now led by Amaya, are a good actor. I'm thinking that the online poker business in NJ will be around break-even for PS, and they'll be okay with that. The real money will be made in live events held at Resorts, to which PS can offer satellites from all over its worldwide network. Would this be a return of the NAPT? Possibly, but whatever they call it will rival Borgata in scope and prestige. The live events will keep PS in NJ afloat until they start breaching more states. I do hope those future states realize that shared liquidity is the way to go. If they do, critical mass will eventually be reached, returning online poker to the U.S. as a whole.

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