I won't link the thread incase of people thinking I'm spamming, but my CEO just released the following article about the future of poker:
It is now a well understood fact in the poker industry that attracting and retaining recreational players is key to a poker room's success. In my two previous columns, I pointed out how some poker rooms misunderstood this principle by turning against professional players. The conclusion was that the right strategy for a poker room is to attract recreational players, while not discriminating against those who become successful.
I want to focus on the former part, how to attract recreational players.
An ecosystem based on gamblers
Back in the early days, around 2004, running a poker room seemed to be easy if one had a stable software platform (which most companies did not). Allegedly, the cost to acquire new real money players was sometimes as low as $10, while average customer lifetime values were in the thousands.
Back then, the typical composition of tables was usually a mix of very unskilled gambler-type players, and a set of stronger players who made big profits due to the low overall skill level.
Even then, the churn rate of recreational players was very high. However, as the market was still maturing and poker was booming, there were always enough new players to take their place.
Nowadays, this is different. A key market - the US - is closed to online poker. Other countries are regulated or about to be regulated. The poker boom, by and large is pretty much over, with overall poker revenues in decline. Typical 'gambler-type' players are much harder to acquire than before.
So what is the large scale picture? On one hand of the equation, we have a worldwide monthly poker rake of around $300m. Typical cash-out-to-rake ratios in the poker industry are rumored to be about two to one, so we can assume around $600 in monthly withdrawals. Therefore, to maintain the poker ecosystem at the current level, monthly deposits of $900m must be generated by the poker industry.
Where is this money going to come from?
Now, first of all, some of the deposits generated are 'pseudo-deposits' made by winning players, i.e. they will not become available to the poker ecosystem as they will be withdrawn again after some time by the same player. Let's assume that this accounts for 1/3 of all deposits made, leaving $600m per month that has to come from losing players.
Let's assume - optimistically - that the average recreational player deposits $600 in his lifetime before he churns. Based on that, per month, 1 million new losing players would have to be generated by the industry to maintain the status-quo.
Given the current state of how poker is marketed - targeting gambler-type players - maintaining this level is, quite frankly, impossible. To illustrate this, let's look at Germany, which is - now that the US is closed - the world's largest market for online poker, with a worldwide market share of around 10%. In the key target group for poker, which is male, between 18 and 40 years of age, there are about 23 million people.
Now, we all know that online poker is not for everybody. The current way it is being marketed, I would assume that no more than 10% of that target group could realistically become online poker players - and I'd say, this is an optimistic assumption. Therefore, there are 2.3 million potential online poker players in Germany, compared to an estimated 300k of active ones right now.
Germany, which is around 10% of the world-wide poker market, could at most sustain the current levels of liquidity for only two months. Even if we assume that the rest of the world is as 'deposit friendly' (despite lower GDPs) as the German market, we are left with 20 months worth of recreational players at most.
Now, of course, we will not see 20 months of the market staying at the same level followed by a sudden decline to zero. Rather, we will see an ongoing drop of rake levels and liquidity, given that the current poker ecosystem cannot sustain itself.
Ironically, some poker rooms that think they will resolve this by focusing even more on attracting gamblers might actually accelerate this development. All in all, if nothing is being done, I would not be surprised to see liquidity halved in 18 months time.
Based on the model above, there are different angles which can be used to attack that problem:
1) Increase the Deposit to Rake Conversion rate, thus, getting more liquidity from the same amount of deposits.
2) Increase the lifetime deposits of recreational players.
3) Make poker more accessible to a wider target group: establish a new type of recreational player.
Lots of things can be written on point #1, as it's a highly interesting and poorly understood topic. In fact, some poker rooms currently might be accelerating their ultimate decline by seeking to acquire more gamblers more quickly, while at the same time losing out on deposit to rake conversion due to discriminating against grinder-type players.
Point #2, realistically speaking, is not going to happen. The current average lifetime deposits per recreational player are insanely high, though the reason for this is that the products and marketing strategies are too often targeted at gambler-type players - a very narrow target group.
In the remainder of this column, I want to talk about point #3, which carries a lot of potential.
A new type of recreational player
How is it possible that the computer games industry keeps growing and growing? After all, playing computer games is quite expensive - taking hardware, software, subscriptions and all other gimmicks into account. In addition to that, it costs a lot of time and could get you addicted - it's not really that different from poker.
The answer to that is two-fold:
The first reason is that computer games players simply have extremely low churn rates. Customers will of course switch games, but rarely will they stop spending on their hobby. Do a little mental check of people around you; those that used to spend money on computer games five years ago, do they still now? In most cases, the answer is going to be yes.
Compare this with the players who sustain the poker eco-system, the gambler-type recreational players whom we talked about above, will spend a lot in a short period of time and then churn, most likely to never come back.
The second reason is even more relevant; the computer games industry has constantly grown its target group. 20 years ago, playing computer games was for a very small percentage of the population only. Hardware was hard to come by and expensive, games were not very accessible. The public perception of playing computer games was extremely negative.
If you contrast this with today, in particular, with the 'social games' you find that nowadays, there is almost a game for everyone. On average, games are far more accessible than they used to be (everybody can play Farmville), far more recreational (playing 10 minutes per day is absolutely fine) and on average, far cheaper (no need to buy expensive hardware, you can play on your phone almost for free).
As a result, per active player, the computer games industry earns much less than it used to, however, the target group is drastically bigger. This development was only possible because many companies in the industry actively sought to widen their target group. Those companies that did not mostly do not exist anymore.
An addiction to gamblers
Now, in poker, a corresponding step would be to try to move away from the industry addiction to gambler-type players, as they will run out.
If you check out the websites of most poker rooms in the market, you will really see that their websites and products are optimized for those players. You usually see green felts, lucky symbols, huge deposit bonuses and the chance to become a world champion at the next WSOP. Also, you are encouraged to get out your credit card straight away and make a large deposit. Hardly any poker room does a good job at engaging and educating their customers first.
I'm convinced that in order to sustain itself, the poker industry needs to move away from its addiction to attract gambler-type players.
The goal needs to be make poker far more accessible, acceptable and fun to a much larger part of the population than currently. The goal needs to be to establish poker as a long-term fun hobby where it's absolutely okay to spend, say, $20 per month on an ongoing basis.
If you think this can't be done, think again. Look at Zynga: they are making money with a game of poker where players spend real money but in return, cannot even win anything!
How should this be done? I can think of the following steps:
1) Change poker websites to be more focused to potential hobby players as opposed to gamblers. Use softer means of conversion; push the 'get rich quick' advertising more into the background. Here, the poker industry can learn from 'free to play' computer games.
2) Educate your player base - this will make them enjoy the game more, be more responsible with their spending and avoid frustration. Also, somebody that is educated will stick to their hobby far longer than somebody who is not.
3) Make poker clients and lobbies easier to understand and use, or eliminate poker clients altogether and offer great browser/app based solutions.
4) Make poker more entertaining for players - don't solely rely on the money aspect to provide the entertainment (See how Zynga does it!).
5) Drastically lower the rake on the micro and small stakes.
6) Optimize for customer lifetime, as opposed to, short term customer lifetime value.
7) Keep in mind that doing all the above does not entail discriminating against professional players. They are a necessary part of the poker ecosystem to make sure that liquidity generated per dollar deposit remains high.
Based on the estimations at the beginning of this column, the above transitions need to happen really quickly.
Currently, the poker industry is strongly lagging behind other forms of online entertainment, such as computer games, and must catch up - otherwise they will be overtaken by Zynga, who are already very good at the points above.
- Current levels of poker liquidity cannot be maintined with the current business model and target groups of the established poker rooms
- Poker needs to be made for more accessible to a wider population to stay at it's current level and grow