The Business of Internet Poker

Back in online poker's Neolithic era, things were different.

When I arrived at PlanetPoker more than five years ago, we didn't have very much competition. That sure didn't last long. And money flowed easily in and out of the site on MasterCard, Visa, and other credit cards. That didn't last too long, either.

Largely out of fear of action by federal authorities (and also partly because of a high percentage of charge-backs), most U.S. credit card issuers no longer permit transactions for online poker (although not all banks are following the regulations). PayPal, the largest, and most trusted and respected Internet payment system also refuses to allow transactions to and from online poker sites.

The industry has responded with a system of "e-wallets," like NETELLER and FirePay. While some sites still take checks, Western Union, and the like, and most sites have some kind of system permitting EFTs directly to and from the bank accounts of established players, the e-wallet alternative is the predominant method of moving money into and out of online poker.

While this system has functioned reasonably well to date, it is by no means the best alternative for the industry, and hampers the growth of the online game. I know one bright person who has tried three times to create an e-wallet account, but the system failed to let him in.

Of even greater consequence is the issue of credibility and customer comfort, especially as it relates to potential new customers entering the online gaming arena for the first time. We as an industry ask our new players to provide their personal information and send their money to some company they've never heard of, often located in a foreign country and not subject to the protection of government regulations that other financial institutions are required to comply with. These are relatively small companies, without a high public profile. As far as I know, none are bonded or insured. And we ask our customers to send them money and give them access to the customers' bank accounts. Many sites (PlanetPoker being one of them), and I, recommend that you set up a second bank account for online poker.

All of that said, I know of no player who has had a problem getting money from an e-wallet vendor, nor of any cases of inappropriately accessing a customer's bank account. But from a marketing point of view, the industry would be substantially better off if credit cards and especially PayPal were available as alternatives for moving funds. Unfortunately, because of government pressure, that isn't going to happen anytime soon.

One of the earliest difficult decisions online poker pioneer Randy Blumer had to make was where to locate his server. The choices today seem obvious, but when this was being done for the first time, things weren't so clear. The tangled issues of multinational legal questions, connection quality, and finding competent local staff are just some of the factors that are important in choosing a server location. When I arrived at Planet, our server was in Costa Rica, and then Guatemala. Today, it's in the Netherlands Antilles, a beautiful place to visit, and part of the European Union, which has certain benefits both legally and from a marketing standpoint.

Connectivity is directly related to server location. Unfortunately, when a location turns out to have problems, it's an expensive proposition to pick up your hardware and people and move them to another country.

Most recent additions to the online poker industry have elected to place their servers on a Canadian First Nations (American Indian) territory. This is a quality connectivity choice, but there are serious questions about the enforceability of contracts and issues regarding Canadian law. Also, the credibility of tribal licensing can't match that of licensing and regulation by an established First World government that is subject to, among other things, international law and treaties.

When I came to the online game, there was really only one software choice, ASF, which took in its revenue from the gross drop from its customers in licensing and leasing fees. Online poker management often thought there was a lack of responsiveness in getting ASF to address poker-related issues in its software. Like many others who have entered the business since, Planet elected to invest its profits in developing its own software, to reduce its long-term expenses and put forth a better product.

Being first had its price, and the learning curve cost both time and money in getting a product online. It was worth it in the long run, I think, and Planet's NextGen software is feature-loaded and connectivity-sensitive. But, it wasn't easy. Those who have developed new software since managed to avoid some of Planet's early expensive and time-consuming mistakes, and there are some pretty impressive products out there. I haven't played FullTilt yet, but because of the involvement of computer geniuses Phil Gordon and Chris Ferguson, I'm hoping to see something special there from which all can learn and grow.

Early on, the Internet poker industry had almost unlimited marketing opportunities. Because of online poker games being characterized as online gambling sites – something I believe is a semantic, factual, and legal mischaracterization – advertising opportunities have closed up.

ParadisePoker, one of Planet's early competitors, built itself up through the use of Google advertising. If you did a search that included poker, you saw a little Paradise ad, and they paid per click, which was quite a bargain. Even though poker for the past two years has consistently been in the top 10 weekly, monthly, and often daily search topics on all search engines, Google and Yahoo have both discontinued accepting advertising from "gambling" sites, including poker. Lycos is on the verge of making a similar decision. This removes one of the game's most effective marketing alternatives, once again largely because of the threat of governmental intervention. This significantly increases the cost of developing each new customer for the industry and for each site, because it eliminates cost-effective alternatives.

Today's online behemoth PartyPoker used television advertising, largely associated with the World Poker Tour, as a principal tool for building its customer base. This worked powerfully, until the day the feds seized $3 million or so that Party had paid in advance to the Discovery Channel for ads, stating the money was for advertising to promote an illegal purpose. TV (and radio) advertising to promote our industry is a risky proposition these days!

Other options are slowly being choked off as a vehicle for promoting online poker. The Justice Department sent warning letters to publishers, radio stations, and Internet sites that sell advertising around the country, advising them that accepting advertising from online gambling sites, including online poker sites, would be a crime, subjecting them to possible prosecution and fines. A number of legal experts have expressed that the Justice Department's grounds for taking this position are spurious at best, but the chilling effect, especially when coupled with the seizure of Party's money from Discovery, is quite real.

Also because of the legal threat, many online sites have been wary of using the U.S. mail for marketing, closing off another potent option to grow our industry. The legal issues affecting both online and live poker are a discussion for another day. The point here is that the business environment for online poker is undergoing serious change.

In my early days in the business, the rough rule of thumb for the cost of generating a new customer was around $25. People flocked to the sites, and word of mouth, the most powerful and cheapest business generator, drove industry growth. Now, the cost per new customer has passed $100 and is almost $200. That number will only get bigger, and even it is low, because it includes only direct costs ranging from advertising to referral fees through both players and affiliate programs. Backroom support, celebrity spokesmen, soft costs, and so on aren't factored into that $200 per new customer cost.

Historically, major businesses that derive their profits from sales of goods and services to consumers (a group that would include online poker) have spent 5 percent to 6 percent of gross revenues on marketing, including advertising, public relations, promotions, and so on. Online poker for the most part hasn't invested near that to generate new business, but with the reduction of availability of advertising opportunities, the industry is going to have to get there. As always, of course, it is far cheaper to invest in keeping an existing customer who might go elsewhere than generating a new customer. How online poker does this is a subject for another day, however.

Note also that there is a significant difference between scavenging among ourselves to win over existing online poker players and creating new online players. Bringing new people to online poker is the kind of thing that cries out for industrywide cooperation, although such industry campaigns are hard to create. Still, industry efforts as opposed to individual company efforts have great cost-effectiveness and much potential. Back in my early days in the business, such a thing would not have been possible, but I think perhaps it is on the horizon.

I have played on many online sites, including Party, Paradise, UltimateBet, and more, in my capacity as a member of this industry and a representative of Planet, as well as for the games themselves. There is a rich and wide variety of online poker experiences for customers to select, and the competition has served the consumer well, as competition generally does. As of late July 2004, industry analysts had identified 210 sites. I doubt I'll ever get to play every site, but I may try.

I'll say this, though: It sure isn't like the old days, way back in 1999, when I became a part of the online game. Three columns in a row about Internet poker is enough for now, but it's a subject I'll be returning to soon, as it is now the largest part of the poker industry. And as I said a few columns back, I know a thing or two about Internet poker.

Roy Cooke played winning professional poker for more than 16 years. He is a successful real estate broker/salesperson in Las Vegas. If you would like to ask Roy poker-related questions, you may do so online at www.UnitedPokerForum.com. His longtime collaborator, John Bond, is a free-lance writer in South Florida.