Party and long term competition

[ipp147]

Luke Johnson has a small section in the business section of the Telegraph (UK Paper) and he says,

"Currently PartyGaming enjoys net income margins of 58 per cent on its commission revenue. Experience suggests that such extraordinary profitability is unsustanable in a capitalist system.

None of the long-term online poker firms has patents, long established brands or proprietary technology - the barriers to entry for this sort of business are remarkably low.

Very little capital is needed to build online businesses. As more entrepreneurs become aware of the profits in this game, the number of big poker websites will boom, and the players will be spread among them. New entrants will boom, and the players will be spread amongst them. New entrants will offer incentives and undercut the established sites, who will be forced to spend money to remain competitive."

I disagree with the final paragraph, Full Tilt, Poomountain etc don't seem to have made any dents into Party's player pool.

What do you all think?

[PokerPaul]

he's miossing one important thing. Unlike most other businesses, in poker if you offer a better deal than another site, a lower margin product, it don't mean S___ unless you got established traffic and a large variety of games to offer your clientele.

Many sites have come and gone that have tried to offer a better return to their customers, some of them with deep pockets. But poker is unique. U need traffic to attract players, but u need players to generate traffic...

i do hope for more competition, but online poker doesnt follow the same bread and butter tangible product strategy.


Its tough to gauge what exactly will drive a successful poker site from startup to regular establishment. It used to be good software, some marketing, and just a smal amount of traffic would be enough in the early days due to lack of competition. But now it'll take way more than that.

Big marketing bucks won't guarantee it as absolute, americas cardroom and other depp pocketed sites have failed.

Getting poker celebritites to endiorse it also does not guarantee success...yes full tilt has worked, but others such as Pmountain, pokerchamps, that doylebrunson site from couple years ago (name eludes me) have failed or are doing way below expectation.

Affiliations with large online casino sites seems to work as they draw on their established casino clientele.

I'm really curious to see where onine poker will be in 4 years and what the market will look like.

I am certain though that the price to play for us customers will drop significantly.

Kind of like atari or plasma tv's.....wayy expensive when they first hit market, then rapidly dropping margins..

[TylerD]

[ QUOTE ]
I disagree with the final paragraph, Full Tilt, Poomountain etc don't seem to have made any dents into Party's player pool.

[/ QUOTE ]

True, but what happens when "Coca-Cola Poker" or "Google Poker" launches (hypothetical of course). My point is that none of the new site launches have established businesses already. If a big company were to launch an online poker room I think it would have a big impact.

[AceHigh]

I like to think of Party poker as similar to Ebay. There aren't many barriers to entry, but once a company becomes "THE" Poker company or the Auction company it becomes a barrier of sorts. Players are going to go where the best games are, and it creates a snowball effect.

[DesertCat]

[ QUOTE ]
I like to think of Party poker as similar to Ebay. There aren't many barriers to entry, but once a company becomes "THE" Poker company or the Auction company it becomes a barrier of sorts. Players are going to go where the best games are, and it creates a snowball effect.

[/ QUOTE ]

I think AceHigh nailed it. There is no substitute for 50k players on one site at one time. More games, more options, attracts more players. That's a tremendous asset that can't be built overnight and at some point the cost gets so high that it becomes a tremendous barrier in itself, and may allow PartyPoker to maintain monopoly like margins.

Similar companies include Microsoft and Coke. I haven't looked at Microsoft lately but it's margins were always 40-50% last time I did.

[Daliman]

I wouldn't be surprised if Party's profits are ALREADY being hurt by an exodus of indeterminate size of players that want rakeback, which PP does not allow and now actively discourages. The #'s you see as totals are for all the skins too.

[sam h]

Economists have a term for this phenomenon. They call it "network effects." Essentially, the value of the product to each individual user increases with the number of users.

[Nick B.]

I heard from somebody reputable that party is going to be introducing rake rebate in the coming months.

[AceHigh]

[ QUOTE ]
but what happens when "Coca-Cola Poker" or "Google Poker" launches

[/ QUOTE ]

No way a US company becomes an online gambling site any time soon.

[slavic]

[ QUOTE ]
I heard from somebody reputable that party is going to be introducing rake rebate in the coming months.

[/ QUOTE ]

This is the type of vaporware that just isn't constructive. If you have details and can back it up, share it by all means otherwise I'd just take a pass on mentioning something like this.

[Felix_Nietsche]

Full Tilt, Poomountain etc don't seem to have made any dents into Party's player pool.
*************************************************
These sites will not make a dent in an establish poker site unless they wise up. These sites think that celebrity endorsements and piddling bonus will attract players. They are wrong. They are wasting money.

Players do not want to leave an establish site where they can get full ring game 24/7 and big MTT. I gave norake.com a chance but I get tired of playing 3 handed games at my limit. Someone will get partypoker's business but they need to be smart about it. If I was starting a new site, I would advertise no rakes for 6 months then 25% discount of party's rakes. Granted the sites will take a loss for 6 months but traditional methods to attract players have been failing. There is too much potential money on the table for someone not to make a move on the poker pie.

[Dan Mezick]

Blogger Bill Rini has a series of great posts on this. He's a player and appears to be a software guy. These are interesting:

Here are some of them:

The Perfect Online Poker Room
http://www.billrini.com/index.php/2005/05/18/designing-the-perfect-online-poker-room

It's About Class
http://www.billrini.com/index.php/2005/05/17/its-all-about-class/

A site that takes these ideas and runs with them will likely do quite well.

[celiboy]

I disagree with the assertion that little capital is needed to start a site. I would imagine it would take at least around $10million to start up a site after taking everything into account.

[TylerD]

Well I think the law in the US will change soon when they realise how much money there is to made from online poker.

[sfer]

I think he should search for "network externalities."

[fnord_too]

[ QUOTE ]
I think he should search for "network externalities."

[/ QUOTE ]

Damn you sfer!! I don't know what that term means (yet) so my reply may turn out to be stupid.

I think the article is dead on. I think you will see internet poker become more commodity like (dictionary.com informs me "commoditized" is not a word). Party has a big established user base, and that is worth a lot, but eventually the market is too attractive to keep out sucessful competition. Were internet poker a niche market, it could maintain its high margin, but I just don't see those margins lasting for more than a few years. A good analogy would be AOL. It is still huge, and still has tons of users, but I do not believe they have that great of margins any more, and they certainly experienced a huge market correction. (Unfortunately for the holders of Time Warner, it happened after they merged).

Right now, there are a lot of small ventures that are not really making any drasticly different offers. There is not a lot of product differentiation in the field, except by user base. Some interfaces are better than others, and some rakes/bonus programs are slightly better than others, but the number one distiction between party and everyone else is user base, and that is a very unstable thing. None of these companies differentiates itself in terms of say perception of quality or integrity. Not many people chose Party over Stars or UB because they trust party more than the others. In fact, on EVERY site I play on at the lower levels (which are the levels that matter for building a user base), the phrase "only on X" is spoken all the time.

When a well funded operation with an established credibility takes a serious stab at this industry, I think you will see some significant changes.

One possible innovtion that could completely change the industry is if bankrolls could be maintained effectively off site. That is, if someone like neteller (or better yet, a major bank) developed relationships with all the sites that allowed for a bankroll account be accessed by each participating site. So, when you go to sit down at a table, it freezes the amount you sit with in the account and makes all necessary transfers (plus or minus) when you leave the table. That would really put pressure on all sites to compete since now a user effectively has an account everywhere.

I've rambled enough, time to google sfer's term.

[sfer]

[ QUOTE ]
Very little capital is needed to build online businesses. As more entrepreneurs become aware of the profits in this game, the number of big poker websites will boom, and the players will be spread among them. New entrants will boom, and the players will be spread amongst them. New entrants will offer incentives and undercut the established sites, who will be forced to spend money to remain competitive.

[/ QUOTE ]

One of the lessons from the late 90s is that this statement is clearly not true. First off, as anyone who has ever worked for a web startup will state, online businesses do not require minimal capital. Second, profits beyond economic profit exist everywhere and there are reasons beyond a simple, perfect competition, microeconomics 101 analogy. Third, and I reiterate, network externalities.

[fnord_too]

[ QUOTE ]
[ QUOTE ]
Very little capital is needed to build online businesses. As more entrepreneurs become aware of the profits in this game, the number of big poker websites will boom, and the players will be spread among them. New entrants will boom, and the players will be spread amongst them. New entrants will offer incentives and undercut the established sites, who will be forced to spend money to remain competitive.

[/ QUOTE ]

One of the lessons from the late 90s is that this statement is clearly not true. First off, as anyone who has ever worked for a web startup will state, online businesses do not require minimal capital. Second, profits beyond economic profit exist everywhere and there are reasons beyond a simple, perfect competition, microeconomics 101 analogy. Third, and I reiterate, network externalities.

[/ QUOTE ]

(I have a 10 page article on network externalities I haven't had time to read yet.)

Though the financial barriers to entry are not non trivial in online businesses, I am pretty confident they are lower for on line poker than selling fungable goods online (except of course the store front/drop ship model, I'm talking about where there are real goods stocked and shipped) which is less than selling goods in a brick and mortar environment which can be more or less than industrial production.

I'm guessing the network exertnalities is somewhat of a first mover advantage effect, where the fact that party got there firstest with the mostest may imply that they have a self sustaining user base. (i.e. their user base size insures that new users have more reason to go there, thus there user base delta is greater than others, either growing faster or shrinking slower).

I just don't think that the high margins are sustainable. The only real asset Party has is it's user base, and that historically is not a long term asset. (Is is Schumpterian or Peterian that is long life versus short life assets? Bleh, grad school flashback.)

To summerize my thoughts:
Yes, there are significant financial and non financial barriers to entry.
No, they are not greater than the barriers businesses routinely overcome.
I don't think on line poker is protected by the niche effect (if that is not already a term it should be).
IMO the online poker industry will follow the standarnd model. I think competition will heat up considerably in the next 2-5 years and will be followed by a shake out period of mergers, acquisitions, and failures. I think we will end up with 5-10 big on line sites (actually, maybe as few as 3 big online sites).
Party will probably be in the top three, but will probably have a more attractive price.

[AceHigh]

[ QUOTE ]
Well I think the law in the US will change soon when they realise how much money there is to made from online poker.

[/ QUOTE ]

Define soon.

I hope you are right, but I can't see the Bush administration letting this happen, so that's 2009 at the earliest. These are the guys fighting the WTO about horse racing in Aruba.

[Punker]

[ QUOTE ]
Well I think the law in the US will change soon when they realise how much money there is to made from online poker.

[/ QUOTE ]

Every time I think this, I think of the US policy regarding marijuana. Supporters of that seem to be sure the US will eventually legalize it as well, given the potential money, and the questionable nature of how damaging it is. Doesn't look like its going to happen any time soon.

[midas]

Party's success can be attributed to being the dominant and well run company in an industry that has limited access to start-up capital (no U.S. investors).

If U.S. investors could invest, someone would buy one of the lesser players and put a $100 million marketing budget behind them to grab market share. If they grab half of Party's clients, they "could" have a value of $3 - 5 billion - not a bad return on investment.

[fnord_too]

[ QUOTE ]
Party's success can be attributed to being the dominant and well run company in an industry that has limited access to start-up capital (no U.S. investors).

If U.S. investors could invest, someone would buy one of the lesser players and put a $100 million marketing budget behind them to grab market share. If they grab half of Party's clients, they "could" have a value of $3 - 5 billion - not a bad return on investment.

[/ QUOTE ]

I thought US investors could not invest, too, but I think I just read that Party's parent company is partially owned by a CA pornographer. Maybe someone can clear this up.

[StevieG]

[ QUOTE ]
I thought US investors could not invest, too, but I think I just read that Party's parent company is partially owned by a CA pornographer. Maybe someone can clear this up.

[/ QUOTE ]

Search for Ruth Parasol. News reports on the pending IPO all indicate that she now resides in Gibraltar, along with Party Gaming operations.

[pokerlaw]

IMO Right now, Party has a TONS of market power in the online market. They are good at using their large cash flow to provide larger bonuses than many underfunded competitors. To keep many players at their site. Further, their rakeback program and style of SNG games enable a good player to make serious $$/hr, which keeps a lot of the high stakes players at the Party $215s, $109s, and STEP tourneys.

For the lower market, they still charge 20% rake for $5 SNGs, maintain as high or a higher rake at the cash games, and milk rake with their step tourneys. They have the cash game market solidified - with 3X Stars volume at most times of day. While more balanced, they have the lead in tourney players also, and if you factor in that most of the higher stakes players play at Party, they make an even higher revenue over other sites than population alone dictates.
Definetly thinking about buyin that stock...

[Jax_Grinder]

Pocket change for the return generated.

And the number you propose is baseless. The software licensing/development costs exceed $10M all by their lonesome.

[Jax_Grinder]

Not sure about her residing in Gibraltar....

but I do love the name of the software guru who owns 40% of the company....

Anurag Dikshit.

You just can't make this stuff up.

[The once and future king]

[ QUOTE ]
I disagree with the assertion that little capital is needed to start a site. I would imagine it would take at least around $10million to start up a site after taking everything into account.

[/ QUOTE ]

How much it cost to establish a network of B&M Card Rooms that pulled in 60K players a night. In this light the capital is small.

[The once and future king]

[ QUOTE ]
Economists have a term for this phenomenon. They call it "network effects." Essentially, the value of the product to each individual user increases with the number of users.

[/ QUOTE ]

Also this is increased by the whole concept of fish. It wouldnt be unfair to introduce another economic term which is virtuos circle.

[fnord_too]

[ QUOTE ]

Definetly thinking about buyin that stock...

[/ QUOTE ]

Pet peeve time.

A good company does not equate to a good stock, and a bad company does not equate to a bad stock.

You buy a stock, not a company. If the stock is undervalued, it is a good buy; if it is over valued, it is a bad buy. Look at Apple in the 80's: Great company, horrible stock. A more recent example, AOL at the time of the Time Warner merger, the stock was way over valued though the company was quite sound. On the other end of the spectrum there are plenty of bargain basement stocks that are a steal because of the perception of the company, even when the perception is correct.

[AceHigh]

[ QUOTE ]
A good company does not equate to a good stock

[/ QUOTE ]

True, but...

[ QUOTE ]
and a bad company does not equate to a bad stock.

[/ QUOTE ]

A bad company is almost always a bad stock.

[fnord_too]

[ QUOTE ]
[ QUOTE ]
A good company does not equate to a good stock

[/ QUOTE ]

True, but...

[ QUOTE ]
and a bad company does not equate to a bad stock.

[/ QUOTE ]

A bad company is almost always a bad stock.

[/ QUOTE ]

It's all about valuation. A bad company is still worth something, and if the market cap is significantly less than the companies worth, it is a great stock.

[crazy canuck]

A bad company is almost always a bad stock.

This is not true in general. There are hedge funds that specialize in near bankrupt stocks, becasue these are often undervalued.

[Jordan Olsommer]

[ QUOTE ]
Very little capital is needed to build online businesses. As more entrepreneurs become aware of the profits in this game, the number of big poker websites will boom, and the players will be spread among them. New entrants will boom, and the players will be spread amongst them. New entrants will offer incentives and undercut the established sites, who will be forced to spend money to remain competitive."

I disagree with the final paragraph, Full Tilt, Poomountain etc don't seem to have made any dents into Party's player pool

[/ QUOTE ]

You are correct. As long as Party doesn't screw up royally or some dark horse doesnt come around to blindside them, expect them to stay number one. I believe this is called "the network effect"? Its the same reason why if you wanted to start an online auction business to compete with ebay, you would in many states be considered legally insane. Ebay became "where everybody is" out of the gate, and now nobody who wants to find what they're looking for or sell what they've got would even think of going anywhere else. If you want to start an online auction business to compete with ebay, be prepared for years and years and years of losses while you desperately attempt to attract customers. This applies to online poker as well - no matter what kind of awesome bonuses you offer, you're not going to get many people on your site if nobody's there in the first place. And of course, since nobody's there, they try to get more people by offering better bonuses, and the other ghost town sites try to trump those bonuses and offers, and the downward spiral begins.

Meanwhile, all Party has to do is a) not screw up royally, and b) be at least somewhat competitive* (so nobody can come blindside them with a "killer app" for online poker that Party can't compete with), and they'll be sitting pretty for quite some time.

*EDIT: I should add that it's not only a straight technological or innovative advantage that could potentially topple PP. They aren't at the ebay-level yet, so they still need to maintain a presence in the poker population's consciousness. So, it's not hopeless - In my amateur opinion, there's still a window of opportunity open where if FullTilt puts on a serious marketing blitz, makes sure they have the best offers/bonuses, and has a good showing in the WSOP, they could stand a fighting chance at eventually becoming the "ebay of poker sites".

[jackdaniels]

This is a great thred.

What would happen if a few of the other sites (Stars, FTP etc...) "pooled" their players and offered a similar experience to Party and skins? Do you think that kind of consolidation would put a dent into Party?

[Masquerade]

[ QUOTE ]
I disagree with the assertion that little capital is needed to start a site. I would imagine it would take at least around $10million to start up a site after taking everything into account.

[/ QUOTE ]

In the venture capital world which Johnson inhabits that's chump change.

[BluffTHIS!]

[ QUOTE ]
What would happen if a few of the other sites (Stars, FTP etc...) "pooled" their players and offered a similar experience to Party and skins? Do you think that kind of consolidation would put a dent into Party?

[/ QUOTE ]

The entire key to party's success is marketing and targeting the low end players while providing higher limits for them to move up to. Although you are now seeing tv ads by other rooms, it's too little too late. Had UB or stars done this aggressive money-intensive marketing early on, I don't see how party could have the dominant position it enjoys today. Obvioulsy at least one of the party owners had another cash cow business (porn) to provide capital for that marketing and most likely as well a committment to plowing all early profits back into even more marketing as well as software development. Unless UB or stars makes that same committment, i.e. sacrificing any profit in the short term to plow back in, then they can never hope to catch up. Being known as better tourney sites won't privide the 24h rake that tons of cash games provide. If you can't come up with the dough to spend on expensive commercials for joe & jane six-pack to see when watching sports and other programs as well as the wpt, then you likely can never hope to achieve anywhere near the success party has.

[pokerlaw]

[ QUOTE ]

It's all about valuation. A bad company is still worth something, and if the market cap is significantly less than the companies worth, it is a great stock.

[/ QUOTE ]

Given Party's current market position, I feel that they have a lot more value (think goodwill) than just their profits indicate. Of course, the valuation of the stock is the key aspect, you are certainly correct about that.

Reading a little more about the IPO, it seems the capital raised is going to pay out individuals in the firm (the head programmer and a few other people) rather than to reinvest in Party's operations - not a good thing for outside investors or their valuation IMO.

[fnord_too]

I would look for someone not already in the arena to be the real agent of change. Somebody like what's his name from Virgin deciding to enter the market would be huge. I think with few exceptions, the current roster of sites is too content with the status quo and/or has no real clue about how to form a good market strategy and execute it.

There are a couple of sites that actively solicit user input and try to apply it, but they are not really funded well enough to make serious inroads against party's dominance. Stars may have a shot, but again, they don't seem to have any fresh ideas. I think the real change will come when US companies are allowed to enter the field (unlikely this will happen soon enough) or when a big company outside the US breaks ground.

I really think the market is too big to not attract the attention of some big players, and when that happens it will be great for us consumers.

[TylerD]

[ QUOTE ]
Somebody like what's his name from Virgin deciding to enter the market would be huge

[/ QUOTE ]

Virgin already have a site, its [censored].

[fnord_too]

[ QUOTE ]
[ QUOTE ]
Somebody like what's his name from Virgin deciding to enter the market would be huge

[/ QUOTE ]

Virgin already have a site, its [censored].

[/ QUOTE ]

Bah! How could they screw things up? They have the money and, well maybe not the intelligence to research the market and put out a good product with a good marketting plan.

I still think some big organization with a clue will penetrate the market effectively. Virgin has such great cross marketting potential; it really irks me that they blundered.

[gergery]

[ QUOTE ]
I like to think of Party poker as similar to Ebay. There aren't many barriers to entry, but once a company becomes "THE" Poker company or the Auction company it becomes a barrier of sorts. Players are going to go where the best games are, and it creates a snowball effect.

[/ QUOTE ]

It's called "network externality", not snowball.

[gergery]

[ QUOTE ]
This is a great thred.

What would happen if a few of the other sites (Stars, FTP etc...) "pooled" their players and offered a similar experience to Party and skins? Do you think that kind of consolidation would put a dent into Party?

[/ QUOTE ]

The other sites need a sustainable, difficult-to-duplicate competitive advantage. The key to success in strategy is to be different, not to be better. Trying to imitate Party is a bad idea.

Stars is getting known as the site for tourneys, and the site for the no-name-who-can-win big. UB and Full-tilt are sites where you can play against your hero’s. Eurobet is where you can sports gamble AND play poker. But the most compelling driver for poker players is to play with bad players, and thus the site that’s most attractive to newbies (ie. read most popular) will have an advantage. Most of the other ones have no differentiating factors, and will erode over time.

However, there are some niches still available – Omahapoker.com, sngpoker.com etc.

Party has several large advantages 1) network externality being a big one – as more people play there, more people want to play there, as that’s where fish are, good game selection, etc. 2) Economies of scale in marketing and customer acquisition costs, which are very large, 3) Economies of scope -- small sites cannot offer tourneys of much significance due to lack of high numbers of players, 4) Inertia, they were they first, 5) reasonable barrier to entry from trust/credibility/integrity of site

I am surprised its taken the sites as long as they have to try to build in switching costs (ie. frequent player points)

-g