PartyGaming as an investment - Quick thoughts

[lorinda]

Thanks Sniper.

We just went through 1/3rd value wiped out.

Lori

[Sniper]

As the dusts settles, more from FT...

PartyGaming, Empire Online shares plunge

Investing in an online gambling company is getting to be as volatile and unpredictable a business as playing poker.

On Monday, it was the turn of Empire Online to disappoint, with its shares falling by a third to close at 121p. That compares with the 175p at which it floated during the summer, and the 288p it reached early last month after a bid approach, which proved abortive.

Empire is a so-called "skin" operation. It does not run internet gaming itself, but delivers new punters to gaming operators' sites by marketing and it gets paid by taking a slice of the "rake", or percentage of bet, taken by the operator.

Its most important relationship is with PartyGaming, the world's leading online poker operator, and an announcement yesterday from PartyGaming appears to have been the primary reason for the share price plunge.

PartyGaming said it had moved its own poker players – about 80 per cent of those that use its sites – to a new platform of its own, on which it will eventually roll out lots of other games, with a common "wallet" – meaning customers will be able to have one account. For PartyGaming, it means better cross-selling opportunities, but it will have to rely less on skins.

Until now, its players have shared the same poker system, or tables, with four skins, including Empire. These will continue to use the existing system, but with the loss of PartyGaming's players the site's liquidity will be reduced, which poses questions about Empire's player activity and yield.

The implications of the move for both companies are unclear, but at present the market is looking for reasons to mark down online gambling stocks and it did so with a vengeance yesterday, since it also sent PartyGaming down by more than 10 per cent.

The size of the drop may also have been due to apparently mixed signals on trading from Empire.

Noam Lanir, the chief executive, was quoted by a news wire as saying the third quarter was flattish, while another representative from the company saw no sign that growth was tailing off.

After PartyGaming's profits warning of September – just months after it came to market – caution is advisable in an industry whose inner workings and growth potential few investors really seem to understand.

[Sniper]

And more post action analysis...

The volatile online gaming sector took another jolt on Monday as shares in both PartyGaming and Empire Online tumbled after PartyGaming moved to change its business model in an effort to increase the number of players using its site.

PartyGaming shares slid more than 10 per cent, while Empire lost a third of its market value. The slide was sparked when PartyGaming, the world's largest online poker group, said it was moving gamblers that play via PartyPoker.com - its own poker site - to a new operating platform so that it could cross-sell them other gaming products.

Such players account for about 80 per cent of PartyGaming's customers, with the rest generated by third-party sites such as Empire. These sites, known as "skins", direct players to PartyGaming's platform and take a share of the "rake" - the fees players pay.

Empire said it was "too early...to accurately assess what, if any, impact" PartyGaming's move would have on its short-term financial performance. The group is keen to reduce its reliance on PartyGaming and has acquired two new gaming brands, which it owns outright.

Analysts were unimpressed with PartyGaming's decision to switch customers to a new platform, saying that the group risked alienating its "skin" partners, who could take their customers to other operators.

"It looks churlish, frankly," said Paul Leyland, leisure analyst with Seymour Pierce. "Someone at the top seems to have decided they need more control of their value chain, but they haven't thought through the full implications."

Mr Leyland added that PartyGaming had not "covered themselves in glory" in the last quarter. The group's shares have fallen more than 30 per cent since it said in September that player growth rates had slowed.

Richard Segal, PartyGaming chief executive, said the company was "on track" with the new operating platform, which would allow it to "focus on optimising cross-selling opportunities".

Empire on Monday said the number of new players on its sites had increased 24 per cent between the second and third quarters. That suggests growth is slowing, as the number of new players increased 62 per cent compared with last year's third quarter.

"Take-up is certainly slowing down," said Mr Leyland.

Noam Lanir, Empire's chief executive, described the third-quarter performance as "flattish". Shares in Empire fell 62p to 121p while PartyGaming, which floated in June at 116p, closed down 9p at 71p. Shares in Sportingbet, the online betting and gaming group that last month ended bid talks with Empire, fell 20½p to 286p.

Separately, Trident, an Isle of Man-based sports betting and technology company, said on Monday it planned to float next year in an offering that would value it at up to £100m. The group plans to raise £30m, with the proceeds to be used to retire debt or increase working capital.

[Bigdaddydvo]

[ QUOTE ]
"We believe the skins customers will be disadvantaged, as they will not have access to PartyGaming's player liquidity," he added. "Player liquidity is one of the key customer drivers."


[/ QUOTE ]

Translation: Player liquidity=fishies

[Sniper]

Monday's damage...

Empire (EOL.L) -33%
Party (PRTY.L) -11%
888 (888.L) -11%
Neteller (NLR.L) -10%
Sportingbet (SBT.L) -5%
WPT Ent (WPTE) -2%
Cryptologic (CRYP) -1%

[Sniper]

And in Tuesday's trading...

Empire continues its slide down another 18%, while party and crew try to find their footing.

[Sniper]

Tuesday's damage (note I'm rounding off)...

Empire (EOL.L)..... -16%
Party (PRTY.L)...... +1%
888 (888.L)......... +2%
Neteller (NLR.L).... -4%
Sportingbet (SBT.L). -1%
WPT Ent (WPTE)...... -6%
Cryptologic (CRYP).. -5%

[HoldingFolding]

relevant?

[Sniper]

And on Wednesday Sportingbet comes out and says all is right with the world...

Online gaming stocks were among the few shares in strong demand, encouraged by a profit surge at Sportingbet (SBT.L: Quote, Profile, Research) , which said that poker revenues were booming.

The results contrasted with downbeat comments on Tuesday from rival Empire Online (EOL.L: Quote, Profile, Research) and helped to boost shares in Sportingbet, as well as PartyGaming (PRTY.L: Quote, Profile, Research) and Empire Online, by about 7 percent each.

[Sniper]

This article from the UK based Times online on monday has some glaring errors, but its worth a read...


PartyGaming doesn't want strangers at its poker tables. Empire Online says it didn't want to play anyway. Bryce Elder asks: who's bluffing?

Online poker companies are rapidly turning into this year's busted flush. Fears of a slowdown have today wiped more than £250 million off the value of the sector's biggest names, after one said growth has been flat and another appeared to turn its back on its main source of new punters.

PartyGaming, the web's biggest operator of poker rooms, said it has shifted all existing customers onto its own PartyPoker.com system, and has divided customers into two groups: those who join through the company's own sites, and those playing via affiliates.

Empire Online, which runs PartyGaming's biggest affiliate site, responded by saying the company must have been panicked by its own growth - a 24 per cent increase in new players over the third quarter.

"They’re showing their concerns about our dramatic growth compared to them and the entire industry," Noam Lanir, Empire Online's Chief Executive, told Reuters. "From what I’m hearing, the overall market was more like flattish."

Perhaps PartyGaming is running scared. But it is worth noting that Empire and PartyGaming are very different businesses.

Empire provides so-called "skins" - front-end interfaces that sit on top of the gambling software offered by PartyGaming and rivals such as 888.com. In exchange for attracting punters towards these skins, affiliates such as Empire will take a percentage of the pot from each hand that's dealt.

The amount of the pot held by the house for each hand (the rake) usually equates to about 3 per cent of the total up to a maximum of $3 a hand. For delivering punters to the table, affiliates such as Empire will get to keep anything up to a quarter of that rake, depending on how much is being bet by the player they provided.

All these percentages-of-percentages may not sound like much. But the beauty of running an affiliate is that it doesn't cost much either. At the interim stage, Empire took in $41 million in gaming revenue, against administrative expenses of $1 million and a cost of sales - mostly advertising - of $20.8 million.

That's a profit margin just shy of 51 per cent.

A margin like that will attract competitors - particularly if your business has no barriers to entry and negligible start-up costs. Sure enough, the affiliates market has mushroomed and the battle for customers is happening between the skins rather than the betting sites themselves.

Rival affiliates are returning their share of the pot through increasingly generous bonuses to the most valuable players; these so-called rake-back schemes are where profit margins disappear.

The problem for PartyGaming is that, by its own admission, 70 per cent of its revenues are generated by just 10 per cent of its punters. These are the high-rollers who are most likely to switch from the main site to an affiliate because of the bonuses on offer. At best, their defection will cost PartyGaming a percentage of the pot; at worst, it means losing a top-tier customer.

So, while the affiliates with their bonus schemes have delivered revenue growth twice as fast as PartyGaming's own efforts in the first half, the increasing price war to attract punters has created the firm's biggest competitor.

PartyGaming's answer, as revealed today, is to choke the companies that are driving its growth. This will be done by ghettoising the affiliates and skin users, thereby denying them the benefit of liquidity. Affiliates need a huge number of players to make all those tiny percentages of the pot add up - which is exactly what PartyGaming is denying them.

For Empire, this slow strangulation will likely mean it will have to rely on the back-end software provided by the recently acquired Noble Poker. That means any rake-back schemes will be coming straight out its own profits. And - perhaps because smaller sites have fewer inexperienced players to beat - the company may continue to lack the scale needed attract the high rollers PartyGaming is trying to retain.

And for PartyGaming, the move to cut off its main customer-acquisition driver could suggest that - after just four months as a listed company - management is already preparing for online poker to go ex-growth.