10/05 Party Stock Report Rakeback Highlights

[firstyearclay]

- Market share under threat from rake-back but
PartyGaming has potential to reduce impact

PartyGaming already gives rake back — just not ‘rake-back’
PartyGaming suffers from competition from sites that offer to return some of
the players’ rake apparently losing some of the activity of some of its most
valuable players. It cannot compete directly with such sites, as it would
undermine its future revenue base. However it already gives rake back through
bonuses and affiliates, and the challenge for PartyGaming is to use those
mechanisms to maximise player activity and retention. To do this, it plans to
use the information from the datamining project, which is in progress and so,
progress is going to be made, it may not become apparent until next year.

At the same time as this was happening, a structural weakness in PartyGaming’s
marketing model was beginning to weigh on the group as growth slowed down. The
problem is that PartyGaming rewards its 4,000 affiliates and ‘skins’ (third party
brands that use the PartyGaming platform and services in exchange for a revenue
sharing arrangement, of which there are four) with a share of the rake that is
generated from the players in its poker room. Not unreasonably, some of these
business partners returned some of this portion of the rake to players that play with
them in order to stimulate their own further growth.
So players have the choice between playing on PartyGaming’s site or playing in
PartyGaming’s room via a third-party site and explicitly having some of their rake
returned to them. PartyGaming indicated that one of the problems this year had been
a reduced frequency of play among their bigger players. It seems reasonable to
assume that some of these players have been playing more actively on third-party
sites where they get some of their rake back. This trend appears to have been
confirmed by Neteller which, with its Q2 results, said that it believes one reason it
was achieving a higher level of income per dollar deposited was that poker players
were more actively moving their funds from site to site. So the incentive structure,
which was put in place in the early days of online poker to encourage partners to help
build the business, has now come to create an unwelcome degree of competition on
the basis of price. Typically the level of rake-back available from the affiliates sites
which specialise in it ranges between 25% and 35%.
So, it is possible to construct a bear case on the basis that PartyGaming has the
choice of either seeing more and more of its business attracted away (and probably
the higher volume, more sophisticated players) by rake-back offers or to undermine
its own revenue base by cutting its rake levels and somehow preventing affiliates
from offering rake back.

Strategically, PartyGaming has decided against offering rake back. Empire also tries
to avoid giving rake back. For these big players it undermines their revenue base
without a commensurate benefit, and there is no reason why the level of rake back
would not continue to spiral upwards. It is also unsophisticated and indiscriminate. It
is simply a volume based discount and it may result in rake of being returned to
players who do not ‘need’ it, or prove insufficient to retain players who require a
higher level of financial incentive to remain with the sites. One of Empire’s strengths
is that it has developed a whole range of incentives, gifts and prizes to retain its key
customers. One objective of PartyGaming’s data mining project is to identify key
groups of players and to develop the incentive they find attractive to remain playing
with the site. We do not believe that rakeback is an insuperable strategic threat. It is
already part of PartyGaming’s business model to make a material volume based
returns of rake, just not through the explicit mechanism of rake back. Sign-on
bonuses, deposit bonuses, refer a friend bonuses, affiliate fees and the profits made
by skins all represent trade-offs made between PartyGaming’s own need for growth
and its needed to maintain the maximum possible margin. The challenge to
PartyGaming’s management is to find an incentive structure which players find as
attractive as rake back without the explicit strategic threats that it represents.

PartyGaming has published that in 2004 10% of the players account for 70% of
the rake

Rakeback
While bonuses are usually associated with amounts deposited, Rakeback is a more
explicit return of rake based on a percentage of rake. We believe that PartyGaming
does not offer rakeback. However it has 4,000 affiliate websites that it rewards for
finding customers ether through one-off payments or, more commonly, by paying a
share of the rake generated by players introduced through that affiliate.
In 2004 PartyGaming affiliates were paid in aggregate 35% of the rake they
generated.
This has been an excellent structure to drive the growth in the business in the early
stages. However, not surprisingly, some of these affiliate sites offered part of their
payment from PartyGaming to players as an incentive to sign on through their site.
This creates an incentive for large players to move away from playing directly with
PartyGaming and reregister through an affiliate site in order to get some of their rake
back2. There are ways that PartyGaming can try to prevent the migration of existing
players but the anonymity of the Internet works against the company. In addition
genuinely new players are likely to be attracted to the offer of rakeback.

What works/what matters?
Rakeback is marketed aggressively by the websites that offer it presenting it as
“being paid to play poker”. Although this is clearly not what is happening its is
clearly an attractive marketing message and would appear to have been successful in
attracting some of PartyGaming’s bigger players away from the site. PartyGaming
has identified a reduced frequency of play among some of its bigger players and
Neteller said with its 2Q results that it believed it detected a greater willingness on
the part of online poker players to move from site to site (a good thing if you are
Neteller getting a percentage of every such transaction).
PartyGaming (and Empire, its main skin) do not like rakeback. From their point of
view it is an indiscriminate discount, highlights to the player the amount of rake the
player has been delivering to the site and may be more than is ‘needed’ to keep some
players active and less than is needed to keep others active. If PartyGaming were to
introduce rakeback on its site it would undermine its affiliate reward structure and,
more importantly, sharply cut back at its revenue.
We believe that one of Empire’s strengths is an ability to target different kinds of
reward activity to different players (prizes, gifts) without and explicit financial link
between the level of rake and the prize. PartyGaming has similar programmes but at
a less sophisticated stage of development. PartyGaming is working on a data-mining
project, which it hopes will help it identify the play patterns of different groups of
players and establish what kind of incentives serve to stimulate their play.
Although rakeback is clearly an attractive marketing tool it is not inevitable that
PartyGaming will have to offer it in its site in order to avoid losing players to
affiliates and skins. As we discuss above, rakeback and bonuses are similar in
financial effect, what PartyGaming needs to do is to find an attractive bonus/reward
structure which stimulates the greatest amount of play for the smallest discount on
rake.
2 The appendix includes a selection of rakeback sites

More info can be found here: http://finance.yahoo.com/q?s=PRTY.L&d=t

Ok, now that I am going to lose my 30% that I was getting from Eurobet I think I will go back to bigmouthfuls.com. I did enjoy this while it lasted!

[greg nice]

hrm interesting. the multitablers are obviously much more important than once thought.


[ QUOTE ]
PartyGaming indicated that one of the problems this year had been a reduced frequency of play among their bigger players. It seems reasonable to assume that some of these players have been playing more actively on third-party sites where they get some of their rake back.

...

PartyGaming has published that in 2004 10% of the players account for 70% of the rake


[/ QUOTE ]

[Sintax]

Well, I guess this explains the various "bonuses" seen this month:


[ QUOTE ]
One objective of PartyGaming’s data mining project is to identify key groups of players and to develop the incentive they find attractive to remain playing
with the site.

What PartyGaming needs to do is to find an attractive bonus/reward
structure which stimulates the greatest amount of play for the smallest discount on
rake

[/ QUOTE ]

I wont be playing those 4500 hands for $180. Datamine that phuckers.

[firstyearclay]

I wont be playing those 4500 hands for $180. Datamine that phuckers.

[/ QUOTE ]

LOL

[LImitPlayer]

I don't get it. If PArty is is publicly saying that 70% of it's revenues comes from 10% of the players, why would they alienate those 10%?

[slavic]

This reminds me a good bit of Compaq's old channel marketting aproach. At one point their bottomline showed as much as a tenth of the companies revenues were being sucked up in kickbacks to the channel itself.

The easy solution as Compaq saw it was get away from their channel and evolve into a Direct Marketer, the problem is that you are already in bed with your current model and changing it is just as likely to kill you as to help you. I have long thought that the affiliate programs had the potential to be very bad for Online Poker, I just didn't believe it was quite this large. If 10% of players make up 70% of play then party is looking at an extremely significant cost of "rakeback", the easiest way to solve it would be to drop all affiliates.

I think fortunatly for party that would be a less painfull ploy than it turned out for Compaq.

[MaxPower]

[ QUOTE ]
hrm interesting. the multitablers are obviously much more important than once thought.


[ QUOTE ]
PartyGaming indicated that one of the problems this year had been a reduced frequency of play among their bigger players. It seems reasonable to assume that some of these players have been playing more actively on third-party sites where they get some of their rake back.

...

PartyGaming has published that in 2004 10% of the players account for 70% of the rake


[/ QUOTE ]

[/ QUOTE ]

I have been trying to convice the Zoo of this for a while. They all seem to think that it would be better for a site to just have fish playing against each other.

This is the case with almost every business. Most of the revenue comes from a core group of loyal users.

Most businesses provide better service and pricing for their best customers because of how valuable to their business. It is much less expensive to maintain a big customer than to acquire a new one.

In the short run, Party may do fine with the strategy of neglecting its biggest customers, but they are at risk of losing them in the long run. Especially if the other poker sites get their act together. Party will do fine if their competitors are more incompetant than they are.

[Soleo]

[ QUOTE ]
I don't get it. If PArty is is publicly saying that 70% of it's revenues comes from 10% of the players, why would they alienate those 10%?

[/ QUOTE ]And someone even quoted that one of Party bosses mentioned multitabling winning players as 'sub-optimal customers' (please give the link anybody, it's somewhere near this thread).

[Inthacup]

It was the CFO Trip report thread and it was posted in the Zoo.

[MaxPower]

[ QUOTE ]
I don't get it. If PArty is is publicly saying that 70% of it's revenues comes from 10% of the players, why would they alienate those 10%?

[/ QUOTE ]

Because they think those players will play at Party no matter what they do. Judging by the attitude of many on 2+2 they may be right.

I don't think that is the case. Especially for the low limit players to whom rb means a lot and where there is plenty of other sites that have good low limit games.