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May 20, 2008

Legalization: Players and Sites

Legalization of poker will benefit players immensely. As I mentioned in the first post, it will mean an order of magnitude more players than we've ever seen before. If you think the last poker bubble was big, be prepared for 5 or 10 times that.

The poker community is a giant food chain. Players, for the most part, start out at the bottom and, as they improve, move their way up the pyramid. Maybe they start off playing $1/$2 or $2/$4 online, and then after they perceive they're winning (which is easy to do in poker even if you aren't) or get used to the stakes, they start working their way up the ladder.

The problem in recent years (in fact, to some extent, ever since online poker's inception) is that it has been the bottom of the food chain that the law has succeeded in keeping off of the sites. These are the guys who just want to blow off a little steam and gamble away some money because it's much more fun than saving. They saw poker on TV or played it with their friends and want to give competitive poker a shot. But if it's too much hassle (i.e. their credit cards don't work) they'll just go buy some lottery tickets instead. They don't care that much, they just want to piss away money because they're Americans or Brits and it makes them feel good to know that they can.

So some of them are willing to jump through all of the hoops rather than blowing their money at a casino or on scratch off tickets or betting on the Jets (or Arsenal) with their friendly neighborhood bookie. And some of them start to play regularly and get used to the stakes, and maybe a few even become winners, and a few more get lucky enough for long enough to convince themselves that they did too. And all the while, every guy winning at $2/$4 is eyeing the $3/$6 game, because who wants to win $20 an hour when they can win $30? And the guys playing $3/$6 are eyeing the $5/$10 game, because who wants to win $30 an hour when they can win $50? It may not be their livelihood (though many quickly start considering making it that) but everyone wants to make more than they do if possible. It's the American way.

Poker is not a true food chain because there's nothing stopping a rich guy from starting off at $50/$100, but it's close enough that it functions like one. So the casual players at the lowest limits provide the same service to the rest of the community that algae does to a lake. They feed the small fish, who in turn feed the medium fish, who then feed the pike. And just like a lake, if you cut down on the algae, you end up with fewer pike. It takes a while for each level of the chain to starve in turn, but it happens, and it has happened ever since the UIGEA (though I'm told some recent advances in payment processing have helped a bit lately, but it won't last). You can see it in the numbers and feel it when you talk to the players.

What happened between the beginning of the boom and the start of the bust is that the algae exploded. It was a pain to get money on, but there were still more sites advertising on more television shows and in more magazines, and there were more funding options, so a larger percentage of the casual players heard about it and made their way through the filter. And the small fish population grew along with the algae, and the medium fish along with the small, and so on up the food chain.

That's why every few months sites were offering bigger limits. When I first started playing online, $10/$20 limit was the max and no-limit didn't even exist yet. But then poker took off and the algae bloomed and the bluegill population did too. The bass population started growing so $15/$30, $20/$40, and $30/$60 games started appearing. The algae kept growing, as did the bluegill and the bass, and so the pike started multiplying too, and suddenly every $30/$60 game was full, and $100/$200 games were going off around the clock. Some sites were offering stakes bordering on ludicrous. Where once $25 tournaments were the maximum, $215 tournaments ran every day. Prize pools went from hundreds to hundreds of thousands.

And when the UIGEA hit it all started to evaporate. There were a few massive shocks, like when Party Poker pulled out of the market. Action didn't increase that much elsewhere and the site, which lost 85% of its customer base, was still in a not too distant 2nd place. That's how big it was before, and most of that action was completely gone. Then Neteller left the market (locking up a lot of player money for many months) and things started getting even worse.

The effect rippled through the casino world too. Tournaments, which were fed by online qualifiers and people who won big online tournaments, have since experienced a gradual decline in entrants. Even the WSOP had fewer than the year before (almost a third) which hadn't happened in as long as anybody could remember.

But the UIGEA is just a dam, and behind that there's a river full of algae, entirely unmolested, waiting to pour forth. And that will be the immediate consequence of regulation. Every publicly traded gaming corporation, and even some non-gaming ones (like Yahoo, who dabbles in poker overseas) will apply for licensing at the first possible opportunity. Massive advertising budgets will saturate the internet and the airwaves with poker ads. Ad sources like Google and television, which stopped taking online gaming ads after the Discovery Networks debacle, will open back up.

It's debatable what will happen with the credit card situation, but fraud prevention is a lot better than it was 8 years ago when issuing banks first started rejecting gaming-related deposits. At the very worst players will fund accounts with PayPal or something similar. You may even be able to buy prepaid PokerStars cards at BestBuy just like you can for Wii Points or iTunes credits. Why not?

New sites will sprout like weeds, but just like the last boom, the vast majority of them will perish. In fact, if you look at the top few sites today, it's almost the same names that existed in 2001, before anyone outside of the small community had ever even heard of Phil Ivey. Party Poker, Poker Stars, Ultimate Bet. The only exception is Full Tilt, which found a rather unique competitive advantage by licensing pretty much everyone who ever won a televised event.

Full Tilt has a stranglehold on that particular angle, but a few sites will pop up that have their own unique advantages. Harrah's will probably become a major contender, given their current customer base and ownership of the WSOP brand. Yahoo might be a serious contender given their reach. Maybe a few more will pop up along those lines.

But for the most part, it will be the same 5 or 10 sites we all use now. Poker has a very strong network effect, meaning that the value of a poker site increases exponentially as its user base grows. A site with twice as many players is four times as valuable. So the new players will look around and land at the sites that already have the old players. PokerStars will probably still be the biggest, and they deserve it because they're clearly the best in almost every respect. Party Poker will likely make a strong comeback in the U.S., because they're brilliant at marketing and most of us old-timers have some fond memories of juicy $30/$60 games and ridiculously large cashouts there.

Sites will probably go through some growing pains. It's not trivial to scale to 5-10x your current size, especially that quickly. Sites, newly flush with revenues, will become hacker targets and DDoS attacks will flourish once again. While I'm sure they've never stopped, I'm told they've been greatly reduced since 2003, when Party Poker was being knocked out almost every night due to a combination of that and their own poor planning.

Some sites will buckle and take player funds down with them, as has always happened, but most will be reputable, and, at least for a couple years players and sites will be rolling in the green.

 

Posted by themaroon at May 20, 2008 6:57 PM