Poker liquidity: it’s a term that’s been bandied about much in the past 5 or 6 years. But what does it really mean? In brief, it means critical mass. Poker players want a game at any hour of the day, with the type of game play at the stakes they’re seeking. That requires having a large enough pool of players to play against. In addition, sites with 100,000 simultaneous cash players can offer multi-table tournaments with prize pools exceeding $1 million dollars on a regular basis. Smaller sites with 2,000 simultaneous players might struggle to offer prize pools greater than $10,000. So, it really is, ‘‘the more the merrier,’’ at least as it relates to poker play. The concept of liquidity has even generated a cottage industry of sites designed strictly to track the liquidity of the leading poker sites and rank them in that regard.
In listening to Morten Ronde, Legal Manager of the Danish Gaming Board, speak at the fall International Masters of Gaming Law (IMGL) conference, it became clear that poker liquidity is more of an issue than some might think. Ronde noted that, given that the total population of Denmark is only about 5.5 million people, liquidity would be an issue. Thus, during public policy discussions on crafting Denmark’s gambling law, the idea became to allow their licensee(s) to tap into the ‘‘global liquidity’’ pool. The legislative history lays out this thinking, the idea being that as long as ‘‘the game of poker networks must comply with Danish law, controlled by the gaming authority, and gaming operator must pay duty on the part of the game that relate to Danish customers,’’ operators would be able to access a much larger player pool than Denmark alone could provide.
This approach is in marked contrast to that taken other European states, such as Sweden, Italy, and France. Many European countries, which have recently developed licensing regimes, have instead taken the approach of requiring their poker operators to ‘‘ring-fence’’ the players (e.g. only French players can play at French sites).
One of the questions this elicits is why a jurisdiction feels the need to keep their players contained. Is it for control purposes? Is it to keep the money distinct for taxation purposes? Is it part of an attempt to build a ‘‘border’’ around a borderless medium (the internet)? What exactly drives a country, state, or province to segregate this market?
As the industry has been learning lately, public policy debates often do not take into consideration what actually makes for a successful commercial model. One need only look at criticism of the licensing regime France developed for a ready-to-hand example.
So when I began to look at the issue of liquidity, two issues emerged. One was that these limitations on the player pool severely restricted operators. The other was that this trend took players out of the ‘‘global’’ pool that some operators were developing with much success.
This is the reverse of what was learned when poker networks were first being developed. As more operators joined a network, they could see their business grow some 15%–25% when they joined larger networks that offered more liquidity.
In speaking with Tony Chaskelson, a co-founder of Tribeca Tables, one of the earliest and more successful poker networks, it was clear that there were three economic issues raised with this trend:
• the effect of prize pools
• the attraction of sizable tournaments
• the ability to find adequate players for cash games in off-peak hours
To break those down, let’s first look at the effect on prize pools in cash games. Poker Stars, which has been quite successful in developing a global presence, is offering a US$2.5 million prize each Sunday. They can do this because of the size of their player pool. A ‘‘ring-fenced’’ country, state, or province would be hard-pressed to compete with that. Second and similarly, it’s simply not possible for a site with a smaller player pool to offer as large a tournament as a site with a larger pool.
Third, if players are playing only with others in their own or an adjoining time zone, it will be hard to offer a full complement of around-the- clock play. Players coming in at off-peak times will quickly determine that there’s no critical mass of players and leave to find a game that offers one. Unless enforcement efforts against these sites are more thorough than anything we’ve seen so far—OR unless enforcement against the players themselves gains any steam—the status quo will continue and a 2 a.m. player will find another game on a site not licensed in that jurisdiction.
A recent article in eGaming Review, Adapt or Die, offered this information. The percentage of Poker Stars’ revenue (PokerStar’s revenue is on track to reach US$1 billion this year (2010)) originating from the U.S. has now fallen to around 30%, according to figures supplied by H2, while at another site, Full Tilt, the percentage of U.S. revenue is down to 40%. This migration of the two market leaders’ business away from the United States and into Europe is borne out by PokerTrafficIndex.com’s data, which shows the combined share of Stars’ and Tilt’s business from the United States fell from 38% to 33% between October 2009 and October 2010, while their share from the European Union correspondingly rose from 46% to 51%. The European market also increased its dominance at the expense of North America last year, growing its market share by 1.5% to 65% in the last year, with North America’s share declining by almost 2% to 27%.
Interestingly, Jim Ryan of Party Gaming has been quoted as saying, ‘‘Ring-fenced markets do help to bring about a level playing field. This is clearly shown by the market share breakdowns for Italy and France. Importantly, regulation allows governments to provide appropriate protections for consumers and it also equals revenue growth as online operators are free to advertise.’’ However, while there are benefits to government regulation or certification—
• Legal advertising
• Enhancing the industry’s “trust factor”
• Ensuring secure payments, as well as regulated, certified, and monitored software and game play
—it is not necessary to ring-fence the market to achieve these benefits. Separating out the impact of legalization and government regulation from that of ring-fencing, it appears much more likely that ring-fencing can result in short-term growth of the tracked poker market in legalized countries like Italy and France while presenting longer-term problems through the reduction in player pool and poker liquidity.
Perhaps the economics of poker is simply not well understood, or legislators are not being educated enough about the commercial impact of the policies they’re developing. This is exemplified by some of the proposals floating around in California, which specify that there should be up to three poker networks competing against each other. Why not just one? With a population of close to 40 million, the state would have good liquidity even standing alone; but, split that potential player pool among three networks and a lot of that liquidity dries up.
If multiple European countries agreed to pool their legalized traffic, one can envision a scenario in which the United Kingdom, Italy, France, Sweden, Denmark, Germany, and a few others will compete with—and begin dominating—the non-authorized sites. This would likely produce a reversal of growth in these unauthorized sites and greater success for regulated countries.
Perhaps it’s time to put our heads together on what accomplishes the quite-valid consumer protection and taxation aims of government while still taking into account what makes for a viable, eco- nomically competitive environment for poker operators. A patchwork system of segregated markets may be in no one’s best interest.
Reprinted with permission from Gaming Law Review and Economics, Volume X, Number X, 2011, courtesy of Mary Ann Liebert, Inc., publishers, www.liebertpub.com/glre