I ran accross this article and it is probably one of the better reads on the industry that I have seen in a while.  Over the past few months you have heard me talking about the "business of online poker".  This article by Adam Woods exemplifies the point I have been trying to get across.  The online poker market is hotter than ever and the industry in general is becoming a large industry with respect to the global economy.  Below is the ariccle.  Feel free to leave your comments at the end.  And for even more information on The Business of Online Poker, visit the Poker-2010.com

Copyright Haymarket Business Publications Ltd. Oct
2005

 

The web is providing a lucrative playing field for poker
operators as the sector picks up more players by the day. By Adam Woods

Paul Newman coined one of poker's great maxims: "If you look
around the table and can't tell who the sucker is, it's you." Given
that online poker's revenues grew from $92m (£47.7m) in 2002 to more
than $1bn (£0.54bn) last year, according to Christiansen Capital
Advisors, it's unlikely that the leading poker site operators feel like
the sucker at any table.

Online poker sees real people play against each other for real
stakes. It might not offer the same psychological challenge as a
face-to-face game, but it's faster, less intimidating for beginners
and, in the words of Ongame chief executive Patrik Selin, "you don't
have to call up 10 friends and get them over to your house on a Tuesday
night".

Since online poker came to prominence two years ago on a wave
of media coverage, the market has been flooded with operators. Industry
sources estimate there are about 200 poker sites, although the leading
eight share 95 per cent of the market (Christiansen). Of these
pioneers, PartyPoker, the flagship site of Gibraltar-based PartyGaming,
is the undisputed market leader, recording profits of $1.4m (£750,000)
a day in the first three months of 2005. Following behind are
Israeliowned PokerStars, Sportingbet's Paradise Poker, Ongame's
PokerRoom and Cassava Enterprises' Pacific Poker, along with brand
extensions from the likes of Ladbrokes and William Hill.

In May, PokerPulse.com estimates that 1.84 million people
played online for money, but Christiansen predicts this $1bn market
will be worth $6.4bn (£3.46bn) by 2009. Although about 75 per cent of
players live in the US, this is expected to fall to 50 per cent within
four years. Europe is marked for particular growth, with the UK the
star market, already accounting for an estimated 80 per cent of the
continent's players.

For its backers, the exciting thing about poker is that it's a
genuine global pursuit. Whereas online sports-betting is territorial
and other casino games are harder to master, poker is international,
cheap to get in on and easy to pick up at a basic level. "There are 50
million to 70 million people in the US who play poker already and a
larger number outside the US," says Vikrant Bhargava, marketing
director of PartyGaming. "A very large percentage of those people use
the internet, but how many have tried playing online?" Without doubt,
it's an increasing number. At the time of writing - late evening in
London, mid-afternoon in New York - there were 49,201 people playing on
6,639 virtual tables at PartyPoker, which often claims 60,000 at peak
times.

Critical mass

The market may not be mature, but the larger players have more
than enough punters online at any one time to guarantee full 'tables'
for all. While a handful of web sites, including PokerRoom, offer a
browser-based option, most operators offer only a downloadable
platform, believing the quality of the software creates stand-out.

However, Michael caselli, editor of poker lifestyle magazine
Bluff, suggests "player liquidity" is more important: "There is not
much differentiation between the technologies. The key point of
differentiation is size. The online poker rooms have reached critical
mass - you can always find the game you want, at the limit you want, at
any time of day."

This autumn, caselli is launching Bluff in the UK and
Scandinavia, where online poker's popularity is building fast, largely
due to TV exposure. "It is a relatively simple game to pick up, and
because it has entertainment value on TV, people watch it and say 'I
could have played that hand better than him'."

The rise of high-rating pokerTV shows, such as Channel 4's Late
Night Poker and Challenge TV's Celebrity Poker Club is one of the clear
origins of the online poker boom. In the US, World Poker Tour is the
highest-rated show in the Travel Channel's history. However, Late Night
Poker is credited with making the game accessible to a TV audience by
building glass squares into the playing table, through which players'
cards can be seen. "That turned it into a decent game to watch," says
Andy May, director of strategic marketing at SportingBet, owner of
ParadisePoker. "But what really brought the whole online thing about
was Chris Moneymaker - fortunate name - coming in, paying virtually
nothing and winning $2.5m (£1.35m)."

It would be hard to imagine a better ad for the game. In May
2003, Moneymaker, a 27-year-old accountant, backed by his dad and a
friend called, incredibly, David Gamble, won the 34th annual World
Series of Poker in Las Vegas, having qualified at PokerStars.com with
$40 (£21.60) stake. His win transformed perceptions of poker among
amateurs and gave millions extra hope of a big payday.

"A lot of revenue online is driven by the tournaments because a
lot of the play online is about winning seats at tournaments," says
Emma Crowe, European area director at WPTonline, the newly launched
site of the market-leading World Poker Tour brand. "You can sit and
play, and earn your cash online, but to go from that to winning a seat
at somewhere like the Bellagio to play against some of the top poker
players is phenomenal."

Moneymaker's win marked the start of the current land-grab.
PartyPoker was the first to take the initiative, investing heavily in
off- and online marketing. "When the market started to grow in the US
in early 2003, we had the infrastructure in place to capitalise on it.
To a large extent, we helped to grow the market," says Bhargava. "It
was a matter of timing and we did a few things right. We never
hesitated to put more money behind something we could see was working."

With size comes momentum, but that isn't the only thing that
makes PartyPoker hard to beat. caselli reckons "they are very clever in
their market. They are results driven and analytical". Bhargava thinks
PartyPoker's greatest asset is its players, who are encouraged by a
referral programme to direct friends to the site. It also has a network
of more than 5,000 affiliates, copious outdoor advertising and branded
tournaments, such as the PartyPoker Million tournament cruise ship.

'Wow' factor

Paradise Poker gave the online market a sense of its
burgeoningvaluewhen it was acquired in October 2004 by Sportingbet for
$297m (£160.6m). It has grown under its current owner and is gearing up
for the world's first $ 1 m (£540,000) free-roll jackpot, which, as the
name suggests, costs nothing to enter and has an enormous first prize.

"What has happened with this 'wow' factor of TV and Chris
Moneymaker, and the whole 'small-stakes, big-win' opportunity, is that
online poker now appeals to a much broader marketing segment, so it has
to be more mass-market in its marketing approach,"says May.
Accordingly, the $ 1m free-roll jackpot will come straight out of
Paradise Poker's marketing budget, "but we have attracted thousands of
people to come and have a go, and our hope is that people will like the
site and the software and come back for more", he explains.

Given the close connection between the appeal of offline and
online poker, the leading web brands are increasingly conscious of how
they must integrate their marketing campaigns. "When we launch an
offline campaign in the UK, the numbers coming from online affiliates
go up significantly," explains Bhargava. "That tells you that anything
you do offline helps to build brand awareness, but the conversion is
more likely to happen through somethingyou do online."

Paradise Poker is spending more offline, largely on TV
activity. Ongame's PokerRoom plans to do the same, having focused on
magazine ads and affiliate marketing to build the brand with the one
and stimulate traffic with the other.

Any relationship will always be long-distance as most poker
sites are run from out-of-the-way places for tax reasons. In all other
respects, a defining characteristic of the market leaders is their
corporate respectability. PartyGaming and Sportingbet are listed
companies; the former was valued at £5bn when it floated it June,
making it as big as British Airways and Marks & Spencer combined.
Meanwhile, Sportingbet is the largest firm on AIM with a £1 bn
valuation.

"It is a real industry," says Bill Mummery, head of e-gaming
development for the Isle of Man Government. "They are real businesses
and they are very well managed. If you lo(Oct 2005): p. 46-48ok at
things like risk management, anti-money laundering and fraud, if banks
had the quality and immediacy of data that this industry has grown up
with, they would find it much easier to deal with these issues."

One reason for this professionalism is that, in many places,
the legality of online poker is a moot point. In the US, no-one is sure
whether it is covered by the Wire Act, which forbids gambling over the
phone. Since poker is a game of skill, its advocates argue that it is
not strictly gambling, but the law has not been tested. "The industry
is young, so it's generally unregulated - that's the problem," says
Selin. "We want it to be regulated. I think what the UK government is
doing [with its pending gambling bill] is very important - putting
everything in place."

John Raczka, former head of content at BTopenworld and now
marketing consultant to the World Poker Exchange, which staged the
London Open in August, points out that online play has rehabilitated
poker in US casinos. Many had largely abandoned poker due to its low
yields, compared with other games, but a good proportion have now
reinstated it as a loss-leader. "Casinos that closed their poker rooms
have reopened them," he says. "Those that still had rooms have doubled
the size."

Last year, the annual turnover from the gambling industry
increased 25 per cent to £78bn. While some say the bubble is destined
to burst, the market leaders are staking everything on a more positive
outcome, possibly taking to heart the words of one Robert 'Chip Burner'
Turner: "A person should gamble every day - think how bad it would be
to walk around lucky and not know it." But, in an industry as hotly
contested as this one, luck doesn't come into it.

The industry is young, so it's unregulated - that's the
problem. I think what the UK government is doing is important-putting
everything in place

Patrik Selin

Ongame

Worldpokertour.com: tournaments drive revenue online

It's a relatively simple game to pick up, and because it has
entertainment value on TV, people watch it and say 'I could have played
that hand better than him'

Michael Caselli

Bluff

Poker wars: the leading protagonists

PartyPoker.com

Founded: 2001

Owner: PartyGaming

Founded by Ruth Parasol, ex-sex phoneline mogul, and Anurag
Dikshit, the firm was catapulted into the FTSE 100 on
itsJuneflotation.lt had 21.46 per cent of UK search traffic that month
(Hitwise), but as it is played over downloaded software, this masks its
true size. PokerPulse credited it with 54 per cent from 1 January to 5
June. PartyGaming saw pre-tax profits of $371.7m (£201.09m) in 2004.

PokerStars.com

Founded: 1999

Owner: Scheinberg family

PokerStars is said to be the second-biggest poker site, with
eight per cent market share. The commission it takes from players, the
'rake', is said to be $400,000 to $500,000 (£216,392 to £270,500) a
day. It wrote its name in the history books when it launched the first
internet poker star, 2003 US Masters champion Chris Moneymaker. It
recently moved to the Isle of Man amid rumours of an IPO.

PokerRoom.com

Founded: 1999

Owner: Ongame

Launched by Oskar Hornell and Claes Lidell, students and
professional poker players in Uppsala, Sweden. Ongame has 200 staff,
125 of whom are programmers, and its PokerNetwork has about five
million registered players. PokerRoom is Ongame's largest site and it
prides itself on its multiple platforms, including Java, mobile and
downloadable interfaces. Ongame grew by 353 per cent last year.

PacificPoker.com

Founded: 1998

Owner: Cassava Enterprises

Based in Gibraltar, Cassava owns online casino 888.com and is
speculated to be next in line for a stockmarket flotation. Former
snooker champion Steve Davis competed in last year's 888.com Pacific
Poker Open 2004 on Challenge TV. PokerPulse credited Pacific with six
per cent market share from January to June.

ParadisePoker.com

Founded: 1999

Owner: Sportingbet

Acquired by listed online gambling firm Sportingbet last
October for $297.5m (£160.95), Paradise has been a lucky charm, raising
its valuation on AIM to more than £1 bn. The site was on course to
register a million users this summer and PokerPulse gave it five per
cent market share for the first five months of 2005.

Rankings based on observed total real money ring game and
tournament players from 1-19 July 2005. Source: PokerPulse

If you look at things like risk management and fraud, if banks
had the quality and immediacy of data that this industry has, they
would find it much easier to deal with these issues

Bill Mummery

Isle of Man Government

Worldpokerexchange.com: staged the London Open in August