Online Poker

Arguably the world’s favourite card game both offline and online, poker has been around in one form or another for centuries.

A main catalyst for the explosive growth in the early years of online poker was the World Poker Tour (‘WPT’), which broke new ground in 2003 by televising high stakes tournaments that proved to be a hugely popular format.

Source: H2 Gambling Capital, February 2011

Online poker operators have capitalised on the acceptance of gambling as a mainstream form of adult entertainment and the convenience offered by the internet. H2GC estimates that the global online poker market was worth $5.1 billion of GGY in 2010, a 6.6% increase over 2009. The US market remained a dominant force in online poker with H2GC estimating it generated $1.3 billion of global GGY yield in 2010, compared with $1.2 billion in the previous year. However, on 15 April 2011, US authorities took action to close down several US-facing online gambling businesses, including major poker sites. This development will dramatically alter the structure of the global online poker market, until such a time when a regulatory regime is introduced in the US, at either the state or federal level. See Regulatory developments for further detail.

Outside of the US, growth in is expected to continue with the non-US global online poker market forecast to achieve a CAGR of 10.4% between 2010 and 2015 when the total gross gaming yield from online poker is expected to reach $6.1 billion of GGY.

How online poker works

The mechanics of online poker are simple: the operator provides a gaming platform where customers can play poker against each other, known as ‘peer-to-peer’. IN return, the operator charges players a fee, or 'rake', for every hand of real money poker they play when where the pot is greater than a certain amount and when the hand reaches the 'flop'. In addition to the need for excellent software, multi-lingual customer services and safe and secure payments, sufficient player liquidity is a prerequisite for success in online poker. It means that players can quickly find a table to play at the stakes they want.

Players can compete with one another either through online tournaments or on individual tables, known as 'ring games'.

Ring games

Ring games have traditionally been the most popular format. Players can play a wide variety of different types of poker games, including Texas Hold 'em, Omaha High, and 7-card stud. In 2010, PartyPoker.com became the first online poker site to launch Double Hold’em, a variant of the popular Texas Hold’em offering players three ‘hole cards’ instead of two.

Each poker variant features players competing against each other for the total amount wagered for any particular hand (the 'pot'), minus the rake. The amount of rake varies depending on the pot size, but is subject to a cap with a maximum of $5 for high limit tables.

Tournaments

Tournament play differs from ring games in that rather than playing with real money, players receive chips in a tournament which they then use to play against each other. With only a set number of chips available, players are progressively eliminated until the winning player emerges with all of the chips. The winning player and usually those in second and third places receive a prize, normally in cash. Revenue varies depending on the size of the 'buy-in' and the number of players participating.

Predicting the future growth rate and trends for global poker revenue is being made more difficult due to the substantial changes to the regulatory landscape that is now taking place. Following the introduction of a ring-fenced market in Italy in 2008, where only residents based in the country can play against each other, France followed suit in 2010 with its own ring-fenced regime. More European countries are expected to roll-out regulated regimes for online poker but it remains unclear as to whether they will adopt a ring-fenced approach or accept the industry’s traditional pooled liquidity approach whereby players from different countries can play against each other on the same table. As a result of these developments, there are now two distinct market models: regulated and ring-fenced so-called ‘dotnational’ markets and the unregulated, ‘dotcom’ market.

The domination by a couple of large players is a symptom of an unlevel playing field in the global poker market.  This is being driven by the fact that a limited number of sites continue to accept real money customers from the US, which remains the largest individual online poker market in the world, but one where bwin.party and many other publicly listed companies believe it is prohibited to offer online poker games. This situation complicates the dynamics of the global poker market as the US-facing sites are able to exploit their high levels of player liquidity and significant US profits in order to secure strong positions in other markets. It remains to be seen what action, if any, the authorities in the US will take against such companies.

As more countries seek to regulate online gaming and assuming they also seek to ring-fence their player liquidity, so the unregulated ‘dotcom’ market can be expected to decline while newly regulated markets such as Italy and France (or ‘dotnational’ markets) expand.  In ring-fenced markets, the non-US facing sites are better placed to compete as they no longer face the unlevel playing field from a player liquidity perspective (although the superior profits generated by US-facing sites continues to act as a source of competitive advantage through the generation of greater cashflow).

All market data supplied by H2 Gambling Capital, February 2011