Friday, November 14, 2014

Is regulation to blame for the PokerStars rake hike?

The biggest news of the month in online poker and indeed online gaming is PokerStars increasing its rake across a number of ring games and SNGs. Unsurprisingly, most of the online poker community is up in arms about it. While I don't play very much poker these days, I do see it as another step towards the eventual extinction of the online poker pro, at least as we know it now. In the economic parlance, Amaya/PokerStars are now capturing back a ton of the rents that poker players have held for a long time.

Among others, Steve Ruddock of Online Poker Report, has mentioned that the policy changes of the new-look austere PokerStars is part of the cost of regulation. Ruddock writes,
[O]ver the past five or so years, more and more countries have legalized and regulated online poker. This has forced operators to apply for licensing in different jurisdictions, resulting in sometimes-hefty licensing fees and local tax bills. 
These expenses were virtually nonexistent in the unregulated online poker markets during the poker boom.
Ruddock also notes that Amaya pulled out of 30 grey markets (albeit mostly small poker markets) and that would cost some revenue.

I've seen the following on 2+2 written many times in many different ways, and it rings true: "You guys wanted regulated poker, and now you're getting it."

Regulation always costs money, and costs are always passed down to the consumer, in this case, the poker player. What's more is that the costs of regulation are not always obvious. Taxes, license fees, and lost revenue from exiting grey markets are obvious. But I suspect the average poker player (or journalist) does not have any idea how much regulation truly costs the online poker industry.

The truth is, the regulatory bodies attempting to regulate online poker do not understand it very well, if at all. The most recent example came of this is when PokerStars was required (and then apparently, not required) to remove its auto rebuy feature in the UK. Players hated this change, with good reason: players immediately realized there would be situations where they would pay the blinds, get stacked on a hand, then to add insult to injury, miss free hands. But this is the kind of thing that only a poker player would understand. A regulator who does not play poker in any serious way sees only that an auto rebuy feature bypasses the psychological hurdle of needing to click to reload, and could thereby potentially exacerbate problem gambling.

The auto rebuy regulation got a lot of press, but it is downright sensible compared to many of the regulations that I know exist in Nevada and New Jersey. While I was working for Ultimate Gaming, we were prevented from launching Omaha games in Nevada because they required a separate game tab to distinguish Hold'em from Omaha. Because of the way Ultimate Poker's software worked, this was not as trivial a change as it sounds, and Omaha games were delayed.  A situation came up in New Jersey where the Division of Gaming Enforcement were on our case over a promotion where we gave away t-shirts on Twitter. Seriously, t-shirts. If they can give sites a hard time over t-shirt giveaways, you can be assured that quite a lot of more substantive promotions got either shitcanned or altered beyond recognition.

These things may seem small, but they cost the companies a lot of money cumulatively. They also create technological overhead for the product development team. The end result is a poorer experience for the players, which means players play less, which means the liquidity pool shrinks, and the cycle repeats. The cost of regulation is very high, and much of it cannot be measured on a balance sheet. It manifests in promotions that never run, players that never play, games that never get started, extra payroll expense, redundant and replicated work, and more. As you can see, the costs of regulation go beyond simply higher rake.

Here's another insidious thing about onerous regulations, whether ridiculous or legitimate. It's that once regulations are established, the existing operators are often incentivized to ensure they stick around. If some regulator requires that the river card must be exactly 17 pixels from the turn card or that the geolocation be accurate to 75 metres instead of 100, then once the operator has made that required change, they actually want it to stay, because it creates more future work for their competitors. Thus the regulation game, at times, is simply throwing up one barrier after another at your opponent like an action movie chase scene. As soon as one company passes the apple cart in the crowded alley, they try to knock it over to trip up the next guy.

(By the way, this is not unique to online poker. One need only look at what the taxi companies are presently doing in Las Vegas. After months of desperately trying to keep Uber out of Las Vegas and protecting their regulated monopoly, Uber is now operational. The result? The taxi companies are on a rampage of bullying and intimidation, including this disgusting case where a cab company employee hired an Uber, contacted the taxi authority, who in turn showed up in bulletproof vests and masks posing as police officers.

This is an extreme example of government-protected business running amok, of course, but it is to the point: when companies are granted a special legal privilege to operate in an arena, they will do anything to protect that status against outside competitors.)

As should be fairly apparent, very little of this actually benefits the consumers. I should say that the majority of the online poker regulations that I have come across are reasonable, but they are also things that any legitimate operator would do anyways. At no time did I ever come across a regulation and think, "wow, that's a great idea, and no one is doing that!" Again, it's not reasonable to expect them to - they're not poker players and they don't understand poker.

It isn't all hopeless, of course. There are certainly some people who will be attracted to regulated poker who might not have played if the situation were the same as the mid-2000s. There is the hope of legalized poker in major markets like California, shared liquidity pools across state lines, and so on. But I cannot see the monstrous profits of online grinders from 2004-2008 ever coming back. I empathize with the individuals who have invested so much into developing their poker game and playing for a living. I think this tweet from Mike "Timex" McDonald encapsulates how many online pros must be feeling (obviously -- it got 89 retweets).
As seemingly unfair as this moving of the goalposts seems to the players, we all knew the era of big money for the 90th-98th percentile players would not last forever. I don't think the era of the poker pro is done with entirely, but if I were a poker pro, I'd be thinking long and hard about transitioning to the real world. Might I make a recommendation?

[Edit: A few hours after this posted, Ultimate Gaming announced it is closing operations in Nevada. Sadly, a lot of good people there will lose jobs because of it.]


  1. This comment has been removed by the author.

  2. While I don't like poker regulation much, I don't think this is the cause here. PokerStars' EBITDA is ~40%.

    1. Sure. Maybe (actually, surely) it would be higher without onerous regulations. Maybe they'd be hiking the rake to capture more rents anyway. But as I said, regulatory costs are passed on to consumers.

    2. Yes and no. Regulation costs, without question. The firm and consumers split the cost of regulation depending on their relative elasticities. I would imagine that given the lack of substitutes the demand for Pokerstars service is fairly inelastic, so much of the regulation costs will be passed on. That being said, if Pokerstars wants to maximize profit, they likely aren't passing on ALL of the costs.

  3. Interestingly, you posted this on the day Ultimate Poker pulled up shop.

    As I work in a regulated industry, I get to see the impact of regulation, and the impact when regulators overstep. The first cellphone was created in the 1940s, but back then the telecommunications industry was completely regulated. Once AT&T was broken up (early 1980s), the telecommunications industry had incredible growth.

    Unfortunately, you're dead-on about the impact of regulation. There's no way around it for legalized gambling (and poker is considered gambling in the US).