Market Fragmentation, Strict Gambling Regulations May Limit Galfond's Options
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Phil Galfond’s Plans For A New Online Poker Room Expose Challenges Any New Market Entrant Must Face

Galfond online poker room challenges
The latest announcement of a new online poker room comes not from an established gaming company, but from high stakes professional poker player, Phil Galfond.

He founded the Run it Once poker training site, and is famous within the poker community while remaining relatively anonymous in the mainstream.

At 31, he has intelligence and ambition, and a lot of support from poker players, but establishing a successful new online poker room is an overwhelming project.

The plans have already received widespread coverage in the poker media, and poker players have responded with initial enthusiasm. However, executing the plan involves facing up to the challenges which all online poker rooms are facing, and inevitably some compromises will have to be made.

Although Galfond has not publicly explained his motivation, it is significant that he was a vocal opponent of the changes to the PokerStars VIP scheme which were introduced at the beginning of 2016.

The announcement was made via a blog post on his Run it Once site; a post which set out the underlying philosophy that will give the new online poker room its identity.

“I want a fair, honest, transparent poker site that believes in the dream that I have lived. I’m going to give it my best shot.”

The initial announcement is here. Note that Galfond makes further statements regarding the site in response to comments below the post.

Galfond’s values based approach to online poker

Galfond believes that a poker site must value all types of players:

“It should value the casual player for the money he’s willing to put on the line to play a game he loves. For choosing poker over other hobbies, and for choosing their site over other sites.

It should value the enthusiast and semi-professional for the liquidity they provide and for growing the game. For spreading the word, across different mediums, about their favorite site.

It should value the professional for embodying the dream that brings so many people to poker. For proving that poker is a game of skill. For promoting the game of poker to their fans, students, followers or subscribers.”

His statements may be universally applauded but trying to be all things to all players is going to be difficult to achieve. A look at several of the major decisions he will have to make sets out the difficulties all poker rooms have in succeeding in the current business environment.

Develop standalone software or join a network?

The biggest decision in terms of its future consequences is whether to develop a proprietary poker client or use existing software from a poker network.

Developing a new poker client has become ever more expensive, as the standard set by the major poker operators is now extremely high. Players expect most if not all the software features offered by PokerStars, 888 and partypoker, even when playing at smaller sites.

Attempts to launch with less have not been successful for companies like Ultimate Poker and Real Gaming in Nevada. WSOP NV launched a year later than Ulimate Poker in Nevada, but thanks to its 888 derived software, quickly attracted players and took over the market lead.

Tonybet provides a model for a proprietary approach

TonyBet was founded by poker pro turned politician, Antanas “TonyG” Guoga.

TonyBet launched with its own software dedicated to Open Face Chinese Poker. It has since added Hold’em and PLO, and gained liquidity with a launch promotion that offered rake-free tournaments and cash games.

For the last six months, TonyBet has managed to achieve cash game traffic at about the same level as partypoker in New Jersey. By itself that may not be a profitable volume, but when cross-sell into casino is accounted for, the business model appears to be sustainable.

Adjarabet uses network software without adding network liquidity

The Georgia based poker room Adjarabet has had a fantastic run over the past three years, several times making it into the top five poker rooms ranked by cash game traffic.

It took advantage of MPN’s Babel Fish technology to develop its existing software so that the look and feel of the poker room remained the same, but included all the advances that MPN had made in developing its poker client.

Adjarabet is owned by one of Tbilisi’s largest casinos, and its name is well known throughout the country. This enabled the poker room to build a local player base over several years, and then expand to other countries.

Currently Adjarabet players are outside the main MPN liquidity pool, but the Bablefish technology means that they could be added quickly.

PKR used Babelfish to keep its identity while adding huge liquidity

PKR also used Babelfish to replace its unique 3D graphics poker client with an equivalent that would allow it to feed players into the MPN player pool. Falling liquidity made the standalone PKR poker room nonviable.

With the advantage of MPN’s network, PKR players now have access to one of the top ten liquidity pools in the industry.

MPN has also benefited, as the liquidity added by PKR has shot it up the cash game traffic rankings (paywall), with the network briefly occupying a position as one of the top five poker rooms in the world.

The issue of liquidity is key but tradeoffs must be made

Liquidity is a catch-22 problem for new poker rooms. Without it, they can’t attract new players, and new players are deterred because they can’t get a game when they want at the stakes they want.

However, joining a network means accepting the products the network provides, and adhering to network rules about marketing and VIP programs. It’s not easy to see how this will enable Phil Galfond to implement the differentiation he wants to see in his own poker room.

If Galfond does begin with a skin on an existing network, the top two options are MPN or iPoker.

Bet365 runs its poker room on the iPoker network, and while it is constrained by the network rules, it is able to offer its own Premium tables, which are only open to Bet365 customers. It gets the advantage of the liquidity offered by iPoker, including the large tournament guarantees and access to Twister lottery SNGs.

MPN offers greater flexibility with its Babelfish technology, but at the end of the day, poker rooms must still accept the rake set by MPN, the recreational player protections that it has adopted, and so on.

At a guess, Galfond may find the MPN option the most conducive to his own plans, but then his site may lack the support he wants for “embodying the dream” of being a professional poker player.

Unibet moved from a network to its own software

Unibet’s experience provides a good example of how a poker room can develop by first using a network to obtain a loyal player base, and then introducing its own poker client.

When Unibet left MPN and transferred players to its new client, it had the necessary liquidity in place. The transition has been a success (paywall), and this week the company announced that it was launching a completely new version of the poker client incorporating the lessons it has learned from two years of managing its own software.

It’s unlikely that this was a long term plan by Unibet, but the concept of building a player base by joining a network while developing a proprietary software platform looks like a potentially sound business strategy.

This may be something Galfond should consider.

There are fewer and fewer markets without national regulation

Building the poker client doesn’t create a business. Galfond will need to decide what markets he is going to target.

Online poker is an expensive business and even with the help of some rich friends, Galfond’s first marketing budget is likely to be tightly constrained. This means that he will have to make some tough decisions about which geographical markets to target.

The richest online poker market in the world remains the US

Using figures from PokerScout via Poker Industry Pro, US cash game traffic is approximately 11 percent of the total global market.

Only 14 percent of US traffic is at state regulated poker rooms in Nevada, Delaware and New Jersey. Until other states introduce legislation, the other 86 percent of the market goes to offshore operators content to risk the wrath of the US Department of Justice.

Phil Galfond’s profile is probably higher in the US than anywhere else, but he has already said that he won’t be targeting US players. He will not want to repeat the experiences of Seals With Clubs founder Bryan Micon whom the Nevada authorities prosecuted in February 2015.

The regulated Nevada and New Jersey markets are too concentrated in the hands of a few top operators to provide any room for an upstart competitor with no track record.

European markets are fragmented but there is still opportunity

France, Spain and Italy are three big European markets that Galfond will want to avoid. Not only are they legally restricted in terms of liquidity, but they are highly taxed, and for a new operator profits are unlikely.

Germany is the largest European market which is open to an offshore operator. The collapse of the German Interstate Treaty on Gambling has left the market effectively unregulated. If Galfond obtained a gaming license from the Malta Gaming Authority, or from the UK Gambling Commission he would be able to operate legally in Germany.

The Malta license would be cheaper, but the UK Gambling Commission license would provide access to the enormous UK market where gambling taxes of 15 percent are not fatal for a new operator.

Both licenses would provide access to the few remaining EU countries which don’t have national gambling regulation, and both would provide regulatory approval for operating in rest of the world countries.

Very few of the other individual national licenses that are available in Europe are likely to be worth their cost for a small new operator.

Outside Europe other issues raise ugly heads

Operating outside Europe produces a whole range of difficulties which Galfond is likely to want to avoid:

  • The market in India has recently opened up after Supreme Court decisions implied that poker was not subject to gambling laws, but a lack of knowledge of the local market makes the country a risky proposition.
  • Russia is cracking down on online gambling and ISPs are blocking online operators.
  • South America is plagued with financial transaction processing difficulties, especially in Brazil.
  • The entire African continent has provided slim pickings for the operators who have tried to build a player base there.
  • Australia has no online poker regulation, so remains, rather like Germany, open to offshore operators, but not to those legally operating sports betting in the country.

Galfond’s geographical options are limited unless he can find the money to acquire multiple gaming licenses and spend the $100 million plus a year in marketing necessary to create the scale which will make them profitable.

Gambling regulation creates hurdles for new operators

The spread of gambling regulation has made it much more difficult for new operators to enter the market. Compliance and gaming tax costs are now a deterrent for any but the most well funded of startups.

Without extremely deep pockets, Phil Galfond will be constrained to operate within the online poker infrastructure that currently exists.

The new poker room will almost certainly be launched as a network skin, and that will limit the extent to which he can implement his vision.

Nonetheless, the vision he put forward is attractive, and it is a great motivator for his own commitment to succeeding. The idea of a values-based poker room fits well with the character of the market segment we now call Millennials.

TonyBet has shown that a sufficiently well resourced and business savvy poker professional can create a successful new poker room. Phil Galfond’s dreams may not be quite as far beyond reach as they look.

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Joss Wood
- A former editor of Poker Industry Pro, Joss Wood is a graduate in English from the University of Birmingham. Joss also holds a master’s degree in Organisational Development from the University of Manchester. His career path has taken him from the British Army, through business and finance to seven years as a successful professional poker player.