Splitting the pot or raising the stakes?

Poker is in an odd state in 2017 with unusual signs of positive momentum. Increased investment from operators, major changes to marketing and poker room ecology and genuine innovation around gameplay are all underway. Meanwhile we’ve seen four of Europe’s largest regulated markets finally agree in principle to liquidity sharing.

We’ve seen partypoker and 888 significantly up their game this year, while PokerStars’ recent alpha launch of its new poker variant, Power Up, is an intriguing insight into how the game may develop for a more video game-focused audience. Although it should be noted PokerStars has told the market to expect no growth in poker revenues during 2017 as the product gets repositioned for a new demographic and the impacts of ecology changes work through the system.

Arguably the biggest news that shook the sector was the launch of PokerStars’ Portuguese site, which rocketed to become one of the top three poker rooms in the world by traffic in the days after launch. But after its gravity defying first few weeks, PokerStars’ Portugal site has settled down to a more modest position as the 18th largest site with similar traffic to Svenska Spel. But Portugal’s addition to the liquidity sharing pool also containing France, Italy and Spain is an interesting one.

The myths of time

So can liquidity sharing save the day in Europe? Well that depends on if you think it needs saving. There is something of a myth that the online poker rooms in Spain, Italy and France have been a failure due to the restrictions of the closed liquidity model. The reality is the largest poker rooms in France, Spain and Italy are the 6th, 8th and 12th largest cash game sites in the world respectively. And both France and Italy’s online poker revenues are larger than those from the regulated UK market.

Since 2013, France’s online poker market has actually grown 13% to €236m, while Spain’s has dropped 15% to €58m and Italy’s has shrunk an alarming looking 41% to €141m in the same period. But appearances are deceptive here. The Italian sector launched with online poker as its only gaming option and casino entered the market in H2 2011 with slots only going live in H1 2013. Spain launched with online casino, but didn’t permit slots until H1 2015. Online casino is still not regulated in France.

What we’ve witnessed then is less the collapse of online poker in dot.country Europe and more of a rationalisation of the market as players adjust to a broader product offering. At 14% of the market in Italy and 27% of the market in Spain, poker is arguably still over-indexing in both of those countries and should continue to lose share to a maturing online casino sector in the mid-term. And it’s hard to argue this is not a positive for operators in the regions.

Valuing online poker

In the short-term liquidity sharing will almost certainly be a boost to tournament revenues in all four countries as prize pools potentially triple or quadruple in size and become more attractive to the recreational player. Cash games should also see a benefit as the number of games running becomes considerably larger and the increased liquidity feeds increased activity and in turn feed increased liquidity. How deep a long-term impact this has though, however, is a matter of debate.

The combined France, Italy and Spain regulated poker market was worth €435m in 2016. If we estimate a fairly optimistic 20% revenue growth overall then that’s €87m in additional revenues that operators will hope doesn’t come at the expense of the existing casino market. Per capita spend is still fairly low in all three markets in comparison to the UK and Nordic markets so it’s reasonable to assume gains could be incremental in poker, but this is by no means an automatic assumption.

Looking at the markets individually, a return to the pre-casino days in Italy seems extremely unlikely. Even if the market returned to the size it was in 2013, rising 40% to €238m, this would be an addition of just under €60m to a market now worth in excess of €1bn a year. A return to 2013 numbers in Spain would add just €10m to a market that could reach €500m in 2017. These are not inconsequential gains, but they are not likely to send share prices rocketing either.

What’s the story?

There is the possibility that regulators are answering a question nobody is asking with this move. In markets where casino is regulated there is no crushing desire to restore online poker to a position of dominance, where it eats away at margins and prevents newer operators from taking share easily. Even PokerStars has shifted focus from driving up poker revenues to using the platform as a cash cow and an acquisition tool for its rapidly growing casino vertical.

Who ultimately will benefit from the increased liquidity? Certainly the players will be able to tap into larger cash game pools and significantly increased tournament prize pools.

Operators will be able to market these larger MTTs and in particular their increased guarantees around the major tournament series. But with so few now using poker as an acquisition tool, this hands an advantage to a very small group of firms led by PokerStars, partypoker, 888 and Winamax.

And arguably it’s the latter, with its dominance of the French market unhindered by online casino that is likely to gain the most benefit from this move. For the majority of the industry this is a welcome, but not particularly significant development in terms of revenue generation or market development. The co-operation of four disparate regulatory bodies, however, shouldn’t be underestimated, and perhaps the biggest benefit of all will be the beginnings of a broader pan-European model for regulation.

But in the short-term while Italy and Spain may see some benefit it’s France and Portugal that perhaps have the most to gain with no online casino sector to damage and a market that has been growing over the past couple of years. So a potential boost to the most regressive regulated market in Europe at the potential expense of two of the more progressive? This hardly seems like a dream scenario for the online gambling industry.