PokerStars and the trouble with change

Amaya’s Q1 results last week painted a picture of an operator in the midst of a transformation – although it’s not quite clear yet exactly what it is transforming into. Major changes to senior management and revenue mix attracted the most attention, but what it does next is perhaps even more interesting.

Until now Amaya and PokerStars have been essentially interchangeable terms, but this quarter that has really begun to change. The BetStars sports betting brand is still nascent, and its casino offering remains mostly a cross-sell addition to the poker product, but referring simply to PokerStars really doesn’t reflect what’s happening at Amaya.

Headline numbers told their own story with poker revenues down approximately 11% year-on-year and casino and sports betting revenues up 267% year-on-year for the quarter. While that growth is obviously measured against a tiny comparative base of casino revenue in Q1 2015, the $55m of casino revenue is a hugely impressive number in its own right.

Poker revenue of $216.4m in the same quarter was far larger in absolute terms, but casino was where the real story lay. Its $55m of Q1 casino revenues placed Amaya among the largest publicly listed online casino operators in the world. 888, by comparison, recorded $231m in casino revenue for the full year 2015.

And what should worry its competitors is this is early days for PokerStars casino, and it’s only just beginning to go through the gears in both product and marketing. Its management were quick to point out this was achieved with a relatively limited set of games, no standalone mobile product and minimal external marketing.

Turning on tier 1

Interim CEO Rafi Ashkenazi, who previously served as COO of Playtech, knows how much additional value can be gained by improvements to all three and highlighted the addition of “tier 1” games and better VIP management as big growth drivers. The addition of the likes of Playtech games is also a necessity as it looks to extend its marketing to a wider audience.

Casino customers to-date have been brought in almost exclusively through cross-sell to poker customers, and Amaya said it had already begun to expand its focus beyond this as the product has improved. But it’s here where the first questions begin to be raised about the firm’s future direction.

By focusing more on casino, is it risking both damaging the core PokerStars brand and moving customers away from a far stickier product (poker) and towards one with the highest churn rate in the industry (casino)? Against a backdrop of 11% poker revenue decline this has understandably got some European veterans raising the spectre of partycasino and its impact on the partypoker business.

The obvious question is are Amaya robbing Peter to pay Paul. Ashkenazi told analysts the casino growth was incremental and he had no concerns over cannibalisation of revenues. But the firm did note that one of the reasons behind its decline in poker revenues was due to “certain customers playing, either entirely or partially in place of, the corporation’s online casino offering”.

A sporting chance

A more significant reason for the dip in poker revenues was put down to FX, particularly the strength of the Dollar against the Euro, and decline in Full Tilt Poker. And the firm did add that changes made to its ecosystem, as well as an increase in rake, was already leading to positive impacts with limited effects on player retention. So it would be wrong to assume this is the start of a downward trend for poker.

But increasing casino revenues are likely to act as a drag on poker growth. Alongside this there is also the sports betting brand BetStars, which is another area Amaya has big hopes for. Its innovative Spin & Bet offering is a highlight, but the product still has the feel of a beta in some areas and it struggles a little in comparison with the slick products offered by some of the European giants.

The question here is will Amaya be spreading itself too thinly by trying to build a sports betting brand and platform almost from scratch? And it needs to ensure sports betting growth doesn’t come at the expense of poker. Sources suggest more than a few teething troubles with the product, but the expansion continues with launches in France and Italy due shortly and mainstream TV ads already running in the UK.

And perhaps most interestingly of all it’s a new look management team that will take this forward, with COO Israel Rosenthal leaving and Amaya founder David Baazov, currently on paid leave, and current CFO Daniel Sebag announcing they would not stand for re-election to the board of directors. There is no doubting the talent that remains, however, and it will be interesting to see if Ashkenazi in particular seeks to move the firm even further down the path of transformation into a multi-product gaming company.

When Amaya bought PokerStars, what it was buying was clear. What it’s becoming is far less obvious. Is it going to be a genuinely multi-brand, cross-vertical operator or will it remain first and foremost a poker site with strong additional verticals? Until now it’s been sheltered from this to a large extent due to a focus on the cross-sell, but the crunch time is about to begin.