Analysis: The perils of investing in poker

W ith the gaming industry unexpectedly unwrapping an early Christmas present at the end of 2011 courtesy of the US Department of Justice’s reclassification of the Wire Act, global operators and suppliers began to wake from their enforced six-year slumber and rapidly huddled together to strategise as to just how they could crack a regulated US online poker market.

Some had been planning this moment for many months, while others began to sniff around the sale racks for potential bargains. But with little or no expertise in online, and time of the essence with no clear view as to how, when and where the US would regulate, they had to move fast.

IGT ““ limited poker options

First came IGT Interactive, the online arm of one of the world’s largest land-based casino suppliers, whose executive team had one of egaming’s biggest warchests with which to conquer a newly regulated US market.

Swiftly on its heals came Shuffle Master, another listed US supplier whose 300 global licences and unique intellectual property, which it licenses to land-based organisations, are being transferred into the online and social spheres.

It too was ready to invest in online poker and had decided that acquiring proven, existing technology that had serviced the pre-UIGEA US market and the increasingly fragmenting European dot.country space was more cost effective and strategically astute than to spend vast sums building and developing its own platform. The acquisition options, however, were limited.

Buying an operator outright may have been an option for IGT but it had bigger plans for social gaming in the form of Double Down ““ which it acquired in January in a deal worth up to $500m ““ and the new social casino demographic that is taking to slots and poker on Facebook in their millions.

The branding, marketing, crossover and cross-sell potential of social was enormous and, at the time, worth the risk. In poker, buying or investing in Full Tilt was not an option due to the uncertainty and ongoing civil and criminal cases against the “Ponzi scheme” alleged former Alderney licensee and the hundreds of millions of dollars owed to players; it had no choice but to ignore networks still taking US players; while a number of other operators were offlimits.

The same applied to Shuffle but IGT was the first to take the plunge. In late 2010, it carried out its due diligence ““ some commentators eGaming Review spoke to said too rapidly ““ and opted not for Ongame, a network that owners bwin and PartyGaming had deemed a “surplus asset” in February last year prior to completing their merger, but for its Swedish neighbours Entraction, a network it valued in May of the same year at $120m (£70m).

The timing of the deal was surprising. To spend more than $100m on a poker network that, at the time, contained a number of licensees operating in unregulated grey and black markets including Russia and Turkey, a week after its $54m disposal of Barcrest and three weeks after Black Friday and the DoJ’s indictment of the founders of some of the world’s largest poker rooms, was a brave move.

At the time, Entraction’s poker network had a seven-day average of 1,440 cash game players according to rankings site PokerScout, placing it between 888 and Microgaming, while in an interim report for the three months ended 31 March, operating profit was down 21.66% year-on-year to SEK8.1m (£808,888) and profits down from SEK10.67m to SEK7.84m, a decrease of 26.5% on the same period in 2010.

While representatives at IGT claim to currently be working on revamping Entraction’s software, platform and overall licensee package, little has changed aside from a January 2012 rebrand to IGT Poker. Numbers are down, largely due to being forced into banning players from countries including Canada, Israel, Norway, Russia and Turkey, and it has made little traction in the liquidity rankings, falling to 18th place between PeoplesNetwork and Everest Poker with a 24-hour peak of just over 1,300 at the time of writing.

A trio of high ranking executives have paid the price for the Entraction buy with the VP of corporate development and strategy (who served for less than a year and shall remain nameless) the first to fall on his sword due to when his “lamentable due diligence was discovered”, according to a source.

Two other IGT executives have also since departed: Alex Kelly, former VP interactive sales and business development, and Gideon Bierer, who was responsible for IGT’s global interactive (online and mobile) business for just over two and a half years.

Game off

Less than three months later Shuffle Master entered into an agreement to buy the world’s second largest poker network Ongame for €19.5m, the bwin.party owned business many thought IGT should have acquired and which would have cost it less than a fifth of Entraction’s final price.

The deal included an additional €10m in cash within five years of closing, contingent on the commencement of legalised, real-money online poker in the US. Its software was proven, if a little fragile and behind other platforms according to experts, while its licensees were less exposed to unregulated markets.

However, several issues remained including: what would happen to the network when bwin moved its liquidity away from Ongame and onto its merged bwin.party platform; the issue of whether Betfair, its largest remaining licensee, aside from bwin, would choose to remain on the network, move with the new buyer or go elsewhere leaving Ongame with almost no significant liquidity; as well as the network’s €20m annual losses including the cost of 200 developers in Sweden on salaries in excess of €50,000 and all extremely hard to move or remove.

There was also no clear sign of widespread US regulatory progress and owning a network that was accruing tens of millions of dollars in losses while waiting for legislative movement was seen as a costly stumbling block.

This aside, its management, including CEO Gavin Isaacs, are said to have remained steadfast in their decision to continue with the buy process. The board, however, had other ideas and vetoed Isaacs and a handful of executives, forcing them to admit defeat and exit the deal in June this year.

Shuffle Master’s official line was “economic uncertainty in Europe”; the real reason was that owning a €20m a year loss-making business for several years without the certainty that the US would regulate and provide it with a steady revenue stream was enough for the board to turn their backs on the investment.

The poker boom in its present form has been and gone and those attempting to invest in the second wave ahead of US regulation are clearly struggling to make any impact. The tactic many US suppliers and land-based casinos in particular are taking or edging closer to taking is aligning themselves with a strategic partner that has a proven and currently robust and successful product and platform, sacrificing future revenue share in what could be a very lucrative US poker market if federalised, ahead of the risk of acquiring an off the shelf network that could be viewed as arguably damaged goods.

Entraction president and CEO Peter Åström said in May last year that the events of Black Friday had “[strengthened] Entraction’s opportunities for success when the US market opens” saying “it is clear that all changes in the market favour Entraction and our partners.”

The verdict is still out but one thing is clear: investing in or attempting to sell a second-hand poker product is far from simple and will inevitably produce some casualties along the way.

This article originally appeared in the August issue of eGaming Review. The e-edition is now available online, and for subscription options click here.