A lifetime sentence

PokerStars’ move to curtail existing lifetime revenue share deals to two years caused controversy in the affiliate sector, but should it be seen more as a sign of things to come?

For poker affiliates May began with something of a rude awakening. An email from PokerStars announced significant changes to the structure of its affiliate programme, which are likely to be felt throughout the performance marketing sector. In essence the move was simple, with revenue shares capped at two years applied both for new deals and retrospectively to all existing affiliate deals. But while the changes are relatively simple, the effects are more complex.

The initial impact of this will be brutal. Affiliates used to commission payments from players signed up prior to June 2013 will see that income stream run dry on 1 June 2015. In future any players signed up to PokerStars will generate revenue share for a two-year period only.

Stars’ reasoning for the move is clear and looking at it top down from a business perspective is hard to argue with. It has a huge marketing budget and spending a large chunk of it on long-standing affiliate relationships that bring in no new players makes little sense in a vertical in secular decline at a time it is investing heavily in growing the wider market.

“Over the last few years, the global online poker industry has changed significantly, and we must change with it,” PokerStars said in its email to affiliates. “Unfortunately, the realities of today’s marketplace means that fewer and fewer new player acquisitions are coming from affiliate marketing. As a result, we must rebalance the incentives to benefit affiliates who maintain and grow new player acquisition.”

Jamie Nevin, CEO of 180Vita which runs a number of affiliate sites including Pokertube.com, says the decision was not surprising. “PokerStars dominance of online poker means that very few affiliates are capable of driving significant traffic to PokerStars in 2015,” he says.

“I understand PokerStars perfectly. It is bad business to continue to pay revenue share on customers that  were acquired years ago, and likely only continue to play because of PokerStars’ superior user experience. Instead this money would be better spent on other initiatives to grow poker and drive new traffic.”

But this didn’t sit well with everyone in the market. “The problem with Stars is that they are an effective monopoly and can, therefore, do what they want,” one affiliate who wished to remain anonymous told eGR DM. “Personally speaking I would do as little as I could with them as their approach doesn’t garner any trust.”

But other affiliates share Nevin’s view that it’s simply a logical move by the poker giant. Interestingly, as Adam Small of poker affiliate site PocketFives points out, this change is actually the second major one from PokerStars after most affiliates moved from CPA deals to revenue share in spring 2013.

“PokerStars has always been savvy in managing their affiliates,” Small says. “In the first few years when everyone was spending like crazy for market share, Stars did too. But they spent via CPA. They only switched to revenue share when they had such a dominant market share they could basically dictate whatever terms they wanted.”

Growing the market
It’s worth pointing out that this type of pivot is not unique to PokerStars, with operators seeing fewer players recruited from the affiliate sector and their cost to value ratio looking far less favourable as a result. This should concern affiliate operators in markets such as poker where organic growth is incredibly hard to come by. In a situation where costs need to be cut to remain profitable, and affiliates find themselves competing directly against operators in the same acquisition channels, they are in a very
vulnerable position.

The impact of this on the poker sector has been very clear over the past few years and many of the larger affiliate groups have already changed their business models to compensate. Nevin’s 180Vita sees itself as much as an advertising platform as an affiliate and says it’s a lesson it learned from similar changes in the past.

“After 888 gained significant traffic from affiliates, they completely ceased revenue share deals, and bwin.party also put a cap on revenue share earnings whereby after a certain time period revenue share decreases to a minimum level,” Nevin points out.

Small says he foresaw this kind of strategic move a long time ago. “If other affiliates are working under the same logic that we have been for the last several years, this shouldn’t hurt them too terribly and shouldn’t require much strategic change. If they were focusing significant effort and capital on generating sign ups for Stars and Tilt for their rev share agreements, they were making a strategic blunder in most cases. They should’ve considered that this would probably happen,” he says.

He also explains the reason for this is the fundamental flaw inherent in revenue share within the poker sector. “In the early part of the agreement, the operator is getting most of the value as new players aren’t usually high rake generators. What affiliates don’t realise is that when they reach the promised land, they’re in an incredibly vulnerable position. They become an unjustifiable line on the balance sheet, even though all that’s happening is that they’re earning out for work that they did earlier,” he says.

Looking beyond poker
But it would be wrong to see this as a poker-only issue. Other sectors such as bingo, and to a lesser extent sports betting, are beginning to see considerable slowdown in the number of new players being brought into the market from all sides.

On top of this is the introduction of additional taxes from newly regulating markets placing a real squeeze on marketing budgets. Betsson, which generates nearly 70% of its revenue from casino and in markets traditionally strong for affiliates such as the Nordics, reported its share of revenue spent on affiliates fell to a two-year low of 9% in Q1 2015. In Q1 2013 this number stood at 14%. The move towards more regulated markets with greater freedom and additional tax costs means operator reliance on affiliates in all sectors is facing re-evaluation.

Another affiliate source is far less sanguine about what the move from PokerStars represents for the market, and suggests there is an increasing split into affiliate-friendly and affiliate-unfriendly operators. “Some see affiliates’ value and others see them as a drain and actively seek to disintermediate them,” the
source adds.

Small disagrees, however, and feels it’s more a natural evolution of what was and still is a somewhat unnatural partnership with both sides’ business goals often in conflict. “I want to stress that I don’t see this as bad behaviour. I see it as predictable, rational behaviour. They don’t see this decision as detrimental to their business, and they don’t believe affiliates have sufficient recourse to hurt them. They’re right.”

“To be absolutely clear I hold no negative sentiment at all toward PokerStars or Amaya about what happened. The people we work with there are lovely, and they’ve always gone out of their way to treat us with tremendous respect and gratitude. I’m certain we’ll continue working with them, though our aim will be to do deals so we can get paid today for the work we do today rather than tie ourselves to any partner long term.”

And this should be the big lesson affiliates from all verticals take from the PokerStars announcement. It shouldn’t be seen as yet more shots fired in the long-running operator affiliate war, but a sign that more than ever the affiliate sector needs to try and remain ahead of the curve and stay ahead of general market trends. Perhaps a bigger shift to CPA and flat-ad deals is needed for affiliates to thrive and this is just an early warning sign.