August cover feature: The Rakeback Rumble
Rakeback continues to divide opinion in the online poker community. Beyond the usual arguments for and against it, eGaming Review asks whether the industry can come to terms with rakeback and come up with a new revenue model that redefines the space.
A DISEASE, THEFT, evil”¦ strong words to describe something as benign as using cashback to reward your most loyal and valuable customers. So why all this hostility towards rakeback? After all, every poker room offers some form of cashback to its most valuable players, the 10% who provide 80% of gross rake, whether by rakeback or points-based VIP/loyalty schemes.
The answer is the negative effects rakeback can unleash on poker rooms and networks if they don’t cap and control it properly. Rakeback involves poker rooms competing with each other and other networks purely on the percentage rake they are giving back to a group of high-raking players (“whales”), often via a rakeback affiliate. These hand most of the lifetime revenue share they receive from the room to the player in the form of rakeback, keeping a cut back for themselves. Under constant pressure to give away more revenue share to players and also to the affiliates looking to maximise offers to players but also clear a profit for themselves, rooms have to keep slashing their margins to put better deals on the table.
This inter-affiliate competition doesn’t just make it increasingly difficult to hold onto players. It also progressively shrinks the money left in poker rooms’ marketing budgets for recruiting recreational, depositing players (“fish”), and starves rooms and networks of the liquidity they need to grow in a sustainable manner.
This is why Mansion’s customer and retention manager, Ariel Reem, whose room used to be on Ongame when it allowed rakeback, calls it “a disease that kills the margins for everyone”. And as we saw with the Empire Online skins after Party cut them off from its network in late 2005, and the serious players acquired by Empire’s rakeback-led marketing machine had nowhere left to play on, poker rooms simply die without a steady supply of new gamblers and fresh money.
Dominik Kofert, chief executive of giant poker affiliate and community site PokerStrategy.com (not be confused with Poker-Strategy.org), stresses that poker sites should be careful to avoid direct and indirect cannibalisation of their traffic and focus on building a sustainable poker ecosystem. “PokerStars are kings at that. They don’t offer rakeback via affiliates, they don’t allow cannibalisation, they don’t have a network. That’s why they’re ahead of Full Tilt.”
But while the likes of Full Tilt and PKR stand as proof that standalone rooms can regulate rakeback and strike a balance between keeping high-value players on board without eroding their margins to the extent where they can’t market their poker room to the masses, the record of the networks in this regard is far from convincing.
Networks vs rakeback
Undoubtedly, the sheer number of skins on networks these days (all with their own commercial interests), affiliates working for those skins and the fact that many savvy high-value players opt for under-the-table deals from affiliates, other players and even room managers, presents networks with a serious challenge.
It also makes preventing rakeback activity which breaches network rules and impairs the overall performance of the network very hard to police. Indeed, the chief executive of a network which does allow rakeback, Peter Astrom of Entraction, says the knowledge that rakeback goes on regardless of network policy is the reason behind Entraction allowing it. “Some networks say they don’t have rakeback at all, but that is 100% not the reality. That’s why we allow our partners to offer it as a promotional tool, but they must control it,” Astrom says.
Poker affiliate and blogger Bill Rini, previously room manager for PartyPoker, suggests the spectre of bad publicity and lost revenues acts as a disincentive to networks to impose sanctions, with rare expulsions, such as NoiQ from iPoker, hardly reflective of the underlying level of rogue activity. “If you’re Ongame, and everyone on the network is complaining that one of the other rooms is offering rakeback and stealing players, but they’re doing a tonne of rake, what are you going to do? You can say, ‘We will look into it’, but unless they are so over the top (that it’s impossible to ignore), you will not slap their wrist too hard, as you don’t want them going to another network,” Rini says.
Working off tighter margins than traditional affiliates, such as PokerNews, which invests considerable resources in content also aimed at drawing in casual, recreational players, rakeback affiliates are accused of simply moving players between rooms and fuelling cannibalisation of existing network traffic.
But the chief executive of market leader RakeTheRake, Karim Wilkins, insists initiatives such as sponsoring the English Poker Open also draw in casual players. He blames cannibalisation on networks being prepared to take a fee but not to undertake proper due diligence.
“iPoker, Entraction, Boss Media and Microgaming seemingly give an online skin to anyone with a few hundred dollars and a small player database. It’s these that cannibalise existing network traffic by poaching players across for higher rakeback via chat at the tables.”
Astrom at Entraction says all prospective licensees have to provide a financial plan including proof of resources available to spend on marketing activities that would grow liquidity within the network. “We don’t want to have partners who just work with rakeback,” Astrom adds. The Entraction chief also says his network imposes financial penalties on licensees found poaching players across from other skins on the network by offering rakeback at more than the network cap of 30%.
Peter Marcus, chief operating officer of William Hill Online, now on Playtech’s iPoker network, however thinks rakeback in its current incarnation is simply unworkable for networks. “Licensees who just want to give rakeback and not spend money on marketing just isn’t going to work. Networks and licensees have to find ways of rewarding loyalty which don’t encourage people to keep switching rooms or involve stealing each other’s customers. The whole industry has to get together and be quite strict on this.”
Rakeback reborn
But as Keith Freeman, founder of Poker-Strategy.org, the first affiliate to publicly offer a ‘rake rebate’, points out, rakeback in its current form will exist for as long as poker rooms allow revenue share as an affiliate compensation model.
“As long as I’m given a report that shows each player’s individual rake, VIP bonus deductions and so on, I can still attract rakeback players by giving them part of my affiliate payment.”
There are, however, ways for network operators operating a capped and enforced rakeback policy to also incentivise skins and affiliates to bring in depositing, casual players; leading to the sustainable growth of both their rooms and the network.
Kofert at PokerStrategy.com suggests rewarding skins for providing weaker players that run a net loss (by winning far less than they deposit over the course of the month) by paying a percentage of this net loss back to the room. Conversely, skins that provide players who rake a lot but also win a lot would be required to pay back a percentage of this net win back to the network. That would not only reduce the need for skins to engage in margin-shrinking bonus wars over high rakers, it would also make large scale, above-the-line marketing campaigns aimed at drawing in fish profitable for network sites, as well as independent rooms.
New models needed
Kofert suggests rakeback affiliates could be similarly incentivised by letting them keep their revenue share but also compensate the rooms if their players drain too much cash from the system by winning too much. As rakeback players are usually big winners, this will incentivise cannibalistic rakeback affiliates to focus more on generating new customers rather than moving existing players from A to B, in turn leading to the sustainable growth of the poker site.
Highlighting the forms of loyalty incentives other than rakeback aimed at all player levels now available on his site, Wilkins thinks the need for operators to make every penny spent on retention count means the days of affiliates receiving 40% lifetime revenue share for a player clicking a banner on their site will soon be over. “We will see all affiliates being made equal and operating on 5, 10 or 15% margins depending on their volume. The rooms will pay rakeback directly and throw in extra races and freerolls as added incentives,” he says.
Rini agrees: “Rev share is a stupid model. The affiliates will have to accept they are going to get a declining payout the longer the customer plays on the sites.”
Liquidity trumps rakeback
Possible changes to the affiliate revenue share model aside, rakeback’s stranglehold on the industry in the years ahead will also depend on the level of consolidation that takes place. As it is currently confined to the smaller networks, the need for liquidity and product differentiation, as PKR has shown, will become even more important in attracting fresh fish. Whether this means smaller networks won’t survive the next phase of consolidation remains to be seen, but it would be part of the maturing process of the industry were it to happen in the next year or two. And as PokerStars is proving, nothing attracts whales like liquidity. As Rini says: “You saw that when Party was top of the game, it had the ability to say to the high-level players, ‘We offer so many fish, you can’t go anywhere else and make the same kind of money, even if you got rakeback!'”
This feature first appeared in the August edition of eGaming Review.