United States of Poker Gives a Reality Check on the True Potential of the US Online Poker Market

USOP sheds light on the US Online Poker Market and the ROI projections of online poker by Delaware, Nevada and New Jersey.

Online PR News – 27-May-2014 – Washington, DC – Online poker returned to the United States in 2013 after Delaware, Nevada and New Jersey legalized state wide online poker to its residents. To say the profit projections of the return of online poker were high would be an understatement.

New Jersey Governor Chris Christie’s administration had projected a $180 million boost in tax revenue in the current fiscal year which comes to a close in June. As of February, the actual amount generated was $4.2 million and in April NJ experienced its first decline in overall Internet gambling revenue. New Jersey’s state’s treasurer had originally lowered the projected revenue to $160 million but has since pulled all public estimates altogether.

Delaware has struggled as well falling short of their online gaming projections that they would generate $5 million in revenues within the 12 months of operation. Online poker in DE took a nosedive in February, dropping 16% to $73,971 in monthly earnings in comparison to the $88,390 in January. The state is on pace to fall well short of its original annual goals.

What happened this week is what often happens when companies or government underperform to their shareholders, taxpayers, and constituents.

People start to point fingers.

In a recent article released by The Associated Press titled ‘Experts Say Illegal Sites Slow Growth of Online Gambling’ a number of state officials and industry experts blamed the lack of growth on non-regulated grey operators that also offer online poker to US residents.

On April 15th, 2011 (also known as Black Friday to poker players) the Federal Bureau of Investigation temporarily seized the URLs of the three biggest non-regulated poker sites still operating in the US. Full Tilt Poker, Poker Stars, and Absolute Poker were all forced to pull out of the US market for illegally operating within their borders. Several smaller unregulated sites stayed behind and continued to offer online poker in the United States and are referred to today as grey operators.

The premise behind the aforementioned article is that these remaining sites are poaching players that would otherwise be playing in the statewide poker rooms, thus accounting for the millions of dollars difference between projected profits and actual revenue.

Numbers don't lie and this just simply doesn't add up.

According to PokerScout.com, which is widely regarded as the online poker traffic rankings authority, Full Tilt, Poker Stars, and the Absolute Poker Network accounted for 15,831 average players before leaving the US Market.

The numbers as of May 29th, 2014 show the combined 7-day average of players across grey market poker sites was just 2,835 players. Therefore across the entire United States grey online poker sites account for 18% of the online poker market, hardly a threat to regulated operators.

Last week Americas Cardroom (one of the remaining grey poker sites in the US) announced it will be pulling out of NJ, NV and DE in response to these allegations.

Michael Harris, an ACR spokesperson said, “These three states combined accounted for only 1% of our overall traffic. Grey sites are being blamed for regulated online poker sites underperforming at a statewide level when the reality is these companies and states overestimated their earning potential and operate on a poor business plan.”

With this statement Harris may just have addressed the elephant in the room that nobody seems to want to talk about.

When formulating profit projections in any business it’s important to have a strong understanding of the market and what drives the business. In online poker, the profit potential is based almost entirely upon the size of the player pool.

Now let’s examine how this pertains to the problems New Jersey is having today. A statewide player pool such as NJ couldn't be more constrained as it is illegal for anyone out of the state to play or deposit out of its borders.

Compound this limited geographic player base with the fierce competition between operators and you run into yet another factor. In New Jersey alone there are at least six operational rooms competing for the limited player base along with five more opening soon contingent upon licensing approval, dividing the player pool into even smaller segments.

The failure to understand the fundamentals of how the online poker business actually works and the impact a limited player pool is a more plausible explanation as to why initial projections were way off the mark.

Other excuses by both government and operating CEOs are beginning to surface for the revenue shortfall which include the need for software development, privacy issues, and public awareness of legality. While these factors may hold some minor weight, they do not equate to the millions upon millions of dollars of over-projected revenue.

States considering online poker legalization should take note of what’s happened so far and learn from their peer’s mistakes. Government should be looking for ways to maximize every dollar brought in through online poker to the state such as forcing operators to employ only local businesses for operation costs such as advertising and software development.

The shortfall is not just in NJ, NV and DE as well. All three states are subject to the foundational micro-economic limits imposed by market size. The reality is that the stakeholders in online poker should be focusing more on addressing the fundamental misunderstanding of the economics of the online poker business rather than looking for scapegoats or excuses.

It’s just another common scenario of upper management needing to justify why they're not successful. In all fairness however, if I was CEO or a government analyst that was responsible for making projections that far off the mark I'd be looking to play the blame game as well.

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