PartyPoker Enters US Subscription Online Gaming Market Party On Or Party Over?

Recently World Poker Tour (WPT) was purchased by PartyGaming. The press associated with this purchase has focused on the sale as a brand purchase by PartyGaming for the purpose of growing Party's business in Europe. Very little press has focused on the fate of ClubWPT.com WPT's US subscription based online poker property. This part of the purchase may have more significant impact on the PartyGaming bottom line and the online gaming industry then WPT brand leveraging in Europe.

ClubWPT operates a US subscription online gaming site. They are allowed to do this legally under US state sweepstakes law. ClubWPT.com is one of a number of US online poker sites operating in this manner. Clubpogo.com, Pureplay.com, and Spadeclub.com are just a few of the other operates running legal US online gaming businesses using the alternative method of entry legal model sweepstakes model.

Although these sites are popular their subscriber base is small relative to the true size of the US online poker market. It is estimated that 10 million US players are still playing online poker either as free players or pay to play players. In point of fact, the real numbers are much higher because the UIGEA legislation enacted in 06 has discouraged US players from engaging in online poker. The numbers could easily be closer to 20 million.

PartyPoker.com, PartyGaming's online poker property has the email addresses for the majority of these players acquired prior to the implementation of the UIGEA and have continued to accumulated e-mail addresses post UIGEA through their free play site. So, what will happen if they decide to drive all of their US players to ClubWPT.com?

PARTY ON SCENARIO - If they decide to leverage ClubWPT.com, PartyPoker.com will become the largest and most profitable US based subscription site dwarfing any other subscription poker site in the US.

From a strategic perspective this could also set the stage for their dominance of the US online poker market if the US government does decide to consider poker as a game of skill and not chance. They will have already re-captured the majority of the US poker players in their subscription model business and will have re-established their brand in the US prior to the legislative change. I slight flick of a bit or byte will allow these players to upgrade to real gambling when the legislation changes.

PARTY OVER SCENARIO - PartyGaming draws attention wherever it does business. If it does decide to enter the US subscription online poker business under the ClubWPT brand it will raise the eyebrows of the Department of Justice and state attorney generals. These lawmakers could decide to tighten the definition of sweepstakes law that would result in online poker being excluded under sweepstakes law. This would spell doom for the existing US online subscription poker operators and would force Party to wait for a redefinition of poker as a skill game to enter the US market.

If Party successfully launches a subscription based online poker site in the US, and is unchallenged by US law makers, then the existing US based online subscription poker businesses would be buried by Party. It will be very hard for the other players to compete given Party's war chest. Party will out spend the other contenders and own the market.

Party's move into the US under the sweepstakes model could also jeopardize the UIGEA being overturned. If the US legal authorities are seriously considering redefining poker as a legal gaming model any attempt by Party to enter the US market prior to this decision could result in the authorities backing off.

PARTY ON OR PARTY OVER -Party is certainly contemplating these scenarios, counseling with attorneys and no doubt probing the US state and federal authorities to sort out what they will do. Their decision to entire the US subscription online gaming market may depend on the likelihood of the UIGEA being overturned and if it is to be overturned when it will happen. Either way all of the potential competitors have a stake in the Party decision and should also be considering what they will do based on the PartyGaming/PartyPoker move.

Zynga Under Investigation By Department Of Justice

Recently, I was discussing the online gambling business with a former online gaming colleague of mine and he brought to my attention that Zynga was under investigation by federal and state authorities suspecting that Zynga's Facebook poker room was engaged in online gambling. I thought this was a bit serendipitous considering the fact that I had recently published a blog, Virtual Currency And Gambling, about the danger of virtual goods purchases and sale being considered gambling. I specifically mentioned Zynga being at risk during a series of exchanges I had with individuals responding to my blog.

The Tech Crunch summary is exactly as I described the risk in my blog. The circular nature of virtual goods purchases, a game of chance and winning virtual goods could be considered gambling.

I have been writing a number of blogs about the online game virtual currency trade and how the Chinese governments gets the connection between this trade and gambling. Virtual currency trade is big business in China and it is obviously now becoming big business in the US.

What has surprised me is the lack of understanding of the relationship of virtual currency to gambling outside of China. A number of my blog viewers adamantly disagreed with me arguing that virtual goods purchases were not subject to gambling law. Clearly this is not the case.

To further complicate matters Zynga has been engaged in selling leads to European online gambling operators. This started well before Zynga began dabbling in virtual currency purchases. Much of their revenue growth prior to virtual currency purchases had been attributed to this exchange. This practice has been discouraged by the DOJ and state attorneys for years. Zynga may not be in violation of any US law if the leads sold to gambling operators do not result in US citizens gambling from the US. However, Zynga's affiliation with online gambling operators does not bode well for them. The authorities may come down hard on the company to set an example for other online game companies.

Optimizing Pay for Play Conversion

In a recent blog I discussed the benefits of using Free Play as a tool to avoid the dreaded credit card fall off problem and to create a retention pool that allowed fatigued Pay for Play players to continue with a game property in the Free Play pool. Another option is to offer a lower risk Pay for Play product that bridges the gap between a Free Play and a Pay for Play offering. Certainly providing a Free Play and Pay for Play product combination is powerful and preferential to a pure Pay for Play offering. However, the step from Free Play to Pay for Play can be too steep for some players. To minimize the risk and perceived player trepidation associated with a Pay for Play offering a lower entry fee option should be considered. This could be in the form of a mirco-transaction for a single game, table, tournament, etc. Or it could be a flat fee payed for a fixed game access period.

A possible critique of this strategy focuses on the lower revenue per customer for Free Play or Micro/Subscription transactions. Certainly this is true but it leaves out the fact that the pool of players interested in playing for free and for a lower committed monetary amount is higher. The illustration below attempts to show that these pool size differentials can be dramatic leading to a nice revenue stream from the two lower risks options. This approach should also take into account the higher conversion rate to Pay for Play and the retention value of these other models. If you combine all of these factors into the cost of acquisition you will find that this triad approach results in a superior return of marketing budget invested.

The other advantage of this combined revenue model approach lies in the conversion overlap of the three transaction models. The illustration below shows that the overlap of the micro/subscription model with Pay to Play players is higher then the overlap of Free Players and Pay for Play players. This makes sense because people that have never transacted or frequently Play for Free have a higher likelihood of staying put as opposed to players that have monetarily transacted in some fashion. This phenomena suggests that offering an intermediary transaction is very important to monetize players in a Pay for Play model. In fact the Play for Free model is growing exponentially and virally through the proliferation of social networks. These social networked players are playing and inviting their friends to play in extraordinarily high numbers. However, a bridge to get these players over to a higher yielding Pay for Play model is required to take full advantage of these ever growing pool of players.

An operator can partner with other operators that offer complementary game proposition. Each of them could focus on a market segment and exchange players. However, this should be a temporary solution unless legal constraints necessitate branding and operator distinctions. Branding is important and brand switching can be confusing for a player. A player would most likely want to stick with one brand and stay within one property.

In conclusion, the online gaming world is evolving quickly with the concept of a game is changing with the total numbers of players increasing rapidly. Many of these players are playing for free, casually and enjoying it. The size and comfort level of this Free Play pool is significant and should be used to build player confidence and retention in a Pay for Play site. The transition from Free Play to Pay for Play can be made more effective if an intermediary, lower risk/reward offering is made available to players. It is preferential that this combination of different experiences and transaction models be provided under a single brand umbrella.