Written by Markus Lind, Business Development Manager at bwin Games AB
Monday, 25 January 2010 on Inside iGaming
As published in Inside Poker Business (Jan/Feb 2010 Issue 5).

Markus Lind, Business Development Manager for Ongame Network and liquidity management expert, outlines Ongame Network’s thinking on maintaining a healthy online poker network by questioning the current way that players are valued.

Certain subjects become fashionable. But as soon as the hype subsides we move on to the next hot topic. At the moment, it seems that everyone is trying to join the online poker liquidity management debate.

This is welcome news for Ongame Network as we have been talking about this for more than three years and would like to seize the opportunity to move the conversation forward by discussing it in the context of a maturing online poker business model.

Question the business model
As in any fast-moving industry, questioning how components of your business model must move with the times is good practice. Here we discuss some of these components – rakeback, player value, drain and rake redistribution – which are individual pieces of the bigger picture called liquidity management.

More than meets the eye
Here lies the heart of the problem. In the current debate, the rakeback question is more complex than it first seems. To simply discuss if rakeback is good or bad for business is less than meaningful. It is like trying to solve an equation with missing variables.

We are not saying that other opinions are wrong but simply our perspective of looking at all factors means our thinking in this area is different.

Treat the disease, not the symptoms
Three years ago Ongame Network was the first poker network to ban rakeback. In hindsight we could look at that decision and say that we already had an understanding of how to successfully work with liquidity management. But in reality the situation is more complex.

A more accurate statement would be that three years ago we were beginning to see the negative side-effects of rakeback without fully understanding the actual, underlying problem. When you try to solve a problem but instead end up fixing a side-effect, all you might be doing is hiding what is really wrong.

So, what is the problem? Let me answer that question with another question.

Can an aging rake distribution model still be applicable in a dynamic business that in all other areas has changed so much? As Ongame Network sees it, the way that players are currently valued does not reflect their true worth, meaning that the business model employed is flawed – or more accurately – outdated. It is incorrect to base player value solely on the amount of activity meaning that players are valued as equal to the rake they generate.

Player value re-examined
Our concept here is very simple: losing players are more important than winning, high-raking players.

This is nothing new as we presented it at the World Poker Congress in 2008.

The actual value of a player is not the same as the rake they generate. Losing players generate the majority of deposits simply because winning players have no incentive to make deposits. As these deposits can only be converted to rake or winnings, this must mean that it is the losing players who are paying the rake.

Deposits = rake + winnings

Explained by an example
This is a re-examination of our industry’s static business model and is best explained by an example. A player deposits $100, loses it and meanwhile rakes $2. This player, the “losing” player, is then valued at $2. In reality the $100 lost by the losing player will be turned over in the network ecosystem many times and better reflects the true value of the losing player.

On the other hand, winning players are paying rake with money won from losing players. In this example, the winning player playing the same hands is also being valued at $2. Because a winning player does not have a spending restraint, they will rake more money than a losing player over time and therefore, are highly valued. However, while raking large amounts, the winning player is winning the deposited money from the losing player and draining the ecosystem of money.

As most high-rakers are also winners, they withdraw money from the network which in turn can not be raked further. Using this reasoning, Ongame Network considers that winning, high-raking players are over-valued.

Quantity versus quality
The correct player valuation must be reflected in an updated business model, taking the actual quality and player performance into consideration. Ongame Network suggests that we move from a state where we only focus on the amount of activity to a new situation where the quality of activity is rewarded.

It is important to understand that all player-types serve a purpose and to have an efficient ecosystem, we need the right mix of all player types. Simply eliminating an unwanted group will not give you the desired result.

Consider player activity
Let’s take a closer look at how this new scenario could be achieved. Today rake contribution equals the amount each affiliated player around a table adds to the rake. In a network, operators whose players are participating in a game will receive this rake taken directly from the pot. Today, simply participating in a hand will award rake and only activity is taken into consideration.

Incorporate player performance
Our change would be to correct this valuation error by changing rake distribution hand-by-hand to incorporate player performance.

This will increase rake from losing players and reduce rake from winning players. This change will cascade through affiliates and sub-affiliates, altering the whole poker value chain.

Change player acquisition tactics
Overnight, player acquisition methods and tools will need to change, as rewards to certain players now need to match how much money that player is contributing to the network.

We expect this will remove incentives to run price campaigns as the value of marketing to winning players is reduced. Marketing poker as mass-entertainment will deliver a higher return on investment as the value of attracting and retaining losing, yet contributing, players is increased.

Losing players can play longer
This new approach will also appeal to the competitive nature of poker players. Any type of loyalty program setup would inherently be more rewarding when playing against players of a higher skill and less rewarding when targeting those who haven’t reached your skill level yet.

As a result, losing players should see their money last a little longer. This improves both network sustainability and the likelihood that players keep enjoying the game. When set up correctly, it also allows many players to make money from their winnings rather than from their rebates.

In conclusion
Changing how we value players in the context of network liquidity reinvigorates a rapidly-aging business model and eliminates the need to fix the much debated side-effect of rakeback.

Shifting focus to how players are valued builds on Ongame Network’s longstanding network liquidity expertise and will deliver a healthy poker environment with sustained revenue growth.