Online poker no longer holds aces

Is the lucrative craze for online poker now a busted flush? That is the question the City is asking after another downbeat assessment from one of the internet gambing firms, Sportingbet.

'There had been a lot of hype in internet poker and that has now come off a bit,' said Andy McIver, chief executive of Sportingbet, announcing this week that revenues from his Paradise Poker site had almost halved to £4.6m in the last three months compared with a year ago.
It is not a surprise that poker revenues are under pressure. The industry is still suffering from the decision by the American authorities in autumn 2006 to outlaw all online gambling. Until then firms such as Sportingbet and Party-Gaming had been stock market darlings - but that dramatic US ruling and the threat of legal action saw their value slashed by 75% or more.

Since then what is interesting is that demand for other forms of online gambling such as casino games and sports betting has been growing quickly in Europe, the biggest market outside the US. Sportingbet, for example, was able to report total losses of just £1.1m for the last three months, down from £11.5m a year ago.

So why is poker struggling? The American clampdown was plainly a factor. Poker is far more popular in the US. The knock-on effect, say experts, is that online poker has suffered because the market depends on liquidity. Successful players, known as big fish, only keep coming back to a site if they have plenty of little fish to feed off. That means bringing in lots of new players willing to lose. After the US ban, there has been a small pool of players and an illiquid market.

The other reason why poker has become less attractive for gambling firms is paradoxically because there is now so much competition. Established names such as Ladbrokes, William Hill and Coral have muscled in to grab a slice of the online market.

But competition also means innovation. Firms have responded by diversifying. PartyGaming is relying less on poker and is keener on casino games, which have performed better - albeit from a low base. Meanwhile, rival Sportingbet, as the name suggests, is focusing on sports-betting. Only 40% of its business relies on poker and casino; 40% and rising now comes from European football, with Euro 2008 to come.

Some analysts argue sports-betting, in particular, offers better revenue opportunities with more-creative bets. That is in contrast to casino games such as blackjack and roulette or slot-machines and bingo which involve fixed odds.

When it comes to marketing and persuading poker customers to play different games, the online gaming firms have a powerful marketing tool - an existing database of customers' email addresses. The buzz phrase is 'crossselling' and some estimates suggest that up to 30% of subscribers have transferred to other casino games or sports betting.

It is also worth emphasising that despite the less-than-stellar growth in poker, it remains a good revenue source. Matthew Gerrard at Investec expects Ladbroke's e-gaming division, which includes poker, to bring in an operating profit of £55.9m for this year. And analysts are pencilling in PartyGaming to post full-year profits of around $105m (£51.4m) although that could change after the firm gives a trading update to the City tomorrow. Yesterday bingo giant Rank warned it is seeing signs of a consumer slowdown.

As well as firms introducing new games - such as 'betting in running' during the middle of a horse race or football match - the obvious way to expand is internationally. However, as America has proved, it is fraught with legal problems. 'The majority of countries in Europe have made it difficult for companies to do online gambling,' says Ivor Jones of Evolution Securities.

France has made a series of arrests in its efforts to maintain state control of gambling. Germany and some Scandinavian countries have not been welcoming either. In contrast, Italy and Spain have relaxed regulations and analysts say eastern Europe has potential.

But Asia, where gambling is so popular, is still regarded as tricky. Latin America, highlighted as another growth area, is also difficult because credit cards are not widely used.

So the future looks hazy. Analysts do not expect much consolidation in the short-term because of the credit crunch. Takeovers are not easy, in any case, because of problems when two sites use different technology.

Experts suggest the most interesting area to watch may involve computer games. That market, worth $12bn (£5.9bn) globally, is booming with record sales of Nintendo's Wii. The gambling industry is now looking to attract video-gamers. For example, Ladbrokes has launched a 3-D poker site that allows more interaction.

As Jones of Evolution points out, if a diehard gambler were asked to choose the colour of his shirt for an online poker game, he would dismiss it as a stunt. But a teenager, graduating from a video game such as World of Warcraft, might love it. All of which suggests that while poker may no longer hold all the aces in the world of online gambling, it is not out of the game.

News Added: 13 December, 2007

Number of views : 877