Sunday, April 13, 2008

Is Online Poker Sustainable?

It is an understatement to say that poker has become much more popular in recent years. The online version helped spark a new wave of growth in the online gambling industry. One online company, PartyGaming, catapulted to a multi-billion dollar market capitalization at its IPO and joined London's FTSE 100 index.

With the passing of the Unlawful Internet Gambling Enforcement Act (UIGEA) in the US, a large portion of the internet gambling customer base was put off limits to online poker operators (at least those that someday have hopes of legally serving US customers). These operators have refocused on European and Asian customers and are expanding to other games; however, the US impact is still large.

This is not the only challenge facing online poker operators, regardless of whether they still take US customers. At minimum, three major challenges face online poker operators: legal/regulatory, competitive, and game security. With these challenges, the question is whether the current online poker industry is sustainable.

A key point regarding poker is that the majority of the players don't win. For online poker, the estimate is that 90% lose. So, for an operator, the need is to maintain a sufficient inflow of inexperienced players ("fish" in poker slang) to feed the existing base of experienced players, either to grow the business or just to maintain the business. This is somewhat similar to a pyramid scheme, where approximately 90% of the participants lose money. As poker players become more experienced, it can be viewed that they move up the "pyramid." Unlike the pyramid scheme however, those at the top of the poker pyramid are expected to stay and receive a recurring payout, rather than receiving a terminal payout and exiting. This increase of experienced players increases the number of inexperienced players required, which puts a greater strain on the system than a typical pyramid scheme. A good description of pyramid schemes is found in this link to Wikipedia. Each of the challenges to the online poker operators directly impacts the number of new players available.

Legal/Regulatory Challenges

The US UIEGA statute was a huge blow to the online gambling industry, costing publicly-traded online gambling companies billions of dollars overall in market capitalization. Other highly publicized prosecutions of online sportsbook operators and payment processors also chilled the online gambling sector. Up to 2006, the US was approximately half of the online gambling market. This activity has not totally disappeared, but only a fraction of online gambling companies still actively service US customers. For the poker operators that have exited the US, all are competing for the smaller European and Asian markets.

Competitive Challenges

As discussed previously, most poker sites are now competing for European and Asian customers, rather than US customers. Additionally, there isn't a barrier to entry for other poker sites to emerge. So, a larger number of poker sites are competing for a given customer base. Typically, marketing efforts become more lucrative to the player and/or the operator marketing affiliate, reducing operator profitability. The operators need to address the reality of facing more competitors all vying for the new players required to feed the experienced players that generally profit from playing.

Game Security Challenges

The online poker sites have done a good job at identifying players operating in collusion, which was the initial massive game security threat. The current poker sites with upgraded software and oversight are better at detecting suspicious behavior. However, being an online game operator facing off against intelligent human adversaries, it would be impossible to say that all collusion is extinguished from internet poker.

The newer and more serious threat to game security is the increasing use of sophisticated automated software programs that play nearly flawless poker. These programs, known as "bots," turn the advantage toward the bot user and for a price of less than $100, can turn a "fish" into a "shark." This, if not countered, could be the issue that brings the end of the current online poker craze. Actual cheating software won't be discussed, but that is available as well. For an example, see

A bot, unlike a human player, does not tire or play based on emotion. Also unlike a human player, the bot can make thousands of calculations per second in order to play more efficiently than a human. If programmed properly, the bot doesn't make mistakes. In addition, bots can scale -- simply obtain more computers and computing power.

Assuming a bot that can generate a profit of $10 per hour per table, the bot can handle four tables simultaneously and a computer that can run two bots concurrently. At full capacity, that computer player would generate a profit of $80 per hour for as long as the bot was up. Want more money? Add another computer. This is a huge problem for online poker operators. What's the counter for the player? You get your own bot.

Software upgrades will come on the scene (if not already) that will analyze for perfect play and use that as an indicator that a bot is being used. The easy counter that operators use to scan a computer hard drive for bot software is beaten by having a second computer with the bot software that reads the poker software on the computer that is actually logged into the game. How bot users will beat the play analysis is that they will program inefficiencies into the bot as a governor, to diminish the profitability of the bot and to masquerade as a human player.

Using technology to gain an advantage is really a big flaw with online casino games that aren't random number generator-based (slots, etc.). In a physical poker game, you easily detect collusion and someone pulling out a laptop would be a bit conspicuous. But in the online world, with hundreds of poker sites, bots can flourish. This is what will likely cause the big decline in online poker and be another impact to the online gambling industry.

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Poker Girls said...

If online poker gets banned therefore it will be the end of this thrilling game...Many are very fond of playing poker due to they do earn some extras with this and the fun it brings...Obviously I'am a fan of poker so I don't really wanna get this game be dropped online..

YouGaming Inc said...

Thanks for the comment. You are approaching the game from a fun and competitive perspective. Do you desire to win? Surely!

However, the bot users are purely in it for the money and view online poker as a technology system that can be hacked for a profit. The sites need to keep up with the technology of those that will impact the integrity of the games.

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Girls On Poker said...

The thing to remember about the UIGEA is that it does not stop players from playing online poker. What it does do is stop them from depositing money from a U.S. financial institution, like a bank or credit card company, to an online poker room.

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