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Skin Wars
By Andrew  Gallantly

PartyGaming’s decision to server long-standing partnerships with its so-called skins has brought about an unsettling new phase of the poker industry’s evolution.  Ever since the dawn of online poker, skins such as Empire Online were ways for sites to collect a slice of the profits generated by online players.  The skins directed users to actual poker operators like and made good money doing it.  Both the platform operator and the skin gained.

     

However, when PartyGaming informed the City that it was distancing itself from Empire and other affiliate operators on 10 October, Empire Online’s shares plummeted 34%,Empire, the brainchild of Israeli marketing expert Noam Lanir, and itself a coveted takeover target of European rival Sportingbet, retaliated by initiating legal proceedings against PartyGaming in the High Court of Gibraltar, with the prospect of several hundred millions of pounds in damages at stake, but whether or not Empire anticipated the split was likely all along, the aftershocks are still being felt around the poker world.

      As Wayne Brown, gaming industry analyst at Altium securities makes clear, “There is every reason to believe Party Gaming’s actions were intended to gain Noam Lanir’s expertise at a cheaper price, but I don’t think it has helped either party and there will be a hangover for the entire sector for however long  it takes to sort out the court case.”
      PartyGaming unilaterally attacked the economics of skin operators by switching its own directly recruited players to an upgraded version of ’s platform.  This left the skin players with the option to changes sites or play on an inferior version of the same site.  Ultimately, many players re-signed directly with PartyGaming and eliminated the commissions made on each player by the skins.  Steve Cook, European managing director of poker network Tribeca Tables says that his has always been a weakness of the skin model: “Any company that jumps in bed with an owner operator whose proprietary software has its own brand is leaving themselves open to this.”

      Empire was not the only affiliate to feel the chill effects of Party Gaming’s  change of heart.  Simultaneously Party also bought two of its other skin operators, one , MultiPoker for $145 million and another, Intertops Poker, for $4 million.  Ironically Coral Eurobet, Party’s second largest skin, decided to take its players to a new platform saying, “Coral  Eurobet is pursuing long-term strategy for its poker business.” Only to find the network it choose.  On game, had just entered takeover talks with the Austrian sports betting company Betandwin over an estimated £ 337 million bid.
      On game, the world’s third largest network whose main subsidiary, PokerRoom.com, is domiciled in Costa Rica said there was “no certainty that any final binding agreement on the transaction will be reached”.  But it is clear that in the maneuvering of the poker jungles biggest beasts the skins have been coming off badly.  As Charles Hall, an analyst with brokers Panmure Gordon, says: “It reinforces the theory that the major listed players are firmly in pole position to dominate the industry as others will choose to Seller rather than float.”

City Darwinism

At the simplest level, the extinction of the skins has been driven by investment community unease about the model.  Analysts worked overtime to understand the phenomenon and, correctly or not, concluded it didn’t make sense, leaving the platform operators to do the dirty work or face a Seller off of their stock.
      As Charles Hall asserts, “There is certainly an element that is about not wanting to pay the skins at work here. Skins provide you with a blueprint so you know what works.  They can tell you what campaigns work and in what territories.  Sins outlive their usefulness, and while they are helpful in building a business, you wouldn’t want to buy in a skin.”

      If Party Gaming’s relationship with Empire was reaching the end of its usefulness though another city misunderstanding  probably accelerated the demise.  Steve Cook sees Party’s decision to terminate Empire as reaction directly prompted by the city’s horror at their own profit warning in September.  “It was absolutely a knee jerk reaction and the way Party handled it has been bad,” says Cook.    The fallout was certainly brutal in effect.  In its IPO prospectus, Empire raised the possibility of the separation of the two systems, but said it “will not materially affect the revenues of the group”.  But Empire, once worth more than £ 500m when it floated on AIM in June saw its value crash to just £ 200m.  As Wayne Brown notes, “one thing that has become clear is that Empire is a hell of a lot more reliant on party than Party is on Empire.”
      Analysts covering the online sports sector sagely observed that what was happening in poker merely shadowed the experiences of sports betting sites, where companies that sit tight and refused to do affiliate deals such as William Hill, eventually get the same customers anyway but when they get them it is on a more profitable basis.  In the online world Hill EBIT profits are nearly twice those of rivals Ladbrokes, largely because they have stayed away from skin type deals.”  If I’ve got a decent name in sports betting, and I think a customer may eventually come to my brand anyway, I don’t want to pay away 30% of my revenue from that customer in perpetuity.”  Says one analysts from a US bank who declined to be named.
      However the city driven-shakeout theory tends to overlook the fact that there is still only a relatively small universe of investors who understand or care what’s going on in the poker world, “This is all about the city still learning what poker is about,” says Charles Hall, “And this is just the latest in a series of misunderstandings.”

      For many seasoned observers the extended  debate about skins is just a part of a wholesale refiguring of what is going on in the whole poker value chain, where a number of industry sectors technology and marketing most obviously, are vying for supremacy.  “The tensions between these groups are exactly the sort of thing that characterize an immature industry.” Says Hall.

The Tolstoy Effect

The Russian novelist famously observed that while all happy families are alike, all unhappy families are unhappy in their own way.  So while its tempting to parcel PartyGaming’s shakeout with its skins partners, and Betandwin’s acquisition of Ongame together, usually the sort of decisions being made by management teams have less to do with investor pressure and more to do with their own strategic and very individual beliefs on where their businesses should go next.
      Betandwin’s CEO Norbert Teufelburger and Manfred Bodner believe that pursuing their rivals Sportingbet into a differentiated multi game offerings is the way forward, while Partygaming’s board saw the bringing in – house of some of its smaller skins, Intertops and Multipoker, as the inevitable unraveling of deals made when it was a $ 30 million a year company that felt inappropriate when it is a $ 900 million year company.  A morbid dislike of the skin concept is a very far from being the motivation for these deals, and, infact they make straight forward housekeeping sense, at a time when both companies are looking to further differentiate their products.

Marketing, Marketing, Marketing

While the skins themselves have been laid low, the marketing that skins do is now more important than ever.  Wayne Brown at Altium Securities observes that, “The single product offer doesn’t make a long term viable customer proposition.  Its important to have crossover between blackjack and poker as Party has shown but now we know that is costing them a lot more in bonuses and retention.  That’s where the skills  of a company that can acquire and retain customers at a low price will become apparent in the medium to long term.”
      Panmure Gordon’s Charles Hall adds, “There are a number of different models that can work, but the reality is that with any model there are going to have to be some complex marketing mechanisms at work.  It’s all about marketing – it’s not about liquidity as people thought at the beginning.  As the business has got larger that has changed.  It becomes: are you adding customers and at what price, and what is your regional presence?”

At the simplest level, the extinction of the skins has been
driven by investment community unease about the model

      certainly the family relationship between Party and Empire never got to the point where the arrangement was in any way comfortable.  There was never a large core of players endlessly renewing itself at low cost.  Instead customers who had been playing for a while began to look around for different bonus deals, and as Wayne Brown notes “Some of your most valuable players will figure out they can be affiliates and with that realization the revenue drops 30%.”
      What is undisputed is that the next twelve months will see more and more sites focusing on customer retention and reactivation – where operators will be looking to restimulate lapsed players from their millions of sign –ups on the best possible economic terms.  Richard Segal, PartGaming’s CEO speaking at the EIG conference in Nice in September observed the only limitation on their already massive $ 100 million marketing spend is that they have not found a worthwhile way to spend more money.  “It’s true we have not been as scientific as we could have been,” says Segal  “but we have a new data mining project underway in the US and focus on retention will be all important for us next year.  But I don’t think the opportunities are out there yet – we would double our spend on them if they were.”


      So with new entrants still queuing up to join the poker market – Skybet the gaming arm of Rupert Murdoch’s satellite broadcaster Sky, is just the most recent to announce its plans, the marketing skills needed to build a successful poker community are unlikely to be under used, and no one is ruling out a comeback for some the best marketers around.
      As Wayne Brown concludes, “Besides the obvious need  to have the technology, this is a marketing game and Noam Lanir is the best at that.  He could potentially do the same thing for someone else.  Take a Noam Lanir and put him into a combined bet and win and Ongame and you could have a very different proposition.”

AUTHOR PROFILE

ANDREW GELLATLY  is a writer and journalist who covers technology, gambling and sport.  He wrote the Financial Time’s most recent special report on the global gaming industry and his journalism appears in The Ft, The Independent, The Scotsman, and Vogue Italia, as well as a number of trade titles.  He recently completed a extensive research report on the Russian gaming industry.

When is it NOT  gambling?  Skill-with prize may be the way forward.

By adding a skill component to its gaming platform, Sennari was able to get around the legal issue of awarding prizes  for virtual poker tournaments and other network gaming competitions.  The developers of Sennari’s PrizePlay gaming service had to take into account these legal  issues when creating prize-based games for play on mobile phones.
      In Sennari’s latest game, the company teamed up with ThwartPoker to create a ‘skill-with-prize’ mobile phone version of Thwart: 6 card Battle.  A skill-with-prize  game is one where the skill of the player predominates over chance in determining the outcome of the game.

A skill-with-prize game is one where the skill
 of the player predominates over chance.

      There are several categories of online skill-with-prize games, but all involve some form of either single player or head to head competition.  There are two forms of single player games; the first is single player where the prize is determined by the outcome of one specific man vs. machine game.  This is the format that Sennari has chosen for their ThwartPoker offering.  The second iteration of the service will add real-time head to head competitions as well as multiplayer tournaments.


      So, is this really just a game of chance?  Actually, quite the contrary.  Thwart: 6 Card Battle is a skill-based game.  Players get their first card dealt face-down, allowing competitors to block their virtual opponents and prevent them from winning.  Each player selects the cards where the goal is to thwart the other player (real or virtual) from getting a good hand, while getting the best hand for themselves.  The hidden, first – cad - down feature also increases the fun factor of the game. 
      Of course, both Sennari and Thwari Poker are aware of the legal issues and anti-gambling laws that surround their industries.  In order to operate within both federal and state laws, Sennari had a legal review drafted that addresses the legal nuances involved in offering skill-based  games with prizes.  In Playing for Profits: Games of Chance vs. Games of skill Game Promotions: Playing by the Rules, David O. Klein. Esq. and Deena B. Burgess, Esq. state that:
      “Games of skill, if crafted correctly, are legal game promotions in every state.  Their winner(s) are selected based upon the skill of the contestant (for example, an essay writing contest).  In contrast, “games of chance” are illegal lotteries in the United States unless one of the three traditional lottery elements – prize, chance and consideration – is removed.  Under existing regulation, only government- sponsored lotteries may include all three lottery elements.”
      Of the three elements, determining whether an element of chance is present is the most subjective.  It is, however, the one element that Sennari has chosen to element from their game offerings.

      Then there are specific federal laws, as well as individual state laws to consider.  The federal government relies upon two laws for the regulation of gambling.  The first is the Wire Act, which makes it illegal for a gaming business to use U.S. telephone wires to transmit or receive bets or betting information on sporting events.  Since skill games do not involve betting or wagering of any kind on such events, this service does not contravene the Wire Act.
      The second statue, the Anti-Gambling Act, applies to all forms of gambling, sports and non-sports betting alike, and makes it a federal offense to conduct, finance, manage, supervise, direct or run all or part of an illegal gambling business.  The Anti-Gambling Act defines an illegal gambling business as a business, which is a violation of the gambling laws of the state where it is being conducted.  Because Sennari only offers games to residents in states where such games are legal, their service does not violate the Anti-Gambling Act.

Thus, a state-by-state review of applicable laws is necessary.

      With regard to individual state laws, each state has adopted its own laws for the regulation of gambling and lotteries.  Some states have also adopted laws that regulate awarding of prizes in connection with advertisements, contests and promotions that may apply to games such as Thwart: 6 card Battle.  Thus, a state-by-state review of applicable laws is necessary.  Sennari does not permit residents in Arkansas, Delaware, Iowa, Maryland, and Louisiana to participate in tournaments where players compete for cash or prizes, however, as these states have laws that apply to games of skill as well games of chance.
      All Sennari Prize play powered skill games provide  customer pay outs in Bling (prize points ), and allow the player to redeem their Bling for prizes from an extensive catalog of both physical and digital goods.  All redemption can be done within the actual application- so, the player never needs to leave the game to retrieve their prizes.

 

 

 

 

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