A good example of this can be seen in this recent Twitter discussion.
Unfortunately, even though $100k in rake paid seems like an impressive number, it’s really not.
Sure, you paid a gross amount of $100k in rake (gross, both literally and figuratively), but you also received $50,000 or more in rakeback, and withdrew another $150,000 from the site. All without ever depositing a dime during that timeframe.
The simple fact of the matter is, the amount of rake you pay doesn’t correlate to your value, it simply shows your volume.
For instance, who’s more valuable?
- Player A contributes $100k to the rake and net withdraws $80,000 annually.
- Player B contributes $20k to the rake and net deposits $20,000 annually.
Why pros pay more rake
There is a very simple explanation why a professional online poker player pays a ton of rake every year.
For a professional poker player, paying rake is like a business renting a building. The bigger your business (in poker terms, the more hands you play), the more square footage you’ll need. The more square footage you need, the more you have to pay in rent each month. And while you’re likely to get a break of the price per square foot if you’re renting a large space, it won’t be at the absolute expense of the building’s owner or the other tenants, who may grow to begrudge your “sweet” deal.
As an example, if a landlord is renting up to 10,000 square feet at $2.50/square foot you might get a deal if you rent the entire 10,000 square feet. Maybe you get it for $2 square foot, and he’s happy to get a steady check for $20,000/month. To the landlord, you’re basically a gift horse, cutting down on the landlord’s workload – one tenant vs. ten – and filling the entire leasable area in one fell swoop.
But if you asked for an even better deal (say, $1.50/square foot, or some kind of build out), it’s now worth it to the landlord to pass and look elsewhere. Even if it means a few units are perpetually empty.
Having eight tenants that pay $2.50 square foot for 8,000 of the 10,000 square feet is worth $20,000/month – plus the landlord has two open units that can still be rented, and if a tenant goes under it’s easier to overcome the lost rent until a new tenant arrives.
The point is, even though you pay more in total, you pay less on average per square foot.
And what if you’re business is incredibly noisy? Or what if it doesn’t directly sell anything and therefore doesn’t attract customers to the strip mall? Or what if it requires more employee parking than the lot can handle? All of these extraneous factors can cause existing tenants to leave and be detrimental to the landlord’s business.
The idea here is, there is a point where rewarding a gift horse becomes detrimental; no matter how “big” a customer they are. What a landlord wants is a tenant who is going to help grow his business, which is why concluding that the bigger a tenant is, the better they are is wrong.
The same principle holds true when it comes to the dynamic between an online poker site and its customers, who are more or less rent-paying tenants.
Why rake generated is a bad metric
As MPN’s CEO Alex Scott notes in this column, basing a player’s value to a site on total rake doesn’t come close to telling the whole story of the player, and it certainly isn’t the best measure of that person’s overall worth to the site, or the poker community by and large.
Yes, high-volume players generate massive amounts of rake for the site, but what nobody on the “we’re your most valuable customers” side of the argument wants to consider is the cost associated with these players.
Many of these players are the noisy, parking-spot-hogging, businesses I mentioned above.
For instance, under the old system, where Supernova Elites were earning upwards of 60% rakeback, if Player A generates $200,000 in rake over the course of a year, and PokerStars returns $120,000 of this through rakeback and rewards, Player A’s value appears to be about $80,000 annually. An amount that would make them an extremely valuable player – an asset to the site.
But there are other aspects of Player A’s “value” that also have to be considered.
If we assume Player A’s skill is responsible for the accelerated loss of 10 players every week (with each player costing the site several hundred dollars to acquire – we’ll go with $300), Player A could be costing the site as much as $3,000 a week in player acquisition costs. This works out to $156,000 per year.
Simply by using net rake paid, and adding this second factor in determining a player’s worth, Player A’s actual “worth” is not $200k in rake per year, it’s negative $76,000.
Toss in the amount they withdraw vs. deposit, and the player’s worth starts to plummet.
Note: even if you want to play around with these numbers, Player A is always going to be a net negative under any reasonable assumptions.
Using these metrics, Player A is actually detrimental to the site. This type of player is the equivalent of a casino whale whose comps outweigh the money they are wagering, or a winning sports bettor. At some point the casino or book has to back them off or renegotiate terms.
Which is what PokerStars has done.
By downgrading Player A’s rewards from 60% to 30%, the site keeps $140,000 of the player’s $200k of generated rake. As an aside, I still don’t agree with PokerStars decision to prematurely cut rakeback.
Furthermore, by increasing the rake in the game’s Player A likes to frequent they might also increase Player A’s rake contribution from $200,000 to $240,000, with the site’s cut now around $168,000, instead of $80,000.
Yes Player A has taken a hit, but in the eyes of his or her landlord (PokerStars) he or she was underpaying. What PokerStars did is no different than what happens to businesses across the country every day – their rent went up.
It sucks, and nobody likes more overhead, but it’s a part of doing business.
As Scott notes in his column, there are other factors that are far harder (if not impossible) to measure that players can do to increase or decrease their value. These range from their chat etiquette to engaging in predatory behavior to the speed and style of their play to their willingness to start games.
It’s one thing to be a winning player who makes the losing players feel welcome or actively recruits more players to the game. A perfect example of this type of player is Jason Somerville, Jamie Staples, or Daniel Negreanu. Or a player who routinely starts games or sits at shorthanded tables.
On the other hand, it’s quite another to be a winning player who harasses their opponents and/or makes the losing player feel like the butt of a joke. Or a player that does nothing but play 24 tables eight hours a day, and withdraw their winnings every month.
All of these things are part of a player’s overall “value” to a site.
The end game goal
Far from making the game unbeatable or a short-term money grab, the changes are designed for long-term sustainability.
PokerStars is hoping that by cutting back on rewards they will reduce the number of predators in the ecosystem. The idea is, the alpha and beta predators will continue to thrive, but the group of gamma and delta predators will be winnowed. The reduction of sharks at the lower levels of the poker ecosystem is expected to lower their player acquisition costs. Instead of paying $300 (this is a random number) to acquire a player, if they could instead pay just $200 per player. This would make Player A an asset again, and not a detriment.
Furthermore, the theory is the remaining predators alpha through delta, will see an increase in their pre-rake win rates, because of the influx of new recreational players. The idea isn’t to eliminate winning players – winning players will still exist – just to cull the herd.
It didn’t always have to be this way. When online poker was booming, sites didn’t have the expenses associated with operating in regulated markets, and when player acquisition and other costs were much lower, the influx of new deposits was capable of supporting far more winning players.
If the poker ecosystem changes again, the sites will once again adjust (if needed) to find the right balance.