Understanding the Poker Economy Part 1: Building a Mutually Beneficial Economy

Steve Ruddock : December 11th, 2015
Money is a tool tony dunst


This is a two-part series on the poker economy.

Ever since PokerStars announced it would be making changes to its VIP program, the poker community at large has suddenly become very interested in the “poker economy” and the “poker ecosystem.” This is something very few people have spent much time on, so its unsurprising that many of the drivers of the poker economy, and where different types of players fit into it, are overestimated, underestimated, or simply misunderstood.

A lot of people are characterizing the changes imposed by PokerStars as a money grab, but the reality of the situation is a money grab is not in PokerStars’ long-term interests.

I’m of the opinion that it’s in the site’s and the players’ best interests to make sure the poker economy is mutually beneficial, as this is the only way a site can increase the amount of customers and money in play, which is the only way to they can grow profits long-term. A shortsighted cash grab would only hurt the players and the site.

As poker pro Mike Schneider recently said on Twitter:

Change is long overdue

Rewards and rakeback were not always standard operating procedure in online poker. This is actually a fairly recent development. True rewards program really only started emerging in 2005/2006, and it wasn’t until more recently these rewards programs overtook other promotions.

The problem is they have been used as a band aid, a way to mask shortfalls in new deposits by injecting marketing dollars directly into the poker economy through rewards in order to keep their exiting player base in action longer, and artificially slow down the overall attrition rates at their tables.

Now that band aid is being painfully ripped off. I don’t blame the players for this, as they were merely working with the system they were given; it was the sites that that pushed players to rely on rewards.

Unfortunately, this direct injection of money has only exacerbated the problem as most of that money is going to high-volume players. Winning players are winning more, and many breakeven or even losing players are now winners because of these rewards. This has led to more withdrawing players and an even greater gap between the amount of money coming into the poker economy via deposits and the amount of money leaving the poker economy via the rake and withdrawals.

The only legitimate fix for this problem is to increase rake (or, as they are now doing, decrease rewards) so they have more money to market with and increase the number of deposits. This will also lead to a decrease in the amount being withdrawn until the ecosystem rights itself.

Poker economy 101

Here’s the most basic example of the poker economy:

Deposits, minus rake plus withdrawals, equals the amount of money in the economy.

That’s it, simple. The difficult part is keeping these things in the proper balance, and making sure the site rakes enough money to market and be profitable and the winning players are happy with the amount of money they are able to withdraw.

When deposits are greater than the rake plus withdrawals, the amount of money in play grows; When deposits are less than the rake plus withdrawals, the amount of money in play shrinks.

Rake is the poker economy’s central cog

The rake a site generates (rake in this sense means: rake collected minus the amount it gives back to players in rewards) influences the amount they can devote to marketing to bring in new players. If the site isn’t raking its games properly things go haywire.

High rake sites

If a site over-rakes their players, it will be more difficult to replace players because, the site becomes less appealing to play at and players will go broke faster.

The amount of money and players at a site that over-rakes their games will slowly degrade as the rake eats up most of the money in the economy and new players can’t offset attrition.

Low rake sites

On the other hand, if a site under-rakes their players (or offers too many rewards) the site is more appealing, but it won’t be able to generate the necessary capital to replace players who’ve gone broke.

This also leads to a slow degradation with fewer players and less money in play as withdrawals take too much money out of the economy.

As you can see, these two starkly different, but imbalanced, rake models eventually lead to the same outcome. Less for everyone.

Hallmarks of a thriving economy

From a site’s perspective, if it can bring in more new players and money than it’s losing, its traffic and profits grow, as does the amount of money in the economy. From a player’s perspective, this means more games and theoretically, softer games.

This is the mutually beneficial aspect of a healthy poker ecosystem.

Hallmarks of an eroding economy

Conversely, when rake plus withdrawals exceeds deposits the poker site will see profits, and by extension their marketing budget, decline. This leads to even fewer new depositors and further erosion.

This is where most of the poker industry is currently at, and what PokerStars is trying to fix.

How the current situation fits in

You can argue if PokerStars will use the money they are diverting from high-volume players as they say they will, but if you ascribe to the theory that the poker economy needs to be mutually beneficial to function properly, than they likely will. If you believe that they are a greedy company making a cash grab, we’ll simply have to wait and see how things play out.

The perfect example of diverting marketing dollars from high-volume players (and let’s be very clear here, VIP rewards are essentially marketing dollars since their purpose is to attract new players and/or promote loyalty), are the milestone hand promotions PokerStars runs. On the days when milestone hand jackpots are awarded PokerStars often has one of its busiest days of the year.

The protestors got a firsthand view of this when the first day of their boycott landed on a milestone hand day and peak cash game traffic soared some 33%. Essentially, PokerStars was able to increase peak traffic by 12,000 players by giving away $100,000.

By comparison, according to Dani Stern, the changes will cost him $50,000 next year – which lines up with the data I saw that puts the loss of rewards at about $42,000 annually per Supernova Elite on average. So for every two or so Supernova Elites PokerStars can run a $100k milestone hand.

In 2013 there were 371 Supernova Elites, so if we round this off to 400, we’re talking about roughly $16.8 million in Supernova Elite benefits being cut in 2016 – Personally, I hope it’s not cut in 2016, and the cuts are pushed back to 2017.

If this money is reallocated to milestone type giveaways, PokerStars could give away $50,000 almost every single day, or offer $100k in free money close to 168 times each year. Which should mean plenty of new deposits.

PokerStars has already announced four $1 million freeroll tournaments (although it’s somewhat unclear if these are new tournaments or eliminating the exclusivity of four $1 million freerolls they have historically hosted for high-volume players) and indicated other yet-to-be-announced promotions were in the pipeline.

Viewed this way, it’s hard to argue that these high-volume players mere presence is worth the same marketing dollars as 168 days of $100k giveaways. It also becomes apparent that with this influx of players trying to hit jackpot hands or trying to cash in on freerolls, the games will be much softer, so theoretically, the SNE’s that saw their benefits cut have the opportunity to partially or fully offset (or perhaps exceed?) the loss of rakeback through increased win rates.

If we take PokerStars at their word that they will use the savings to market to new players, the future starts to look bright for everyone.

In part two of this series I will examine the smaller ecosystems (micro-, low-, middle-, and high-stakes) within the larger poker ecosystem.

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