Hadrian Wall

PartyPoker Says Goodbye to 18 Countries and Hello to Profits

April 30th will see the end of new sign-ups in 18 countries currently served by bwin.Party. When the Emperor Hadrian built his famous wall in the North of England it signified the end of Roman ambitions to conquer the whole world. Could this move be signaling the end of bwin.Party’s world-conquering plans?

HadrianWallThe only official announcement has come in an email to affiliates. In the EU, the move affects nine full member countries, along with other groups:

  • Full EU members: Cyprus, Finland, Greece, Hungary, Latvia, Lithuania, Poland, Romania and Slovenia;
  • Three EU candidate countries are also included: Croatia (which has already acceded, but is not yet a full member), Macedonia  and Serbia;
  • Three former Soviet Republics not associated with the EU: Armenia, Belarus and the Ukraine;
  • Plus, three South American countries: Argentina, Brazil  and Colombia.

The recently published annual report announced that bwin.Party lost €39.2m in 2012, so investors will not be uncomfortable to see the company’s CEO taking seemingly substantial action. If these countries are the ones which have the lowest profit potential for bwin.Party, then it makes a lot of commercial sense to get out and concentrate their resources on business lines which will deliver the profits investors expect.

Sharp observers will have seen the warning that these country withdrawals were coming soon. The annual report contained this delphic utterance from CEO Norbert Teufelburger:

“With most of our single technology platform in place, we are now optimising the shape and size of our business in order to maximise our operational and financial performance. Our strategy is unchanged, but we are not relying on innovation alone to return our business to growth. We are accelerating the pace of change by shifting our revenue mix towards nationally regulated and to be-regulated markets.”

“…optimising the shape and size of our business” was apparently code for exiting a third of the EU countries, one of the BRICs and sundry other markets.

The strategy was enunciated in no uncertain terms later on:

“Whilst geographic diversity can be an advantage, being spread too thin across too many jurisdictions can also prevent the allocation of marketing spend from being optimised and lead to operational inefficiency. Outside of our core regulated and to-be-regulated markets, we are therefore reducing the number of jurisdictions where we provide a full suite of services. The net result of this shift will likely reduce dotcom revenues but should also deliver a significant reduction in associated costs, increasing net cashflow.”

The focus on regulated markets may not bring in as much profit as the riskier gray areas of international online gambling, but once market share has been achieved, the resulting profits are relatively stable and predictable. Regulatory barriers and high national gambling taxes create utility like returns for the companies that can successfully hurdle them and deter new entrants from challenging incumbent operators.

The withdrawal from certain EU markets could well be reversed in the long run. If the current financial crisis fails to break up the Union, it is probable that member states will move more quickly towards legal harmonization. The action plan contained in the EU Commission document, “Towards a comprehensive European framework on online gambling”, is lacking in many respects, but the title clearly signals the political direction the Commission wants to follow.

PartyPoker may well end up reentering the markets it is now leaving at minimal cost, and at a time when their economies have recovered sufficiently to provide the prospect of reasonable profit. The other countries may well remain off their radar for longer. The one exception may be Brazil.

Floods of US and European investment money have driven up the value of their currency to the point where Brazilian farmers are being priced out of export markets. The introduction of capital controls in 2009 made it much harder for poker operators to extract their profits. Even so, bwin.Party’s decision to exit such a large and growing market is difficult to understand.

Since last year, capital controls have been relaxed, and their great rival PokerStars has signed Ronaldo Nazario as the latest member of “Team PokerStars, SportStars.” Securing the endorsement of one of the greatest soccer stars and therefore, in Brazil, where soccer is more popular than sunshine, one of the best known celebrities in the country shows a serious commitment to the market.

Some investors may well urge a Brazilian rethink, but they will probably be content with the other decisions. The share price showed very little reaction to the news on Friday, although it may move some more this week as the information gets out of the poker world to reach the investment forums.

I was once told that Coca Cola’s marketing strategy was to ensure that their customers were never more than an arm’s length away from a Coke. The idea of PokerStars voluntarily leaving a market seems unthinkable. They so obviously want every poker player wherever they are in the world, to be able to play from their own computer or phone or tablet or anything.

But bwin.Party won’t care when PokerStars is weeping because there are no more worlds left to conquer. They will be quite happy behind their regulatory barriers making a safe and reliable profit in every country where it is possible.

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