Converting Social Media Players into Real Money Players
There are two types of companies that operate in the online poker landscape right now. There are established online poker rooms that are active in the real money poker business and there are social media companies that have yet to attempt to offer real money games. The social media companies are flushed with a massive database of players. The question remains how these social media companies will be able to convert their freerollers into real money players.
Free play online poker became popular after the Unlawful Internet Gambling Enforcement Act became law in the US. It exploded after PokerStars and Full Tilt Poker were forced out of the US market on Black Friday.
Zynga Already Has Trouble Converting Play Money Players
There are many players that are enjoying free play games on social media sites. Zynga has reported that nearly 99% of these players do not generated revenue for their company on a monthly basis. It is safe to assume that other companies operate on the same margins, but since Zynga’s financials are available, I will use them as an example.
Zynga reported their fourth quarter earnings on February 5, 2013. The company reported 298 million Monthly Active Users (MAU) for the quarter. There were only 2.9 million Monthly Unique Payers (MUP), in other words, players that actually spent money. This means that less than 1% of their players were paying customers in 4Q 2012. Total revenue reported by Zynga in 4Q 2012 was $311.2 million. This includes $36.8 million in advertising revenue. Ignoring other unreported income categories, this means Zynga players spent $274.4 million during the fourth quarter.
The average MUP spent $31.54 on average each month in the quarter. Zynga MAUs paid about $.30 per month. Each monthly active user was worth just a penny a day. These are low value players as a whole that for a number of reasons do not spend money on Zynga games.
According to AppData, Zynga’s Texas Hold’em Poker is the second most popular app with an estimated 40 million monthly users. That is about 13% of Zynga’s overall MAU count. Even if we assume that these players spent twice as much as other players using other apps, they still only account for about $24 million in monthly revenue. That would mean the MAUs spent about $.59 per month. Assuming this same number for Texas Hold’em Poker MUPs, actual paying poker players are only spending about $30 each month. An average MUP is only worth about $1 a day under this possibly optimistic scenario.
Play Money Players Are Traditionally Not Depositors
Most players that are using social media poker are not going to ever be convinced to spend money on awards, features, private tables or extra play money chips. The numbers Zynga provides in their financials proves this and it is only getting worse each quarter.
Some of these players could be convinced to actually deposit for real money play. These are the players that companies like Zynga are betting their life on to keep their companies afloat.
Millions of players that partake in social media poker sites are doing so because they do not trust real money online poker rooms. This could be due to the fact that they lost money on Full Tilt Poker, Absolute Poker or Ultimate Bet. It could also be attributed to a lack of trust in playing for real money over the internet because they are convinced there is too much cheating. Others may not want to play because it is illegal or they do not trust that an online poker room will pay them. These players will be extremely difficult to convert, even if online poker is made explicitly legal in their jurisdiction.
There is another issue facing social media sites. Most players do not take those games seriously. Some players may have the notion that they will win money at real money online poker games due to their success in the social poker arena. These players will learn quickly how untrue that is. Most social media players would be a massive fish at penny games, much less at any real limits.
The Party Poker Network seems to be taking an action that could resolve this. The network has decided to restrict some access that their winning players have to the general pool of players. This could be penny wise but pound foolish. The network risks alienating their winning players in an attempt to keep a small number of micro limit players in the game longer. This will only work if Zynga and other social media sites are able to convert large numbers of their players and keep them in the game.
Zynga plans on opening a skin on the Party Poker Network for their UK players. Arguably, this will have little effect on their bottom line. UK players have access to virtually any online poker room in the world. There is a reason these players chose Zynga Texas Hold’em Poker. They are not real money players. UK players are also unlikely to be any significant percentage of their player base. This will be a problem for their players in most countries that already have access to legal and regulated real money gaming.
This result may be different in the US where Zynga has applied for online poker licensing in Nevada. No plans for the use of this license have been announced. It seems the company is planning ahead at this time. In the end, the US is going to be where Zynga has a chance for success as players there are starved to once again play online poker. That process will be very slow though.
There are also many players in Zynga’s system outside the UK and US. These players may be in countries with licensing processes that are expensive or unavailable to them where the return on investment will be low. There are also many players located in countries that are known to have very low value players that cannot be converted to real money, at least not at a profit.
There is another issue with converting MUPs into real money online poker players. If these players are of a low skill level, they will lose quickly. This means they will generate little rake in the process. These players may make one deposit and disappear. If this happens, the company could lose their revenue from the players forever. This is a big problem facing existing real money online poker rooms and social media sites will be no different. In fact, it may be a bigger problem considering these players were already reluctant to become real money players.
Social media sites are not the only companies creating large databases of players. There are several subscription sites operating in the US under sweepstakes laws. These sites include ClubWPT and SpadeClub. These companies charge a subscription fee of about $20 a month to access play money games where points and play chips may be used to enter tournaments with cash prizes. Savvy players know that they can participate in these subscription sites for free by sending a letter to the company as required by sweepstakes laws. Players that actually pay for this service likely realize that there is an extremely low return on their monthly investment. These players would not seem likely to deposit any substantial amount of money to generate real action if these sites were to convert to real money, though subscription companies will probably do better than social media sites because most of these players are probably paying the subscription fee and are accustomed to spending $20 each month.
Lack of Experience in Real Money Gaming
Another factor that could doom social media sites before they ever begin could be their lack of experience. Social media sites would need to create or purchase online poker software and learn how to process payments. Online poker software is expensive to develop and payment processing mistakes have doomed a number of online poker rooms. They would also need to hire experienced security employees, something a play money poker room does not need.
One option these rooms would have is to join an existing online poker network. These deals may come with terms that are unfavorable. For example, bwin.party has entered into an agreement with MGM Resorts and Boyd Gaming in the US. This deal gives bwin.party a 65% share of the company. This is much higher than network agreements tend to be. Most network deals offer skins a 70% or more share of the revenue. Assuming revenue is based on ownership, it will be hard for skins to turn a profit with this type of arrangement. This is especially true after promotions and payment processing fees are included. This means that a player that deposits $100 to play online poker may only provide 20-30% of that revenue back to the social media site. This is good news if the player would otherwise play for free, but if the player is already spending money on social games with a much higher margin, this could actually become a negative.
Social media sites will be competing against experienced online poker rooms and brick and mortar casino companies in regulated markets. They will be at a clear disadvantage in this situation. They will have to hope they can parlay their social gaming experience into real money play, partner with companies in a deal where they pay royalties to an existing operator, or hire talent that can get them where they need to be. All of these options are expensive and threaten to devour potential revenue, an issue they do not already have with their social media models.