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Thoughts on PokerStars VIP Changes

It's been a long time since I wrote a Weekly Shuffle. Quite frankly, I've been primarily focused on daily fantasy sports. While online poker is now a very matured industry (and PokerTips.org is over 12 years old!), daily fantasy sports is still relatively new. What makes poker and daily fantasy sports so similar though is that the operators must balance a complex ecosystem of players of various skill levels.

While daily fantasy sports is just coming off of its boom stage and is now in the process of plateauing, online poker has been around for awhile. It's dealt with the legal issues, the games have become tough and next to impossible to beat for a majority of players, and one clear dominant operator has a near monopoly in the space.

For years, the effective rake of PokerStars (rake minus VIP rewards) has been low enough to allow for some users to win a lot of money, some users to win a little money/break-even, and then the majority of players to lose a little or a lot of money. This is generally how these ecosystems need to work.

At first, it's possible for winning players to win with a higher rake, as their skill level is much higher than new and casual players. However, over time, casual players learn to play better or quit altogether. The skill edges decrease, and if the rake is too high, the games become unbeatable for nearly everyone. Poker has managed to avoid this issue, at least in the mid to high stakes games, since the rake is capped at a certain dollar amount per pot (which is generally much less than the 4.5% advertised rake in cash games) as well as the VIP rewards.

In contrast, daily fantasy sports isn't quite there yet. The rake on its games is modeled after poker tournaments (generally around 10% of the buy-in). Like poker, there are contests with payout structured modeled after poker tournaments, with a top heavy payout structure where you can turn $20 into tens or hundreds of thousands, and others modeled after cash games where you nearly double your buy-in if you land in the top half of finishers.

From what I can tell, the top heavy payout structures (called GPP's) are still potentially profitable since a variety of other strategies come into play when trying to play in the top few of thousands of entries instead of just the top half. In contrast, the rake on the double-up payout structures have rendered the games incredibly difficult to beat at all but the smallest stakes for the vast majority of players. So unlike poker in the earlier days, daily fantasy sports seems to be already running into the wall of running some types of games where next to no one can beat the rake without incentives and rewards to knock the effective rake down.

But let's bring back the conversation to PokerStars. With poker a very mature industry and PokerStars seemingly found the sweet spot of rake and rewards to keep the ecosystem at least somewhat balanced, why would they suddenly pull the rug under poker players, especially its most active customers?

The official line seems to be that PokerStars doesn't want its reward system to be the method that the profitable players turn a profit. It's better, according to them, to get your winnings from the table and not the VIP system. By taking away the top tier rewards, it should discourage people from grinding. Some of those grinders may leave, but the ecosystem will have a higher level of casual players, making the games easier to beat.

The argument has some merits. While multi-tabling grinders do increase liquidity, it's questionable if that has a significant appeal to casual players. Poker games have become so tough that it's difficult for new players to want to keep playing, and the most important part of the food chain is always the bottom.

PokerStars claims that only 2% of its players will be adversely affected. These percentages should always be taken with a bit of a grain of salt, since it's up to the statistician to decide what is a 'an active player' (does a person who played 5 minutes in the past 2 months count for example?) Nonetheless, we can all agree that the change clearly negatively affects high volume grinders and won't really affect casual players that much. One player estimates it would affect his bottom line by about $50,000 a year .

Some defend PokerStars saying that by essentially dissuading high volume players from playing, a lot of them will quit and the games will become easier to beat. However, that's not how these ecosystems work. It's not as though all the high volume players will quit overnight and the games get easier. They will all just get slowly squeezed out over the course of the year. Previously losing players will still lose (though maybe a bit less), winning players will not win or win less, and PokerStars effective rake goes up.

What's unclear though is if over the next couple of years if liquidity, especially in high stakes cash games, dries up completely. Edges in poker are incredibly tiny currently. By hammering the edge with a rake increase (especially on high stakes players), it may get to the point where next to no one is able to win.

What is important to remember is that even most casual poker players at this point play poker decently. There's a large swath of casual, losing, somewhat-skilled poker players. They may be the only ones willing to continue playing.

It's important to remember two things about PokerStars. They've had a near monopoly for a long time, so everyone just sort-of expects it to continue. Second, they're now a public company with different management than what made PokerStars the #1 player in the space.

Public companies are notorious for being short-term oriented to boost profits and the share price. They generally don't worry about 10 years from now, since it may be different management and shareholders by then. Going public ruined Party Poker and may essentially cause the slow demise of PokerStars as well.

Rake changes generally occur in the early to mid stages of an industry's life cycle. I expected we'll see rake and player points changes in daily fantasy sports as the companies adjust to the changing ecosystems. However, the recent PokerStars rake changes has come really late into poker's life cycle.

Will games dry up or will PokerStars just be able to keep a higher percentage of the rake? Will 888 or some other company step in and become a clear #2 as people get tired of PokerStars shenanigans? We won't really know the answer to these questions for another 1-2 years, but it'll be interesting to see what the answer will be!

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