Is regulation to blame for the PokerStars rake hike?

The biggest news of the month in online poker and indeed online gaming is PokerStars increasing its rake across a number of ring games and SNGs. Unsurprisingly, most of the online poker community is up in arms about it. While I don't play very much poker these days, I do see it as another step towards the eventual extinction of the online poker pro, at least as we know it now. In the economic parlance, Amaya/PokerStars are now capturing back a ton of the rents that poker players have held for a long time.

Among others, Steve Ruddock of Online Poker Report, has mentioned that the policy changes of the new-look austere PokerStars is part of the cost of regulation. Ruddock writes,

[O]ver the past five or so years, more and more countries have legalized and regulated online poker. This has forced operators to apply for licensing in different jurisdictions, resulting in sometimes-hefty licensing fees and local tax bills. 

These expenses were virtually nonexistent in the unregulated online poker markets during the poker boom.

Ruddock also notes that Amaya pulled out of 30 grey markets (albeit mostly small poker markets) and that would cost some revenue.

I've seen the following on 2+2 written many times in many different ways, and it rings true: "You guys wanted regulated poker, and now you're getting it."

Regulation always costs money, and costs are always passed down to the consumer, in this case, the poker player. What's more is that the costs of regulation are not always obvious. Taxes, license fees, and lost revenue from exiting grey markets are obvious. But I suspect the average poker player (or journalist) does not have any idea how much regulation truly costs the online poker industry.

The truth is, the regulatory bodies attempting to regulate online poker do not understand it very well, if at all. The most recent example came of this is when PokerStars was required (and then apparently, not required) to remove its auto rebuy feature in the UK. Players hated this change, with good reason: players immediately realized there would be situations where they would pay the blinds, get stacked on a hand, then to add insult to injury, miss free hands. But this is the kind of thing that only a poker player would understand. A regulator who does not play poker in any serious way sees only that an auto rebuy feature bypasses the psychological hurdle of needing to click to reload, and could thereby potentially exacerbate problem gambling.

The auto rebuy regulation got a lot of press, but it is downright sensible compared to many of the regulations that I know exist in Nevada and New Jersey. While I was working for Ultimate Gaming, we were prevented from launching Omaha games in Nevada because they required a separate game tab to distinguish Hold'em from Omaha. Because of the way Ultimate Poker's software worked, this was not as trivial a change as it sounds, and Omaha games were delayed.  A situation came up in New Jersey where the Division of Gaming Enforcement were on our case over a promotion where we gave away t-shirts on Twitter. Seriously, t-shirts. If they can give sites a hard time over t-shirt giveaways, you can be assured that quite a lot of more substantive promotions got either shitcanned or altered beyond recognition.

These things may seem small, but they cost the companies a lot of money cumulatively. They also create technological overhead for the product development team. The end result is a poorer experience for the players, which means players play less, which means the liquidity pool shrinks, and the cycle repeats. The cost of regulation is very high, and much of it cannot be measured on a balance sheet. It manifests in promotions that never run, players that never play, games that never get started, extra payroll expense, redundant and replicated work, and more. As you can see, the costs of regulation go beyond simply higher rake.

Here's another insidious thing about onerous regulations, whether ridiculous or legitimate. It's that once regulations are established, the existing operators are often incentivized to ensure they stick around. If some regulator requires that the river card must be exactly 17 pixels from the turn card or that the geolocation be accurate to 75 metres instead of 100, then once the operator has made that required change, they actually want it to stay, because it creates more future work for their competitors. Thus the regulation game, at times, is simply throwing up one barrier after another at your opponent like an action movie chase scene. As soon as one company passes the apple cart in the crowded alley, they try to knock it over to trip up the next guy.

(By the way, this is not unique to online poker. One need only look at what the taxi companies are presently doing in Las Vegas. After months of desperately trying to keep Uber out of Las Vegas and protecting their regulated monopoly, Uber is now operational. The result? The taxi companies are on a rampage of bullying and intimidation, including this disgusting case where a cab company employee hired an Uber, contacted the taxi authority, who in turn showed up in bulletproof vests and masks posing as police officers.

This is an extreme example of government-protected business running amok, of course, but it is to the point: when companies are granted a special legal privilege to operate in an arena, they will do anything to protect that status against outside competitors.)

As should be fairly apparent, very little of this actually benefits the consumers. I should say that the majority of the online poker regulations that I have come across are reasonable, but they are also things that any legitimate operator would do anyways. At no time did I ever come across a regulation and think, "wow, that's a great idea, and no one is doing that!" Again, it's not reasonable to expect them to - they're not poker players and they don't understand poker.

It isn't all hopeless, of course. There are certainly some people who will be attracted to regulated poker who might not have played if the situation were the same as the mid-2000s. There is the hope of legalized poker in major markets like California, shared liquidity pools across state lines, and so on. But I cannot see the monstrous profits of online grinders from 2004-2008 ever coming back. I empathize with the individuals who have invested so much into developing their poker game and playing for a living. I think this tweet from Mike "Timex" McDonald encapsulates how many online pros must be feeling (obviously -- it got 89 retweets).

Spend years branding poker as a "skill game". Analyze winrates of top players. Set rake to be slightly more. Our job is now a carnival game
— Mike McDonald (@MikeMcDonald89) October 30, 2014

As seemingly unfair as this moving of the goalposts seems to the players, we all knew the era of big money for the 90th-98th percentile players would not last forever. I don't think the era of the poker pro is done with entirely, but if I were a poker pro, I'd be thinking long and hard about transitioning to the real world. Might I make a recommendation?

[Edit: A few hours after this posted, Ultimate Gaming announced it is closing operations in Nevada. Sadly, a lot of good people there will lose jobs because of it.]

Peer-based marketplaces are awesome!

I recently got back from visiting friends in Boston. Like almost every civilized city in North American now, Boston has Uber. Two major cities which don't have Uber? Las Vegas and Vancouver, the place I just moved from, and the place I'm in right now. The reason, naturally, is taxicab companies being dickheads and using their lawyers to protect their government-granted monopolies (Vancouver, Vegas) . So until my trip to Boston, I'd never used Uber, but I was seriously impressed! It does seem that any consumer mentions Uber, it is with the most glowing of terms.

Is there any doubt that these peer-based marketplaces are the future? Uber and Airbnb seem like the biggest and most used ones so far. I also just hired someone off of Odesk.com to do some software work for me. It's not that it was cheaper (though it was), it's that I literally probably wouldn't have been able to find someone with the skills I was looking for without combing through my social network and asking everyone I know.

This is some serious democratization of both the capital and labour markets, which is awesome. Uber reduces the cost of transportation, Airbnb reduces the cost of housing, Odesk reduces the cost of skilled freelance work. And in many ways, they're not just cheaper than the traditional model, they're better. I way prefer apartments to hotels. I want a fridge and a kitchen, not maid service and a lobby bar. Airbnb was freakin' made for me. Uber has your payment information pre-stored, so you don't have to carry around cash and cards. Odesk -- well, I don't even know where I would have found the person I was looking for if it weren't for Odesk.

There's others that I've heard of but never used like Etsy (arts and crafts), Prosper (loans), Taskrabbit (errands) that continue to break down commerce walls in unique ways to unite buyers and sellers. Of course, the traditional companies (taxi companies, hotels, b&m retail, banks) will try to use their corporate goons to prevent this, but it can't be stopped. It's too awesome.*

This is all exciting as hell to me, and makes me wonder what other peer-based marketplace companies I might not be aware of. Is there a complete list of these anywhere? Please tell me of ones you know of in the comments.



* The more I think about this, the more that I think that the Ubers, Airbnbs, etc of the world have the potential to unify people of differing political views. Left-wing folk often complain about the power of major corporations and that they leverage their size and economies of scale to such an extent that it is bad for the consumer or worker. Right-wing folk are theoretically supposed to be in favour of free markets and lack of government intervention, so it'd be pretty damn hypocritical of them to oppose this. In the end, getting an Uber off a random guy who owns a car and knows the city well is basically the transportation equivalent of buying your produce from the farmers market, instead of the supermarket.