Great brands and great companies are a rare commodity. When a company builds its brand by creating a high quality product or service and builds a trust amongst its customers/clients the results are incredible. Think Tesla, Apple, Coke, and I could go on with many more. Those are truly great American companies with incredible worldwide brands. PokerStars was/is also an incredible brand in the poker industry. People love it! They love the customer service, the software, the payouts, and they trust PokerStars to be the best in the business. Today all of that is at risk in part because of the PokerStars rake increase. We may be witnessing the end of the greatest brand in poker. Let’s take a look at some of the details.
As a former Investment Banker for JPMorgan securities I can see the “genius” behind this transaction. Amaya is worth (market capitalization) of approximately 4.29 billion today. When the PokerStars merger was announced they were valued at only just over 1 billion. How does a 1 billion dollar company buy PokerStars for 4.9 billion? The answer is of course leverage and debt. Amaya gaming has taken on far more debt than their company was worth in order to buy PokerStars.
Some of you may have thought that it doesn’t make sense for Amaya to hurt the brand of PokerStars. Unfortunately, I have bad news for you, it does make sense for them. Amaya has taken on an incredible amount of debt and they need the cashflow, today! Building or even maintaining the business are only secondary considerations. The reality is that PokerStars was undercharging relative to the industry averages and they did that with a long term vision for building a great company. Today that long term vision dies and PokerStars exists to pay off the debt that has been taken out on it. If that means raising rake further that is exactly what will happen. At this point maintaining the brand is a secondary consideration. First, the debt must be paid by you!
Tough question to answer. I spoke with a fellow poker player on Stars earlier today and he basically said, “It is against Amaya’s interests to hurt PokerStars.” Is it though? Unfortunately, there is a decent possibility this is not the case. Why? Because Amaya took on a ton of debt to finance this deal and immediate cash flows are their biggest concern. If they don’t pay their creditors the whole company dies.
Scenario #1 Amaya’s buyout of PokerStars is a complicated leveraged buyout funded (in part) by Blackstone. Take a minute to consider a simple scenario. You have only $10,000 to your name but are allowed to finance a $1,000,000 purchase of a pub. The pub is incredibly popular, prices are low, and live entertainment is frequently offered. People come from all over the city to go to this pub because it is so cool. Their “brand” is incredible. However, the pub only makes $100,000 per year and you need at least $120,000 the first year to finance the debt. What are you going to do? The simple answer is raise prices. Unfortunately, there comes a point where you will kill the golden goose. Amaya is currently trying to thread the needle of raising prices enough to finance the debt they have taken on while not completely destroying the business. Whether they succeed or not remains to be determined. Unfortunately, it may be in their interests to continues squeezing the margins of poker players. Realistically very few PokerStars regs will be willing to leave as a result of price increases. Why? Because PokerStars essentially has monopoly power over the regs. Monopoly? Sure I know there are other operators out there but there are none that offer the same liquidity that Stars does. In an industry where liquidity often equals profit for regulars this means Stars is the only game in town. As for the recreational players most of them don’t care. Sure the odd one might like that guy who recently posted on two plus two recently but not that many will. This brings me to my next question…..
I think there is a really good chance we see this in the next 6 months to 1 years. They will certainly do it if they think they can get away with it. Amaya has no qualms about making move after move that hurts poker players. The recent changes may just be a precursor of more changes to come. Ex. I still think there is a chance that PokerStars will be exiting more markets like Canada in the near future(see article PokerStars Leaving Canada). There is a new boss in town and this one doesn’t think like the old one….. Old school PokerStars was willing to skirt and even break laws at times while providing online gaming services all over the world. The new bosses will be far more concerned about legal liability, criminal liability, etc etc.
Lol, I think this is a very clear no. The industry has been in steady decline and there isn’t much reason for somebody to invest a huge amount of money into this industry. Also, if anybody did invest the money then Stars would just match or beat them on prices for a while. Poker players tend to be pretty focused on the bottom line and they would quickly forgive PokerStars if the rake went back down. Hence we get the environment we deserve. Poker players happily supported Stars as it became a monopoly and destroyed the rest of the industry and now they will suffer as Stars (Amaya and Wall St) reap the rewards of monopoly power.
Amaya’s takeover of PokerStars has dramatically altered the rules of engagement between PokerStars and the players. Before PokerStars was run with an ideology that focused on making it good for the players and benefiting as a result of providing a quality product that poker players loved. The business thrived even in a tough environment by stealing market share away from all other participants in the industry. Today the ideology is dominated by clever businessmen who are looking to extract every dime from a well built company. With no more market share growth to be had their only option is to take advantage of their monopoly power to squeeze poker players margins. Amaya will extract every dime they can from the poker community and much of it will end up in the hands of the creditors. Surprise, Wall St wins again…. Sorry for the depressing article but I think this one is fairly clear. What remains to be seen is how much the brand will suffer. The less the brand suffers the more likely they are to aggressively squeeze margins. Time will tell….
Author: Exploitive No Limit Holdem