Charles Ponzi came up with a great scheme in 1919. He showed investors huge returns in his foreign currency investment company by paying them off with later investors money. Of course, when the money ran out the whole thing came crashing down around his ears. Classic pyramid schemes basically rob Peter to pay Paul.
Internet poker is not necessarily a classic ponzi scheme. They are not paying the old players with new players' money. Actually, in a fair envoronment that would happen naturally. However, online poker bears some similarities. The economics of online poker do not support long-term viability. Think about the way a bank operates. They have a large pool of deposits which they loan out. Interest on the loans pays for a smaller interest rate on the deposit. In theory, the overall pool of money in the bank grows as deposits earn interest. Internet poker sites also have a pool of money on deposit. However, they are constantly raking the players and taking money out of their pool of funds.
Plugging the Leaks
So how do these online sites avoid going broke? There are two ways, and both are short term fixes. First, they can solicit more deposits. New money coming into the sites provides parity, keeping the overall pool of deposits level or growing. However, the rake continues, so more and more deposits are needed. This is sustainable only if the profits are somehow funneled back to the community from which they come by the poker sites. 80% or more of the customer base resides in the United States. 100% of the profits from online poker are taken by companies outside the United States. Banks funnel money back to their communities in the form of interest and capital improvements facilitated by loans. The wealth created comes back to the bank in the form of more deposits, and the cycle runs upward. The profits taken by internet poker sites has a long way to travel to get back to the community from which it came in order to be recycled into the system.
The second way online poker sites can sustain their unsustainable business model is to rake the players less. This would slow down the rate of the depletion of the pool of funds. Outrightly reducing the rake would create a "price war" among the poker sites and the resulting slippery slope would decimate the margins industry-wide. Some sites are trying creative ways to reduce the effective rake without actually lowering the sticker price. Absolute Poker offers bonuses non-stop, giving a little bit back to the players. Other sites such as Crazy Poker, True Poker, and Superior Poker offer rake back, allowing players to get a percentage of the rake they pay back on a regular basis. This reduces the effective rake that the players pay without reducing the amount collected. Again, these methods only slow down the rate of depletion. Some sites have actually gone the other way, increasing the rake to increase short term profits. Party Poker has increased the rake on their 6-max tables in order to show higher profits to their investors in the short term. This actually accelerates the rate of aggregate player losses.
The Future of Internet Poker
There is no question that poker is booming. Interest is at an all-time high as more and more new players of all ages flock to the game. However, eventually all of the people who are going to play are going to start. Right now people from all demographics are signing up for Online Poker. What happens when the older market is tapped? The industry will have to rely on growth from young people who become old enough to play. This will slow the growth rate substantially. Also, eventually the bad players will lose their money, assuming the dealing is fair and balanced. With a shrinking player base the industry will contract.
The internet poker industry can respond to this in two ways. They can either increase their per player profitablility or they can try to grab a bigger piece of the shrinking pie. Regardless of how the sites approach a shrinking market, there will be consolidation and failures. This has already begun, as online poker sites buy each other and/or fail. Obviously internet poker will never go away completely. There is enough disposable income in the world and especially in the US to support the rake. However, it will definitely slow down.
