Last week’s exit from the formally regulated New Jersey online poker market by Bovada marked a clean sweep for the US state’s legal authorities in ridding the state of unwanted offshore competition to its newly licensed online poker sites. The New Jersey Division of Gaming Enforcement (DGE) had sent out a formal cease-and-desist notice to six major, US-based online poker affiliates, demanding the removal of sign-up links and banners promoting the offshore sites.
In at least some of the cases, the affiliates in question appear to have been promoting both the regulated and offshore offerings at the same time. However, when New Jersey made online poker expressly legal and created a mechanism for its Atlantic City casinos to offer poker and other forms of online gambling, it also signed into law language that made the offerings by unregulated offshore sites expressly illegal as well.
That the New Jersey DGE targeted the US-based affiliates rather than attempt to take on the offshore sites themselves is a simple matter of applying pressure to the weakest link, but it also highlights a long-running problem with the traditional affiliate model itself. Such models – in which the affiliates themselves receive payment based either on conversion rates or earned revenue (or a combination of both) – have the perceived legal effect of making the affiliates an agent of the offshore site, and therefore a part of the business that is engaged in what states such as New Jersey believe is illicit marketing behavior.
This is the same principle the US Department of Justice employed when it came time to construct the remission (refund) process for former players of the original Full Tilt Poker, which failed in April of 2011, leaving a nine-digit hole in the collective pockets of its players. Non-US Full Tilters were refunded in a year or so, while the site’s American players had to wait roughly three years for their refunds, a process which continues even today.
Yet one category of player balances remains notably excluded from the Full Tilt refunds: True affiliate payments for signups of other players that were then dumped into affiliates’ own FTP accounts. The DOJ at first said no affiliates would be refunded, on the legal basis of their having served as agents of a “fraudulent business enterprise.”
They later relented and a compromise was reached when players who were inaccurately tagged as affiliates fought for the portions of their player balances that were due to actual poker play (a process assisted by the PPA). It turned out that the original Full Tilt threw “affiliate” tags around like candy, as a way of giving rakeback deals to friends and friends of friends who otherwise didn’t qualify. The mess that that practice created almost caused tens of millions in balances to not be refunded.
The core problem, though, was the affiliate model itself. That’s how the online-gambling world evolved in its earliest days, and it never changed, even though such models are far more suited to new and expanding markets than they are to maturing, competitive ones, particularly in an era of increasing government oversight. In a stagnant or evolving market, affiliates often engage in price wars, trying to steal larger slices of an existing pie rather than developing new business, and that’s been a bad part of the online-poker business as well.
What’s happening now with the US market may finally represent a tipping point: For a lot of affiliates, trying to do online poker business in a regulated US market represents a lot of overhead with the possibility of very little reward. Nevada regulators want $5,000 per affiliate license; New Jersey’s is less, but still expensive at $2,000 to start.
Now, consider that every US state that regulates online poker will likely charge a similar fee, and it’s easy to see that an affiliate could spend $100,000 just to serve the fledging US market. That’s a hundred grand that affiliates have never even had to consider before, an upfront expense and a barrier to business that’s going to get rid of a lot of the small fry. Reportedly, only one traditional online-poker affiliate even applied for Nevada licensure in the first months of that state’s application process.
Such hyper-regulation and balkanization of the US market echoes what’s gone on in Europe, but in this case it’s the affiliates that are facing the financial hammer. In the US, affiliates not only have to face these new licensing fees, but also have to face the potential legal threats if they continue to support unlicensed, offshore sites. Such risks are on the wise and represent a real expense whether or not a federal authorization (or ban) is passed, or whether or not a given state – say, California – chooses to authorize or regulate online poker.
Whether or not it’s done by the feds or the states, all US states will eventually deal with online gambling, either banning it expressly or by regulating it, but by declaring the competing activities of offshore sites (and those who support them) illegal.
That’s an interesting pickle for online poker affiliates who are based in the US. They’ve operated in a gray market for a decade, but one way or the other, future regulation will erase that gray area.
How, then, will the industry evolve? The easy answer is to abandon the traditional affiliate model. In that scenario, affiliate link farms disappear for lack of real content, and the online sites themselves support news and other poker-content outlets through traditional advertising and referrals not tied directly to the business model. That saves affiliates from having to be rescued from situations such as New Jersey, where the largest remaining US-facing sites had to yank their links from the targeted affiliates
However, that easy answer is on the far side of a vast gulf from where the online-gambling world sits today. It might not even be the right answer. What is for sure, however, is that the current affiliate model for online gambling is the wrong one. As the US market develops and matures, we’ll see more evidence of why this is so.