Legalization and regulation have changed the online gaming landscape in the United States. With three of the 50 states offering legalized online gaming, and several others considering it, the industry is engaged in some serious soul-searching, and no part of the iGaming industry finds itself at a greater crossroads than affiliates.
Affiliates have been an integral part of the online gaming economy since the earliest days of the industry. In many people’s minds, iGaming affiliates deserve much of the credit for the success of online gambling, but many people also point out the practices of unseemly affiliates, blaming them for some of the industry’s current problems.
Legalization was supposed to eradicate these bad actors from the industry. Unfortunately, some of these dubious affiliates are now present in the regulated markets, and regulators, new to the task of all things online gaming, are struggling to stamp out their undesirable behaviors.
Before diving into the current struggle between affiliates and regulators, it’s important to provide the back story of affiliates in the online gaming industry.
Witness the Wonders of iGaming
Affiliates are, for lack of a better analogy, the carnival barkers of the iGaming world.
Their singular mission is to steer potential customers toward the online gaming sites they promote on their websites.
Some are content providers, offering visitors to their site unique perspectives on the industry, strategic tips and/or data analysis, which allows them to convert players in a very organic manner. Other affiliate websites engage in a more transparent tit-for-tat approach, offering potential players rewards, ranging from free gift cards to free poker bankrolls, in exchange for signing up under their affiliate banner.
Affiliates in the online gambling world have historically performed their duty in exchange for a one-time fee, or more commonly, for an ongoing share of the revenue generated by the players they send to the sites. And it’s the latter revenue-sharing arrangement that many people feel has led to most of the problem behavior in the affiliate market.
Incentivizing the Wrong Behaviors
By offering affiliates a share of revenue instead of a one-time CPA (cost per action/acquisition) payout, online gaming sites unwittingly incentivized affiliates to go after high-volume players instead of new players. It didn’t take affiliates long to realize that attracting a single high-volume was worth more to their bottom line than 1,000 new players.
This created an environment where the affiliates and the online gaming sites they were promoting had contradictory goals. iGaming sites wanted new, depositing players. Affiliates wanted high-volume winning players, and the revenue-sharing deals greatly favored affiliates.
When online poker and online gaming was booming in the early and mid-2000s, this arrangement was mutually beneficial, as affiliates prospered along with the online poker sites they promoted and there was plenty of money, and players, to go around. But, because there was so little regulation, when times got harder, some affiliates sought shortcuts, and the iGaming affiliate industry became far more cutthroat.
Having seen firsthand what happens under a revenue-sharing model, PocketFives.com cofounder Adam Small says, “Affiliates should always be paid today for the work they do today, and every deal should include one or both of these things: fixed fees and CPAs.
“The early years of online poker were such a disaster affiliate-wise. A lot of players were brought in, but at incredible cost to operators in terms of how it limited their long-term upside.”
The Dark Times
When the industry started to decline due to legislative hurdles in the U.S., and the Balkanization of European markets, some affiliates increasingly turned to shady practices to keep the money train chugging down the tracks.
Following the passage of UIGEA (Unlawful Internet Gambling Enforcement Act) in 2006, and the subsequent developments on April 15, 2011 (Black Friday), the lucrative U.S. online poker market was severely eroded, and much like the high-volume players they were sending to online poker sites, affiliates started cannibalizing one another.
Poaching high-volume players from other affiliates was a common occurrence, as were secret rakeback deals and other “privileges” ranging from something as mundane as fronted withdrawals to the utterly repulsive, such as setting players up with VPNs (virtual private networks) or the use of other players’ accounts.
While some affiliates engaged in these practices, the majority of affiliates were simply the victims of these disreputable tactics, figuring they could bide their time until iGaming was legalized and regulated, and the regulations would put an end to these types of disreputable practices.
The hope was, the good guys would come out on top and the bad guys would be punished and ostracized.
As Small puts it, in a regulated market, “affiliates should be required to demonstrate some actual value to the operators and the market at large. They shouldn’t simply be ranking in Google for ‘Party Poker Deposit’ or be offering special deals to players via private message on a poker forum. They need to actually be working to grow the sites they’re marketing, and the market as a whole.”
Thus, far removing parasitic affiliates has proved to be a more difficult task than first expected.
What Are Regulators Doing?
When Nevada, Delaware and New Jersey regulated online gaming within their borders, one of their goals was to cleanse the industry of these bad actors.
To accomplish this mission, regulations in these newly legalized markets extend far beyond the operators and software providers. For the first time, U.S.-facing affiliates found themselves under the sway of local regulators, subject to the same vetting and licensing processes to which any significant casino vendor must submit.
For instance, affiliates seeking a license in New Jersey’s regulated market must first part with a non-refundable up-front licensing fee of around $2,000, as well as submit to an extremely invasive background check that includes past tax returns and fingerprints, according to Jeremy Enke, a longtime online poker affiliate who now works for Pala Interactive.
Many affiliates decided the licensing fee and suitability check was unwarranted and continued promoting offshore sites in lieu of the regulated sites in New Jersey.
Others, seeing long-term potential, jumped through the Division of Gaming Enforcement’s hoops and received their license.
Unfortunately, some tried to have it both ways. These affiliates went through the licensing process but thumbed their noses at the regulations, bringing their dishonest business practices to the U.S. regulated online gaming markets.
What these affiliates didn’t anticipate was regulators actually enforcing the rules.
The DGE Steps In
In New Jersey, several licensed online gaming affiliates were double-dipping—promoting both licensed and unlicensed sites—and the DGE was forced to step in.
In April 2014, the DGE sent six cease-and-desist letters to these licensed affiliates, warning them that their practices were in violation of the state’s Casino Control Act and could lead to prosecution if the links to unlicensed sites were not removed.
Two of the affiliates that received the C&D letters, PokerSource.com and RaketheRake.com, complied with the DGE’s demands.
Another affiliate website targeted by the DGE, RakeBrain.com, decided to continue promoting unlicensed sites while expunging New Jersey’s licensed sites. This is something Small suspects most affiliates will choose. “I doubt more than a handful of affiliates will choose the regulated New Jersey market over promoting offshore sites to the rest of the states,” he says. “There just isn’t enough leverage right now.”
A final affiliate, which operates two of the sites named by the DGE, CardsChat.com and PokerSites.com, has apparently decided to test the DGE’s mettle. At the time of writing this affiliate continues to promote unlicensed sites along with licensed sites.
It’s a risky gambit, but it’s also the more profitable one—for now.
DGE Creates an Affiliate Bright Line
In June, the DGE followed up on its previous C&D letters by issuing an advisory bulletin to clarify the regulations iGaming affiliates must abide by, and to issue a final ruling on what, if any, punishments would be handed down to the affiliates they caught double-dipping last year.
The bulletin created a bright-line date of June 4, 2015, and gave any licensed affiliate still promoting unlicensed U.S. sites 150 days to remove them from their websites.
The bulletin extended an olive branch to affiliates who previously promoted unlicensed sites (prior to New Jersey’s iGaming industry going online on November 21, 2013), with the DGE stating that this would no longer cause the affiliate to be found unsuitable, so long as they ceased promoting unlicensed sites within 150 days of June 4, 2015.
This decision has opened the door for many affiliates previously deemed unsuitable by the DGE, as well as providing these affiliates with a carrot to chase, as they must now make the decision to either enter the regulated market or forego it in perpetuity.
Second, and more controversially, it granted affiliates who were caught double-dipping amnesty. The DGE said it would not punish currently licensed affiliates that were promoting unlicensed sites so long as they comply within the 150-day window.
For some, this was too much of a slap on the wrist.
One licensed affiliate, who wished to remain anonymous, called the ruling “a punishment on the affiliates that made financial sacrifices in order to conform with the state’s regulations.”
“Affiliates who consistently bring in low-value players or who are found to be cheating the system in any way should be banned from operating in that market,” Small says. “If New Jersey actually starts prosecuting affiliates—including ones in other states or countries—who promote offshore U.S.-facing poker sites, the results of this move will be a lot more interesting.”
The Regulated Market Conundrum
It may not go as far as the above-the-board affiliates in New Jersey would have liked, but what the advisory bulletin does is force other affiliates, the ones on the fence, to make a difficult choice. Do we cut ties with the offshore sites or do we swear off the regulated U.S. market forever?
This is a much harder choice than it appears.
As Small indicates, there simply aren’t a lot of economically viable business models for affiliates in the current regulated markets. “New Jersey is the biggest regulated market in the U.S., but it’s still a very small market,” he says. “It’s a challenge to find an economically viable way to create enough content to make a site sticky for that kind of local, niche audience.”
A quick perusal of PokerScout.com corroborates Small’s comments. Average cash game traffic at the five major offshore poker sites/networks operating in the U.S. is in excess of 3,000 players. Comparatively, average cash game traffic at licensed online poker sites in New Jersey, Delaware and Nevada is less than 500 players combined.
Small sees this market size discrepancy between regulated and unregulated sites as the biggest barrier for affiliates in regulated markets. “The tradeoffs aren’t worth it for affiliates that simply have their own short- or medium-term financial interests in mind,” Small says. “Affiliates, by and large, are choosing to continue to promote offshore because there’s so much more money in it at the moment and for the foreseeable future.”
Another affiliate, who wished to remain anonymous, is even more blunt about this issue, calling it “a bad business decision to be a legal affiliate because the market is so small.”
Not only is the unregulated market six times larger, it’s also more mature. Affiliates who have been promoting these offshore sites for several years already have a strong core of players at these sites. They would lose the revenue they receive from these players if they were to end their association with the offshore online poker sites they currently promote.
Because of these factors, affiliates who decide to make the switch to regulated markets are likely going to have negative margins for the foreseeable future.
For some affiliates, being among the first wave to promote the regulated markets is a solid long-term investment. But for others, it’s not an option at all. Losing their current revenue and operating at negative margins would simply put them out of business.
“We see long-term value for our brand in this decision,” Small says. “But most affiliates aren’t in it for the long term.”