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"Dotcom shares still spook investors…" announces a news item in March 2005. However, just three months later, the online poker firm, PartyGaming, was floated on the London Stock Exchange for over £4 billion, valuing the eight year old company at more than British Airways. It would seem there are some that are still willing to believe the internet can offer big winnings.

A safer bet?

So will on-line poker prove to be a better investment than other dot.com ventures?

Sites such as Party Poker can be considered as a type of online marketplace. This is a virtual location where buyers or users can come together to find what they are looking for – in this case, a chance to play poker. In their research on business models for electronic marketplaces, Dai and Kaufman identify three basic functions of traditional markets that online markets would seek to replicate; aggregation, matching and facilitation.

Aggregation is the provision of a wide range of goods and services that enables a buyer or user to be sure they will find exactly what they are looking for. As an example of aggregation, there's the vast product ranges offered by online retailers. Matching is the ability to balance supply and demand and is illustrated online by auctions. Finally, facilitation refers to making the process of buying goods or using the service as easy as possible.

So how do the online poker services address each of these functions?

"It's less intimidating for beginners than walking into a casino"

With 1.8 million estimated to play online poker each day, these services can certainly claim to aggregate players looking for a game. PartyPoker alone has an average of 120,000 players per day. With this large number of users, matching supply and demand becomes easier, as observed by one industry expert "you can always find the game you want, at the limit you want, at any time of day". Finally, it has been observed that the online game is less intimidating for beginners than walking into a casino, facilitating the uptake of the game by many new players and allowing them to play at any time of day – or night.

Clicks or cards

Poker also illustrates another emerging lesson from the online world – the importance of a multi-channel approach. While some businesses have thrived with an online only version, most are finding that a mixture of different communication and distribution channels are important. In the case of poker, the growth in the online game is both fuelling, and riding on the back of, a boom in the game in the 'real' world. Much of this is led by the rise of the game on television. The online poker boom has also led to a resurgence of poker at traditional casinos – and at a time when casinos in the UK are benefiting from the recent abolition of the 24 hours registration period and there is a huge expansion planned in the number of casinos in the UK.

The risks

Whilst the foregoing might all suggest that online poker, and the companies that provide such services, will continue to prosper, there are a number of concerns.

An important risk is associated with perceptions of gambling’s potential for social harm (see for example Gamblers Anonymous or GamCare). For this reason gambling is subject to strict legislation in many countries. In the USA, a major market, the federal government take the view that online gambling is illegal, although this has yet to be tested in court. Given that users in the US currently account for 70% of online gamblers and around 90% of the revenues and profits for some organisations, the loss of their customers would wipe out many of the online providers.

"Their customers, by definition, are not risk-averse"

Another risk comes from the very success of these online offerings – and all the attention they are receiving. Descriptions such as "this spews out cash like you have never seen" – are likely to attract other providers into the market. Strategic theory teaches us if a market has low barriers to entry, customers have low switching costs and it is difficult to differentiate your offering, then competition in the industry will increase, eroding margins. In the case of online gambling, entry to the market can be bought for the price of gaming software and the cost of promoting the service. Whilst excellent execution will always differentiate a good organisation from a poor performer, the only clear differentiation in this market appears to be in the aggregation of players. However, whilst encouraging familiarity and building a brand name can help aggregation, by their very nature, these customers are not risk averse and are likely to be happy to move elsewhere if the thrills and stakes are more attractive to them.

It would appear that investors have recognised such risks in the online poker providers. In September 2005, despite announcing strong growth, over £2 billion was wiped off the value of PartyGaming, representing approximately 30% of the value of the company. Concerns included a slow down in the growth of users, the increased costs associated with attracting new users and the lower stakes and less time spent playing by new users.

Perhaps the most interesting question arising from the online poker phenomenon isn't 'Is this a chance for investors or organisations to make easy money?', but 'Why do we still think that online businesses are immune to the rules that apply to traditional businesses?' It would appear that the answer may be the same as that driving the users of gambling sites – a belief that this time it really will be different!

Further reading

• The online gamble – what rules apply for a business when it moves online?
• 'On-line Retailing: Learning from Experience' by H White and EM Daniel, in Journal of Marketing Intelligence and Planning (Vol 22, No 1, p.10-23)
• 'Business Models for Internet-Based B2B Electronic Models' by Q Dai and RJ Kauffman in International Journal of Electronic Commerce (Vol 6, No. 4, p.41-72)

About the author

Elizabeth Daniel is Professor of Information Management at the Open University Business School where she undertakes research and teaching in the fields of e-business and information systems. Elizabeth also undertakes consultancy work for a number of blue chip and leading public sector organisations.