In recent years, there’s been an increased amount of scrutiny on online gambling and in particular, online poker. The states of Nevada, Delaware and earlier this week, New Jersey have approved and launched online gaming markets.

POLITICAL CONTEXT
There has been increased scrutiny from government players with Republican politician, Joe Barton advocating the roll out of nationwide law that will help regulate and legalize online gaming. Barton had introduced a bill in the US Congress that would help create a licensing system for online poker companies. Whilst, this was welcomed by many, it was also simultaneously opposed by many and this can be seen by the fact that the bill was introduced in July and has not made any progress in the last 4 months. Making things illegal can increase the price of the illegal activities – there have been instances in the past where the prohibition of marijuana or the prohibition of texting & driving, went on to increase the occurrence of the prohibited activity post the passage of the law. Pro-online gamers have supported a controlled and closely monitored legalized online poker world. Whilst this is easier said than done, the golden question is whether the government can help the online poker companies to take baby steps in the near future?

ECONOMIC AND ETHICAL CONTEXT
Whilst we are still recovering from an economic recession, arguments can be made to support banning online poker – gambling can easily become an addiction and cause serious mental and economic harm. Having access to online poker via the internet can provide easy access to the wrong individuals which can only exacerbate the current economic condition. But one can argue that similar addictions currently already exist in the form of the lottery, cigarettes, alcohol, drugs etc. Furthermore, the underground gambling market without access to casinos can potentially operate in an open monitored environment and hence enable the government to collect taxes on winnings while enforcing necessary regulations to protect consumers. There are ways to curb abuse of IP addresses, credit cards, age of players etc. by monitoring patterns of play among many other sophisticated security measures. However, is this enough to give parents the comfort that underage children will not have easy access to online poker?

 

COMPETITION
The best form of innovation eliminates wastage in the system and removes inefficiencies. We have seen e-commerce disrupt the traditional brick and mortar retail model benefiting consumers tremendously. E-retailers are able to pass down costs savings from zero physical store rent to consumers in the form of lower prices, better selection of products and quicker & convenient service. This very concept can be applied to online poker — the casino business is a high fixed cost business which runs continuously regardless of the occupancy rate or utilization level. By providing consumers with the ability to play poker online, consumers are able to save money on travel and hotel charges and casino companies can save on rent and other fixed/variable costs. It’s a win-win for both sides of the network. Also, legalization of online poker will be a breath of fresh air for dynamic and entrepreneurial companies such as Zynga, thereby enabling and supporting innovation in the gaming industry.


read more

I like getting stuff for free. I think most people also like free stuff. To paraphrase Professor Edelman, if you want people to use your product, make it look free. The internet has made it even easier to get stuff for free, as consumers. Some companies make money by giving away free products and services to customers and then charging some customers for add-on features, advanced functionality, virtual goods and/or premium services. This business model has been dubbed “freemium” – a term combining “free” and “premium” – by Fred Wilson, a notable venture capitalist and blogger in 2006. Many of us now associate this business model with companies like LinkedIn, which charges customers for premium accounts or additional features such as messaging un-connected contacts. Another notable example is dropbox, which gives users a limited amount of free storage and then charges for additional storage. While this business model has become very popular in the most recent generation of internet companies, it has been in use in the software industry since the 80’s, when “lite” software (limited feature) was given away on floppy disk (or preinstalled on computers) for free to promote advanced paid versions. This is not to be confused with free-to-try business model where full versions are given away for a limited period of time and then require payment to continue to use.

Freemium has been a successful business model for software for a number of key reasons. First, the marginal cost of serving an additional customer is equal to or near zero. Because infrastructure costs (storage, computing, bandwidth, etc.) have decreased significantly, once a product has been developed or new features released, there is very little marginal cost. Secondly, customers are fundamentally attracted to the idea of free and will try nearly anything because they have “nothing to lose”, which does not account for the value of time. Assuming the product is actually useful and creates value for the customer, adopting a freemium model can greatly accelerate user growth. Specifically in software applications, integrating data and being compatible / integrated with other applications increases switching costs for the customer, making the app even more sticky. For these reasons, many companies have successfully adopted the freemium model as a strategy for quick growth and user adoption. Dropbox grew from 0 to 50 million users in less than 3 years.

To the extent that the economics work out profitably varies dramatically across companies, products and customers. One thing is certain, to be sustainable, the free to paid conversion rate and lifetime value of the customer must be greater than the cost to serve all customers. On its surface, the relatively straightforward economic formula should be very clear for any entrepreneur, executive or investor to understand the sustainability of a freemium business. How one thinks about a few key questions will define whether freemium really works:

  1. Who is the buyer? It’s not uncommon for the person making the decision to pay or not to be a different person than the end user. For example, enterprise software where the buyers are IT professionals, but the users are other workers in the company.  Understanding both the user and the buyer is critical.
  2. What is features will be free and what will be paid for? Seems simple, but there’s a delicate balance between creating value for the user, the costs associated with developing and delivering each product / feature and providing significant value for the buyer.
  3. How much do you charge? Not to be confused with how much you can charge. Maximizing the value you create and capture depends greatly on how much value customers derive from the product and how sensitive they are to paying for it.

read more