A Tale of Two Cardrooms

PokerStars vs. Full Tilt Business Choices Pre-Black Friday

PokerStars vs FullTilt"Oh, what a tangled web we weave
when first we practice to deceive!" -- Sir Walter Scott

As I write this at the start of 2018, it might seem the sordid saga of the failure of the original Full Tilt Poker has been beaten to death. But I think a lot of the looking back that happens still doesn't fully understand how things were then and why things got how they did.

We do know for sure that before online poker's Black Friday in 2011 PokerStars was the world's #1 online poker room and Full Tilt was second. But even that is misunderstood by most people today.

I was one of the founders of PokerStars, so you can consider anything I write here with that grain of salt, but anyway, after several attempts to write something shorter than a novel, I'll structure this article into bullet points...

1) not only did PokerStars have all player funds safely segregated, but it had enough assets also sensibly saved so the company could pay the US government a $731,000,000 settlement that included buying the Full Tilt assets and paying off players who would have been left high and dry otherwise.

2) in contrast, Full Tilt had literally zero -- zilch, nada, nothing -- company funds in reserve. According to the DoJ, by November 2010, Full Tilt Poker owed players about $344 million but had only $145 million in its bank accounts. This amount shrunk to owing $390 million to players in April 2011 while only having $60 million in their bank accounts. The DoJ further declares the amount of "phantom deposits" to be $130 million.

3) in addition to holding hundreds of millions of dollars in reserve for a "rainy day" (instead of disbursing those funds to shareholders), PokerStars paid its shareholder dividends on a quarterly basis. In contrast, Full Tilt made shareholder payments on a monthly basis, probably because some shareholders were degenerate/junkie gamblers who needed more-more-more money now-now-now to feed their gambling (or lavish personal spending) habits.

4) looking at traffic numbers, it appeared that Full Tilt was about half the size of PokerStars, but in reality it was far smaller. Remember, about 1/3 of the $390 million in player funds Full Tilt was supposed to have was "phantom" money. It never existed. Those players who deposited phantom money were actually phantom players. Those players who won pots from phantom players then themselves bet this phantom money, sometimes winning from other players and sometimes losing and passing on the phantom money to others. Imagine if over a period of time a brick and mortar casino like the Commerce Casino had 50% more cash on its tables and a lot more people coming in and out to play. The Commerce would certainly appear busier and bigger than it was -- which in turn would draw more people to its greater variety of games. Additionally, PokerStars had far more tournament action than Full Tilt (PokerScout does not track tournaments). Bottom line, to throw a ballpark number out there, let's say Full Tilt Poker was actually only about 20% the size of PokerStars -- in terms of games based on actual deposits. (Looking at the numbers in #6 and further below, Full Tilt was even smaller still in relative profitability.)

5) I know Isai Scheinberg was frustrated by FTP looking like it was growing closer in size to PokerStars than it was, but he did not give in to the temptation to also take phantom deposits. This decision was one of the key moments in online poker history, and reflects the difference between a sensible person with a longterm vision who thinks doing things right is the way to go and a company with a reckless junkie now-now-now philosophy.

6) According to the DoJ, between 2007 and 2011, Full Tilt dispersed about $444,000,000 to shareholders (about $10 million a month). As noted in #2 above, in April 2011, Full Tilt had $330 million less cash on hand than needed to simply cover player deposits. This means that $444m - $330m... during this time 2007-2011 period any dispersals over about $114,000,000 were always knowingly never actual profits and at best reckless (though "reckless" is a pretty tame word to describe such behavior). Forget about saving for a rainy day. These actions are what a person might do if a debt collector thug was kicking down your door... and yet, the company was actually making over $100,000,000 during this time!

7) Suppose you reading this article owned a piece of the second largest online poker room in the world. You'd think that was pretty cool, right? If you were such an owner, what would be one of your highest priorities? How about: don't screw anything up!!!! Being the second largest online poker site generated huge profits. Why would anyone, even junkies, risk the second-largest position in a wildly desperate gamble to try to be first? Who thinks like that?

Well, apparently greedy, degenerate junkies do.

Prior to Black Friday, everybody with any sense knew offering online poker had risks, because most countries had laws written before the advent of the Internet. (A similar situation exists now with cryptocurrencies like Bitcoin. Laws in 200+ countries written in the 20th century never considered cybermoney.) One way to deal with risk is to set funds aside, be careful with your enormously profitable assets, and to diversify your income streams (by design, far less than 50% of PokerStars players at the time of Black Friday were from the US; the vast majority of Full Tilt's players, especially the phantom ones, came from the US).

Instead of these "rainy day" ideas, Full Tilt dealt with risk by deciding to disperse to shareholders not just every dollar of profit it could, but even funds beyond that. Think of how absurd this is... Full Tilt paid dividends to its shareholders from the "income" derived from the rake of phantom money! Wouldn't paying dividends on phantom income taken from phantom rake that existed because of phantom deposits give even a junkie pause?

Apparently not.

And then there is this "bridge too far" that truly boggles the mind... Full Tilt Poker loaned money to shareholders with the collateral being their future monthly shareholder payments from phantom profits! It's hurts my brain to even think about how this could possibly happen. In the first place, how degenerate does someone have to be to need an advance/loan when you are getting paid dividends on a monthly basis?! (Clonie Gowen's lawsuit against FullTilt claimed she had a 1% share of the company, so presumably every other founding shareholder had at least that much of a stake, meaning if $10 million was paid out every month, the minimum amount any original shareholder was getting was $1.2 million a year.)

Forbes Magazine published an article about the process of Amaya shopping the idea to buy PokerStars to investment bankers, calling the company "a literal cash machine, making $417 million annually on $1.13 billion in revenues" and quoting the buyer as saying PokerStars "was a phenomenally well-run company."

While I wasn't involved in the bean-counting/dispersals/financial decisions part of the PokerStars business, I personally am proud of having been involved with a company where doing things right, doing things better, doing things best, was the basic philosophy of the company, whether talking about the poker stuff, the software stuff or the corporate stuff. I'm glad to have been involved in creating something with people who had a longterm vision and wanted to make something lasting.

And I'm glad not to have been intimately involved with a company that seemed to be guided by the need to maximize the shareholders' ability to put a bet down on the second half of the Packers game.

Full Tilt had a large collection of people involved at the shareholder level of the company. At the very least, every one of them had a responsibility to do more than just cash their monthly profit checks -- responsibility to other shareholders, responsibility to employees working under an assumption of good faith, responsibility to players, and even a responsibility to themselves.

On the other hand, if you are part of a company making net profits of about $25 million a year but paying out dividends of $10 million a month... well, "responsibility" may not be in your vocabulary.

You reading this, don't get me wrong. I'm not saying I'm special and was smarter than these Full Tilt shareholders. I'm saying a shoebox full of dirt was smarter than the apparent operating philosophy of these Full Tilt degens.

See also When Chris Ferguson Almost Became the Face of PokerStars and The Online Poker Industry Evolution