Most people who don't own or run a business assume they are run in similar fashion. Even with some additional education, you are taught that a typical retail business involve goods being purchased from a vendor, "keystone it" (i.e doubling the price of purchase) and sell it within a reasonable period that often can be accelerated through special sales or incentives. That formula works if all the conditions are right; that there is an ease and reliability of purchasing, that there is little risk to your business and that you have sufficient turnover. But the reality is many businesses have to deviate from that model due to one or more of those conditions not existing.
I'll use the example of an art gallery because I owned one for twelve years before I entered the poker world. The typical gallery markets consigned artwork (i.e they don't own it/invest in it), receiving 25%-50% of the sale price. They can afford to receive a smaller percentage than typical retail because they run no risk related to the inventory. They must market, display it, and sell effectively, but if a show doesn't do well one month the art is returned to the artist and they start anew with a fresh inventory of art the next month.
My gallery deviated greatly from the standard gallery business model. The artwork mostly came from Zimbabwe, a troubled country half-way around the world. Considerable time, effort, and expense was involved in procuring the artwork directly from the artists throughout Zimbabwe and arranging its delivery back to the gallery. Without going into too much detail, I will say that doing any business in Zimbabwe is an extremely challenging affair. It wasn't feasible to consign the work as the cost to return the work was too great, so I purchased most of the art months in advance of it arriving at the gallery.
The unique dynamic of my gallery meant I had significant capital tied up in the art for long periods of time. Without a monthly "must sell or it's gone" dynamic that most galleries artificially create, the permanent exhibition model can lead to a slower sales environment. As a result of these factors, it was necessary to have much larger margins on the artwork to cover all the additional costs and risks when it eventually sold. Unfortunately, this often created a tension with new customers. They would naturally assume we operated like other galleries, so it was necessary to simplify and explain the specific circumstances of our gallery. Much like in poker where the unknowing will come in with preconceived notions and blindly ask "but how much did you lose?" in the gallery it was "how much does the artist get?" For the dozen years that I ran the gallery, overcoming their pre-conceived notions never dissipated. So when conditions continued to worsen in Zimbabwe and the U.S. economy was slow to recover, I realized it was time to move on.
Relating this business discussion to the online poker world, we have learned in the nearly six weeks since Black Friday that U.S.-facing online poker rooms didn't operate as we imagined they did. Much as the customer walking in blindly to my gallery would, we assumed that PokerStars and Full Tilt were operating lawfully as they might in a regulated and legislated environment. They weren't. With the significant UIGEA obstacles in place, they faced challenging dynamics to the more traditional poker room business model that led them to consider non-traditional and as we are learning now some illegal methods to manage aspects of their business.
In a licensed and regulated market with a limited and controlled environment of competitors, you can map out your business with many of your variables already considered. In the unregulated and post-UIGEA environment U.S.-facing poker rooms didn't have that luxury. In order to maintain and grow their business while giving the appearance of smooth and efficient operations, they were making some questionable decisions.
I unknowingly encountered this at PokerCurious several months ago. I used to host four weekly freerolls for members on Full Tilt Poker. I would fund the freeroll prizepools from my Full Tilt account. Every few weeks I would transfer funds to that account via electronic deposits from my PokerCurious bank account. Each time I deposited via the Full Tilt Cashier, the money was instantly credited and available. But we know it takes time for the money to actually be taken out of your bank account and arrive at Full Tilt. Somewhere along the line, Full Tilt decided to start fronting the money to players temporarily and assume the risk and float until player funds arrived to them.
Then some time after that I noticed that the bank account balance was larger than expected at the end of the month. I didn't dig very hard to discover why, because my Full Tilt deposits had been working smoothly for many months and who doesn't like a larger than expected balance. It turned out that I had stumbled onto the next decision that Full Tilt had made. Sometimes they weren't able to access the money that players tried to deposit via the various Cashier methods. Instead of making a fuss or reversing your balance, they absorbed it as a new cost of doing business.
That decision was finally made public and clear in a paragraph within the recently released Franzen guilty plea agreement and DOJ press release:
"FRANZEN admitted that in early 2011 he had been asked to help Full Tilt Poker deal with a $60 million shortfall created by the company’s inability to find a payment processor to process transactions involving U.S. player accounts. The company was facing the shortfall because it continued to credit funds to player accounts despite being unable to actually debit (or "pull") funds from customers."
Not only was Full Tilt instantly crediting as yet unreceived funds from depositing players, but they chose to allow those credits to stand even when they were unable to actually collect the money from the player's banks due to their difficulty in processing deposits in the post-UIGEA environment.
At this point, we don't know how long Full Tilt was crediting accounts to the tune of $60 million in unreceived player funds, but that is a huge additional and unexpected cost of business they absorbed as they tried to maintain the facade of a smoothly operating depositing, playing and withdrawing poker environment.
Additionally, Full Tilt and PokerStars received considerable and justifiable scorn for choosing to miscode transactions. Irrespective of its illegality, it seemed like an unnecessary money grab to avoid the roughly 7% transaction fee and slower processing compared to the swift roughly 2% transaction fee if they miscoded the transaction.
Their alleged decision to purchase a bank, launder money, pay off bank officials, and commit bank fraud were clearly the actions of a desperate business. Their decision to co-mingle player and operating funds, which were seized by the DOJ on Black Friday leading to the extensive and ongoing delayed return of player funds back, was in retrospect highly suspect.
While I am not excusing Full Tilt in any of their decisions, my experience in having worked in a challenging and unregulated economic environment is that it introduces many tough decisions. There was no guidelines or set formula for how to run my gallery. It had never existed in the Portland before, with only a few in the entire country. No one could tell me how to manage it or how to buy or sell the art. I learned by doing, attempting to employ reasoned and ethical decisions along the way. But those decisions can always be seen from different perspectives that might see it otherwise.
In the end analysis, Full Tilt's questionable business decisions make a strong argument for creating a licensed and regulated U.S. online environment where all poker rooms can operate on a level and legal playing field as soon as possible. When businesses conditions are unclear with many uncertain variables, negative human-nature elements such as greed will prominently creep into the equation. I believe if Full Tilt had been operating in a legislated and regulated U.S. environment, none of these questionable decisions would likely have occurred.