Given the recent legalization in NY, and that NFL opening kickoff is just 15 days away, I’ve been thinking a lot about the current and future state of DFS. I am not an investor in either of the well-known unicorns, and I’m ignoring legal issues, so most of my perspective is that from an avid consumer.
For some personal context, I have been playing fantasy sports in its different varieties since the late 80’s (when we would track baseball stats by hand using the weekly USA Today). I was an early adopter to DFS, playing both on FanDuel and DraftKings. I’m also an investor in a hedge fund that was established to play these sites (yes, they exist — more on that later). and have seen some of the inner workings. Before DFS, I was an experienced online poker player (supporting myself through law/business school) which has inspired much of the business model and software behind DFS, and is a good comp to understand where the industry may go.
It doesn’t matter if DFS is a game of skill or luck — either way the majority will lose their money over time
It’s important to understand the standard business model — players do not play against DraftKings and FanDuel, but rather against eachother. The obvious analogy is casino games — DFS is akin to the poker room, not the blackjack table. DFS sites earn their money by taking a rake, or a percentage fee of every contest entry. Standard is around 10%. So basic example, 100 people enter a $10 contest, the prizepool will be $900, with the site keeping $100. They don’t care who wins — as they say ‘the house always wins’.
Now if you take the argument that DFS is not really a game of skill (what you’d really be arguing is that the sites price all of their players perfectly efficiently, so it doesn’t matter who you select), players are certainly destined to lose. Variance will do its thing, but over time, they have a negative 10% ‘deficit’ on every bet made. Over time (the more you play the quicker it will go), you’re destined to go broke. This is the ‘model’ that drives the standard gambling industry — pick a side w/ a 50% chance of winning, but pay out an extra 10% ‘vig’ when you lose. The other obvious analogy here is the lottery.
Now if you take the argument that DFS is a game of skill, most people will STILL eventually lose all of their money. The relevant equation is ‘edge’ v. ‘rake’. The rake here is 10%. So the average player will lose 10% on the average transaction. You don’t just need to be above average, but enough to ‘beat the rake’ to be a profitable player. Unfortunately, this is much harder to do than most realize. So it really just winds up being ‘rate of loss’ — below average players lose money at a scary-fast pace, average players lose gradually, and slightly-above-average players lose slowly. There is room on this bell curve for winners — but it’s a tiny fraction, and most of them are pros (more on that later).
That being said, it is clearly a game of skill
While luck can certainly play a factor in any single contest (just like any single poker hand), over time the variance is flattened, and ‘edge’ is all that matters. The data is pretty clear here. Exacerbating this is that it is very hard to ‘spot the sharks.’ You’re not going the challenge Michael Jordan to a game of 1-on-1, or sit with deep stacks at a table full of poker pros — but that’s exactly what you’re doing most times you enter a DFS contest, you just don’t know it. The anonymity of DFS (this was the same in online poker) makes it difficult to gauge. You’d think that the pros are going to stick to the big money contests ($100, $500, $1000+ contests), but you’d be wrong — the rules allow them to enter hundreds of entries into the smaller fee contests — so they can put a lot of money to work against lesser competition.
It only gets worse
I watched this play out over years in the poker world:
- bad players (‘the fish’) lose quickly, and don’t come back
- the average to good players stay on the platform, and get better over time
- the great players remain great
- because of 1,2, and 3, the average level of play increases over time. This decreases everyone’s edge, making it even harder to overcome that 10% to profitablity
Now fortunately, new players are always coming onto the platform to fill (1) above. We can thank the $807M ($446M for Draftkings, $361M for FanDuel) of venture funding for this, so they can continually acquire new players by showing those awful commercials on loop on every station imaginable. But due to (4 — increased average level of play), these new players have an even greater deficit and fall off even faster.
This flywheel starts churning faster than you’d think. I started playing online poker in 2003, and just 4 or 5 years later, there was a noticeable difference. Sitting down at similar stakes today and it’s predominantly solid-to-great players
There is an entire ecosystem that most don’t realize exists
Don’t kid yourself. Everyone thinks they are one of the better players — or at least average. What they don’t realize is that they can be the smartest kid and the biggest football fan, but the deck is stacked against them. Content sites, both free and paid. Professionals spending investment-banker-like hours squeezing out their edge. Statistical models. Pooled capital (one pro not enough for you? How about a group of them working together!). Data feeds. Weather feeds. Scouts in the stands. Software scripts. Fish finders. It’s akin to PEDs for athletes. It doesn’t matter if they make up only 1% of the player base — one research report from McKinsey found that the top 1 percent of players put enough entries and money out their to be responsible for 40% of the entry fees. Even scarier, they reaped 91 percent of the profits.
Does the market then eventually cap out and begin to contract?
This one is still TBD. A lot of it actually comes down to perception and intention. At some point, many will realize everything I just laid out. Most will learn the old-fashioned way, by watching their account dwindle week after week. But you can say the same thing about the lottery, or traditional casino games. If enough play for the pure entertainment value, the above matters less. Don’t get me wrong, it still matters — few are entertained by losing money quickly and consistently.
My gut says yes, it caps out and then contracts. But if it caps out at a huge number, and contracts very slowly, it’s not an issue.
Social components will play a bigger role moving forward
If pure entertainment value is paramount to success, I believe social components will need to play a bigger role moving forward. After all, this is really what drove the success of fantasy sports to begin with — 10 friends getting together, being competitive, and talking smack. Have you not heard of the Tattoo League? Celebrities play, families/kids play, even the actual players themselves! The league that I’ve been in since I was 8 was started by my father and uncle with their friends that go back 50+ years. They’re all in very different places in their lives now– most married, moved to different states, different careers, some have passed away. It’s often the only day of the year they see each other, and keeps them connected. It’s one of the amazing constant reminders of my uncle who died of cancer three years ago, to be in a league with his fraternity brothers. The entry fee was $150 twenty-seven years ago, today it’s around $200 — so clearly few really care about the money. (I highly recommend Mathew Berry’s NY Times bestselling Fantasy Life, which celebrates every aspect of the fantasy world, including some truly uplifting stories that remind us why we play these games in the first place).
How do they do that?
Ironically, I think it’s by taking a step back — back towards the traditional, season-long leagues that built fantasy. Both sites have already teased or launched such product in anticipation for this season. The goal is a hybrid of traditional and DFS — bringing in the ‘best of both worlds’. You get to draft a new team every week, but accumulate points for the season against a group of people you know. I participated in a similar contest last year (we managed it offline since their was no tool), and it was a resounding success.
I’m hoping there are other products in the pipe that fit the different preferences of play.
Please don’t merge
It has been rumored for a couple of months that the two dominant players in the space are in acquisition talks. I certainly understand why they’d consider it: similar services, battle of advertising dollars, collective influence in legal battles, etc. But for the customer, it would stifle the innovation that I think is necessary to keep the entire industry viable. They are both already light-years ahead of the incumbents (ESPN, Yahoo, CBS) in terms of UI/UX, especially on mobile. And while seemingly identical, we’re seeing FanDuel and DraftKings begin to deviate slightly in product and branding from one another — DraftKings skewing more towards the more serious player, FanDuel catering to the casual masses.
We’re already seeing FanDuel and DraftKings begin to deviate in product and branding
I don’t know if this is the intention, but I get the impression that DraftKings is going for the more ‘professional’ vibe, while FanDuel wants to keep the casual player. Some nuances in product:
- Deeper rosters on DraftKings (addition of ‘flex’) increase skill component
- Complex scoring (addition of PPR scoring) increases skill component
- Inefficient pricing of players (DraftKings has much wider range of salaries) increases skill component
You’re seeing this in branding as well. While each launched ways to play in private, season-long contests, DraftKings refers to the feature as “Leagues”, while FanDuel calls it “Friends”. FanDuel also recently underwent a rebranding, and according to their home page: we made real improvements, built for everyday fans.” Some examples:
- Main value proposition is “Sportsrich,” or the experience…not huge prizepools
- Three Pillars they ‘stand for’:
- Fair and level playing field — beginner contests, transparency into who is playing, capped entries
- Fun and excitement — play against people you know, single-entry contests
- Protecting and supporting our players — Bill of Rights, employees banned from playing, limits on play (in partnership w/ National Council of Problem Gaming)
So who wins?
Each approach has merit. The DraftKings approach will attract the sharks who contribute so much revenue, but at the risk of long-term viability. FanDuel’s strategy will sacrifice short-term to keep the masses long-term.
Ultimately, the customer wins with more options.
I think this football season is a real inflection point for these companies. I’m very curious to see how many players have dropped from last year to this year, and how many drop throughout the season. Either way, I’ll be there battling against the sharks!
Do you play DFS? Why or why not? What do you think the landscape will like like 3 years, and 10 years, from now?
I’m running a 100-person season-long DFS contest (hosted on DraftKings) with weekly and season payouts. $30/week, $50k prizepool. Taking entries for another week — if interested email me at firstname.lastname@example.org