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Examining Daily Fantasy Sports Part 1: Uncertain Potential

Daily Fantasy Sports (DFS) is supposed to be the proverbial “next big thing” in gambling, pseudo-gambling, or not gambling at all as some refer to DFS.

In this two-part series, I’ll take a close look at the DFS industry and see what it is that has people so excited about the future of Daily Fantasy Sports, as well as the uncertainty that surrounds the DFS industry.

DFS for dummies

DFS sprang into being in the years following the passage of UIGEA in late-2006. As the government continually tightened its grip and cracked down on online gambling operators and payment processors, many online gamblers were left looking for legal betting options, and DFS sites sprang into being in an attempt to fill the void.

In simplistic terms, DFS takes fantasy sports and reduces it into single game, day, or even week-long, contests.

Combining the immediacy of sports betting results and with the skill component and perceived legality of fantasy sports[i], DFS would seem to be tailor-made for today’s discerning gambler, particularly the millions of displaced online poker players in the U.S.

However, this has yet to happen, at least to the level some have anticipated.

The industry is still in its infancy, and projections by Adam Krejcik of Eilers Research[ii] indicate DFS has the potential to turn into a multi-billion dollar industry by 2020, but as Chris Grove pointed out recently, the current DFS market is only on pace to generate roughly half of New Jersey’s vilified online gaming market in terms of yearly revenue.

The current DFS market

Although they are talked about together, DFS is not on the same level as standard Fantasy Sports Leagues.

The number of people who participate in Fantasy Sports (including DFS) is downright shocking.

13% of the U.S. adult population and 18% of the Canadian adult population, according to the Fantasy Sports Trade Association (FSTA) – Eilers Research chalks up the higher rate of Canadian participation to the country’s Hockey mania.

From its inception in the late 1980’s until now, Fantasy Sports participation in the U.S. has grown from about 500,000 participants to over 40,000,000. The Fantasy Sports market is estimated to be worth about $3.6 billion annually.

On the other hand, DFS is extremely new. According to Eilers Research, “DFS revenue will reach $85.6 million in CY14, which is up from $21.9 million in CY13.” It’s a pretty remarkable number considering the $1.28 million the DFS industry produced in 2011.

As strong as this growth has been, DFS is a drop in the bucket compared to the overall fantasy sports industry.

Reasons for optimism

Using its current growth trends as well as historical data from Fantasy and Online Poker, Eilers made three potential projections for the potential growth of the DFS industry by 2020:

Baseline = $1.18 billion

Bearish = $471 million

Bullish = $2.6 billion

In addition to the growth trends reported by Eilers, people are also bullish on DFS thanks to the industry’s ability to bring the professional sports leagues on board with their product.

The NFL has long opposed sports betting, but the league apparently sees DFS as something altogether different. The New England Patriots signed a deal with DFS site DraftKings, not unlike the deal between partypoker and the Philadelphia 76ers and New Jersey Devils. DraftKings has also signed a deal with the NHL.

Furthermore, big name players like Tom Brady and Richard Sherman have been hired as spokesmen for various DFS sites, as have many other, lesser-profile professional athletes.

At present, it appears sports leagues view DFS more as fantasy sports and less as sports betting, which has many people feeling extremely optimistic about the industry.

Reasons for pessimism: High CAC

Before you run out to invest in DFS sites, the revenue projections do come with a few important caveats, as Eilers points out.

The first sobering caveat has to do with player acquisition cost: “… user acquisition costs have been skyrocketing and the two major players in the market (FanDuel & DraftKings) are both entirely dependent upon Venture Capital financing and it’s unclear when either company will be able to generate a profit.”

In an addendum to their original report, Eilers notes that DFS sites are claiming CAC (Customer Acquisition Cost) to be far less than Eilers insinuates. However, on the surface acquisition costs appear to be high.

For instance, the services of Tom Brady and Richard Sherman do not come cheap, and neither does signage at Gillette Stadium, considering the number of national games the Patriots play.

Additionally, it’s unclear how productive affiliate marketing has been. One online poker affiliate I’ve spoken to stated that DFS ads on his sites have not had the crossover appeal he anticipated, which would seem to verify the need for the more costly marketing campaigns like TV, radio, and other outlets.

Basically, DFS sites are finding it hard (or harder than online poker sites) to ferret out new players.

Also, consider this tweet from poker pro turned DraftKings DFS’er Jon Augiar:

Over $600k in overlay in the $2.5mm Milionaire Maker on Draft Kings w/25 minutes left.”

Marketing efforts like that are certainly appealing, but that’s a lot of overlay for a company to eat in an industry on pace to do somewhere between $70 million and $90 million in total revenue this year.

Reasons for pessimism: Too skillful?

Another potential issue the industry must solve is the aforementioned skill component of DFS, which Eilers also addressed: “… an increasing number of high-volume players (pros) are already having an adverse impact on casual user growth.”

If DFS turns out to be even more skillful than say poker, the game might simply fizzle out and die before it ever approaches its apex. This could be solved by tweaking scoring or the format of DFS to lessen the skill gap, but finding the balance between skill and luck may be quite hard in such a data driven game without going too far in one direction.

Coming up…

In Part 2 of this series, I’ll take a look at the unknowns that could help or hurt the DFS industry down the road, from potential regulation to legalized sports betting.

 

[i] DFS is available in all but four states (Arizona, Montana, Louisiana, Iowa and Vermont), and while the legality of DFS is up for debate, it should be noted PayPal processes DFS payments, whereas they will not process legal, state-regulated, online poker transactions in New Jersey, Nevada or Delaware.

[ii] This column relied heavily on Eilers Research DFS White Paper available for purchase here: http://eilersresearch.com/downloads/daily-fantasy-sports-the-future-of-us-sports-wagering/

 

 

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Steve Ruddock

Steve is veteran of the the poker industry, first as a player and now as a writer focusing mainly on the regulated U.S. markets and the politics of poker. Follow Steve on Twitter @SteveRuddock and at Google+.

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