Part 1 of this series covered the rise of Daily Fantasy Sports (DFS) in the late 2000’s as well as the current DFS market. This time around we’re going to look into the future of DFS and do a little prognosticating to see where the industry may or may not be heading.
Sports Betting could play a key role
As illustrated in Part 1, there are several reasons to be bearish about DFS. In addition to the reportedly high player acquisition costs and the wide skill gap amongst DFS players, there is another potential hurdle that could derail the DFS industry.
Since it came on the scene I’ve wondered if DFS (which basically sprang into being to fill the void left by online poker) is simply a placeholder for legalized sports betting? Legal sports betting in the U.S. is something that now appears to be a ‘when not if’ proposition based on the current situation in New Jersey and recent comments (here and here) by NBA Commissioner Adam Silver.
The arrival of legalized sports-betting could very well spell the end of DFS.
In addition to being a skillful contest, DFS suffers from being a peer-to-peer game as opposed to sports betting, which pits players against the house.
A skilled DFS player will seemingly have a greater edge in DFS contests than a skilled sports bettor has against the book, which makes DFS a far better proposition for knowledgeable players.
But the issue with DFS is when it comes to casual, unskilled players. The players that are gambling and just want to throw down a bet on a sporting contest.
These players are the lifeblood of DFS games, just as they are in the poker world. These players will lose whether placing sports bets or playing DFS, but they will lose at a much faster pace against the skilled DFS players (who research and treat DFS like a job) than they will against the balanced lines of a sportsbook – considering randomly betting in a sportsbook will only cost you the Vig.
Essentially, for unskilled players, the difference between DFS and sports betting is the difference between slots and keno, or more aptly, slots and poker, since an unskilled poker player is a major dog (poker is one of the worst ROI games an unskilled gambler could participate in) while slots will just slowly bleed you (maybe $5 for every $100 you gamble) and you can get your money’s worth while trying to get lucky and hit a big payday.
In DFS it’s the skilled players who will win the big paydays.
And this is why I think DFS will have a difficult time gaining market share if legalized sports betting becomes a reality in the U.S: There is a good chance unskilled players will gravitate towards sports betting, and the DFS games will become even more skillful with less and less of an edge as the overall player pool’s skill rises.
Legal sports betting could lead to DFS becoming a lesser, redundant option.
This could also explain why DFS is mainly a North American industry, and hasn’t found a foothold in Europe where legalized sports betting is widely available – although this doesn’t explain the popularity of DFS in Canada – perhaps proximity to the U.S. is the reason?
The DFS ceiling
Further troubling to me is the fact, outside of Nevada, we do not have legal sports betting in the U.S., and DFS has yet to truly explode despite operating in a veritable sports betting vacuum. With so few options available, it would seem that if DFS cannot create a market for itself right now, it simply may not be in the cards.
Yes, growth has been between 259% and 384% over the past three years, but this was also a million-dollar industry back in 2011, so it had plenty of room to grow.
After this explosive growth, I now wonder if the DFS ceiling is coming around the corner?
Using poker as an apples and oranges comparison, the WSOP attendance growth between 2003 and 2006 was on a similar but not as pronounced growth pace (and had experienced only a single negative growth year since 1970), but a market ceiling and/or outside forces stopped that growth in its tracks in 2006:
2003 WSOP: 839
2004 WSOP: 2,576 (+207%)
2005 WSOP: 5,619 (+118%)
2006 WSOP: 8,773 (+56%)
2007 WSOP: 6,358 (-27%)
DFS 2011: $1.28 million
DFS 2012: $6.12 million (+384%)
DFS 2013: $21.9 million (+259%)
DFS 2014(E): $91.3 million (+337%)
Perhaps DFS revenues in 2014 or 2015 will be the 2006 WSOP?
Is regulation coming?
In the UK, you would need to possess a gambling license to offer DFS for real money, but in the U.S. (in 40-something states anyway) this is not the case. Currently DFS falls under fantasy sports in the U.S., which has many favorable exemptions from gambling laws and regulations including UIGEA – which is why PayPal will process DFS payments.
If this does change and DFS gets moved out of the Fantasy Sports column and into the gambling column, it could upset the entire apple cart. And the bigger the industry gets, the more likely it is to draw attention from lawmakers and regulators.
On a side note, I suspect a similar situation is likely to occur at some point in the future when it comes to social casinos.
DFS could go in either direction. The appeal of the game seems obvious (it seems like a million-dollar idea for sure), but there is still a lot of uncertainty surrounding DFS. Whatever happens, the next few years will likely be interesting ones for the DFS industry.
I’d also like to give a special thanks to Eilers Research and Adam Krejcik for their excellent analysis of the DFS industry. Eilers’ DFS White Paper is available for purchase here: http://eilersresearch.com/downloads/daily-fantasy-sports-the-future-of-us-sports-wagering/