At the World Gaming Executive Summit in Barcelona earlier this year the latest buzz was around Daily Fantasy Sports (DFS). According to a recent article published by McKinsey, in 2014 1.5 million Americans paid more than US$1 billion in tournament entry fees, and Fan Duel grew its number of active customers by 300 per cent. Great numbers, causing major private equity to get in on the act, with Kohlberg Kravis and Roberts investing in Fan Duel.
The authors draw on the analogy of poker and chess. Chess is a popular game but few people play it for money because the outcome is too heavily determined by the players’ skill. The best player wins. I am not sure I agree with their poker argument, that it remains popular because an amateur can beat a world champion, as was the case at the World Series of Poker, where a 51-year old football coach from Florida defeated seven pros. Those poker players, however, that have sufficient control and play a pure percentage game have a better record than those that do not.
In the first half of 2015 Major League Baseball (MLB) season, 91 percent of DFS player profits were won by just 1.3 percent of players. In one sample 1.3 percent of daily- fantasy- sports players paid 40 percent of entry fees and scored the largest profits.
The top 11 players paid, on average, $2 million in entry fees and profited $135,000 each. They accounted for 17 percent of all entry fees. The biggest winning player profited $400,000 on $3 million in entry fees.
The rest of the top 1.3 percent of players paid, on average, $9,100 in entry fees and profited $2,400 each, for a 27 percent return on investment, very nice! These contestants accounted for 23 percent of all entry fees and 77 percent of all profits.
Five percent of players are big fish, eighty percent are minnows.
There is a second factor that disturbs the consultants and it relates to inefficient pricing. Sports betting, they argue, “thrives despite a large skill gap between the average sports fan and the sharp gambler. The reason is that the odds are set by a large, liquid market.” You can place a bet with a bookmaker, select a team at random and still win most of the time. Betting randomly over time the gambler will lose money but with the margins so tight he will lose about 5% to 7% of stakes.
With DFS you buy players at prices set by the site and those prices do not reflect player values perfectly. For example some sites may not take account of recent team changes and this creates opportunity for the sharks.
I recall an investment paper written some years back prior to the Party Gaming float by one of London’s leading investment banks. It argued that the business model of online poker was flawed, because eventually the “sharks” would eat the “fish” and the fish would become tired of losing and not play. It has taken a long time for poker to rise, and now it appears to be past its best days, so perhaps the investors in DFS have time to turn a profit.