The DFS Industry Killed Itself

It appears that the daily fantasy sports industry in the United States may be crumbling. Within the past month or so, Nevada has determined that DFS is gambling and has kicked DFS sites out of its market. StarsDraft has withdrawn from all but four states. The New York Attorney General has sent cease and desist letters to DraftKings and FanDuel, FanDuel has stopped accepting action in the state, and the two sites are gearing up for a legal battle against New York. Numerous other state and federal officials are also looking into the legality of DFS. It doesn’t look good.

And that’s a shame because none of this had to happen. DraftKings and FanDuel brought it on themselves.

As I mentioned in a previous article, I have participated in fantasy sports for more than two decades. I recently began dabbling in DFS and, despite its flaws, I have enjoyed it. I am a casual, yet knowledgeable player; I have never bought-in to a contest for more than $10 and have won a little bit of money while having fun in the process. I don’t expect to win big and am more than content to min-cash my way to profitability. I am the Chainsaw of DFS, if you will.

fanduel-logoIt is because I enjoy fantasy sports and see it as a hobby that can be a lot of fun for a lot of people at minimal cost that I am greatly disappointed in what is going in with the industry right now. I don’t want it to go away in the States, but it’s looking like it will, just like online poker did. And while I have mammoth-sized problems with the legislators and Attorneys General who are attacking DFS as well as the laws governing gambling and skill games, and am devoting this article to explaining why I am disappointed in DraftKings and FanDuel. They could have prevented this.

But they were greedy.

Now, I’m not necessarily saying they were Charles Montgomery Burns greedy, looking to lie, cheat, and steal their way to everlasting wealth (they might be, but I have not seen evidence of that). The greed I’m talking about is the greed that came from the excitement the founders of the companies felt when envisioning the future of the DFS industry. They saw DFS as the next online poker gold rush. Their eyes got big, they had dreams of rake piling on top of rake. And they let their excitement get the best of them.

With the rise in awareness of the two leading DFS companies in recent months, many people don’t realize that they both have been around for a few years – FanDuel was founded in 2009 and DraftKings was founded in 2012. After flying under the radar for a while, they decided, for whatever reason, that this football season was the time to take the leap, to become the world beaters they knew they could become. I’m not sure which site started it, but an arms race quickly developed as the two tried to both grow the industry and grab the largest piece of it. This rush to the top, rather than being content with controlled, sustained, growth, created a chain reaction that may have made the current legal events and potential collapse of the industry inevitable.

Big Prizes, Big Promises

In order to become the get rich, the executives at DraftKings and FanDuel naturally had to attract as many paying customers as possible. Can’t swim in a coin vault without revenue. But both sites had been operating for a few years already, so they needed something sweet to attract the bees. That honeypot: million dollar guaranteed prize pool tournaments. What better way to get someone to deposit some money but the lure of riches for playing something as simple and fun as fantasy sports? Of course, they had to make the games affordable, so they set the price point for their headliner, “Millionire Maker” tournaments at $20. Not bad – cheap enough for most people, but not so cheap as to make it look like a raffle.

But the multi-million guaranteed tournaments posed their own problem. A guaranteed prize pool means that the money is getting paid out no matter what. Two players or two hundred thousand players, the DFS sites were on the hook for the money. Thus, DraftKings and FanDuel not only WANTED to recruit as many players as possible to become overwhelming market leaders, but now, with the crazy guarantees, they HAD to. If they didn’t bring in enough players to cover the guarantees, they would be on the hook for massive overlay and would bleed money faster than they already had been.

The Clone Wars

This then led to another problem. There was almost no way the sites would draw enough individual players to hit the guarantees, so they had to allow players to enter the contests dozens or hundreds of times. This policy was already in place – it didn’t just change this summer – but now the sites were stuck. They had to allow multiple entries.

Permitting hundreds of entries per player, in this writer’s opinion, was an extremely short-sighted policy decision that DraftKings and FanDuel ended up relying upon for much of their revenue. Letting players enter a GPP contest essentially as many times as they want took much of the skill component out of DFS. There is naturally luck involved no matter what, but if each player was only allowed one entry into a tournament, just like they are in poker, the contests would have been much truer tests of skill. I have my team, you have yours, and we see who made the best picks.

But now, as we all know, the vast majority of the DFS sharks load up on entries for each GPP tourney in which they participate. This gives them a major advantage over those who can only fire a single bullet, reducing the effect that skill has on the results of the contest. It’s now a casual player’s single entry against a shark’s hundred or two hundred and unless that casual player gets extremely lucky, he has no chance to win. Certainly, the best players have more skill than casual players: they study hard, develop strategies and calculations, and develop edges over other players through practice and hard work. I don’t begrudge good players their success at all; if you put in the time and effort, you deserve the rewards. I’m happy being a “smart casual” player, winning a few bucks here and there with maybe a chance, if all goes well, to hit a big score. But I would prefer the game to be a better test of skill, not reliant on whose pockets are deeper.

Perception Problems

The chain reaction continues. One of the criticisms of DFS, particularly from those investigating the legality of the DFS sites, is that a small percentage of elite players win the vast majority of the money. Look, for example, at what the New York Attorney General said in his cease and desist letter to FanDuel:

Further, FanDuel has promoted, and continues to promote DFS like a lottery, representing the game to New Yorkers as a path to easy riches that anyone can win. The FanDuel ads promise: “anybody can play, anybody can succeed”; “Play for real money with immediate cash payouts … the money is real!” and similar enticements. Like most gambling operations, FanDuel’s own numbers reveal a far different reality. In practice, DFS is far closer to poker in this respect: a small number of professional gamblers profit at the expense of casual players. To date, our investigation has shown that the top one percent of FanDuel’s winners receive the vast majority of the winnings.

Now, I would argue strongly against much of what he says here – for instance, his comparison to poker is way off and I don’t believe the DFS companies are misleading anyone – but the point is that the DFS companies and DraftKings and FanDuel, in particular, have allowed this negative perception of DFS to exist because of their shortsighted policies* and tournament structures. If they would not have allowed greed to govern their decision making, they would have been happier to grow more slowly, not felt the need to let deep-pocketed sharks completely dominate, not become reliant on those players, and thus not drawn some of the ire of critics.

Sensory Overload

The greed capper, and you knew I was going to get here eventually, was the onslaught of ads that DraftKings and FanDuel ran starting sometime this summer. They ran commercials last year, but those aired at normal intervals. I remember them being at least somewhat entertaining and not annoying at all. But holy shit, these companies decided that before the current NFL season started they needed to fill every moment of our lives with commercials showing fantasy bros celebrating with checks the size of middle schoolers. DraftKings and FanDuel spent more money on commercials than the likes of AT&T and GEICO, for crying out loud. Things got so bad that people who didn’t even care about fantasy sports wanted the two companies to die just so we wouldn’t have to suffer through another thirty seconds hearing about how we could win millions. Had the commercials not brought so much negative attention upon the DFS industry, lawmakers and attorneys general probably wouldn’t have thought to investigate anything. Even the whole thing with DraftKings and Ethan Haskell might not have made many waves.

draftkingsThe advertising strategy was also completely wrong. Again, I don’t believe people were misled by any of the ads; reasonable people are going to understand that it’s not easy to win tons of money playing DFS. But constantly telling us that we could win millions was not the way to go. They should have portrayed DFS not as a “get rich” game, but simply as a fun game in which people have a chance to win a bunch of money. But now, as was noted with the New York AG’s quote earlier, DraftKings and FanDuel are being looked at as deceitful for pushing the dream of cashing big when that wouldn’t have been a problem had they toned it down and just appealed to people’s desire to have a little fun.

And now we’re in a spot where DFS is in serious trouble, teetering on the brink of extinction in the United States. Had the DFS companies not let dollar signs cloud their minds, everyone in the U.S. could be getting their NFL Week 11 lineups set right now and the rest of us who still can wouldn’t be wondering if this is week is our last hurrah.

*While the investigations cleared anyone of any wrongdoing, the “insider trading” non-scandal at DraftKings also shows, at least somewhat, that these companies didn’t do everything they could to make sure everything was on lockdown and that any chance of impropriety would be kept to an absolute minimum. This is even more disappointing considering many top people at DFS sites are former poker players and should have learned their lessons. But once again, greed made for poor long-term decision making.

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