5 Problems With The Daily Fantasy Sports Industry

Steve Ruddock outlines his take on fundamental problems the booming daily fantasy sports market is experiencing as growing pains while the legal market takes shape and continues to grow as a legal alternative to sports betting.

1. Two Daily Fantasy Apps Control 95% of Marketshare

When it comes to Daily Fantasy Sports websites there’s DraftKings and FanDuel, and… um… some other sites… at least that’s what people tell me.

It’s not a monopoly, but considering the simplicity of DFS (which is probably one of the reasons for its meteoric rise in popularity) it will be hard for a new site to setup shop and peel off some market share from FD or DK, or even more unlikely, displace one of these two DFS giants.

The reality of the situation is: DFS doesn’t allow sites to differentiate themselves from their competitors, which gives the early adopters, and the companies with deep pockets a major advantage.

This lack of competition could potentially lead to problems down the road, such as a lack of innovation as the gaming industry continues to evolve.

Further complicating this dynamic is the high cost of entry a new site would have to pay to compete since…

2. DK and FD Spend Hundreds of Millions of Dollars On Marketing

With DraftKings’ and FanDuel’s ever-growing marketing war chests, a third site trying to compete would have an increasingly difficult time raising enough capital to have a shot at breaking through.

After all, why would a potential investor choose to invest in your site – that is for all intents and purposes, identical to its better-established competition?

And if a major corporation decided they wanted to dip their toes in the DFS market they would have to somehow justify this massive marketing expenditure to their shareholders – which may explain why so many companies are willing to invest in DraftKings and FanDuel instead of opening a DFS site of their own.

In my estimation, this would be an extremely tough sell considering…

3. So Far, No DFS Site has Turned a Profit

With FanDuel and Draft Kings spending money like Dan Bilzerian on his birthday weekend, it shouldn’t be overly surprising that neither site has managed to turn a profit.

According to comments made by Adam Krejcik, Eilers Research’s DFS Guru, at the C5 Online Gaming Conference, these companies could be profitable right now, if, IF, they significantly cut back on their marketing spend.

But what that would do to the industry’s continued growth and long-term sustainability is unclear, so for the foreseeable future we are going to see the price of entry in the DFS market require a nine-figure investment if you want to take on DraftKings or FanDuel.

It seems as though player acquisition costs will continue to plague the industry as DK and FD continue to battle for daily fantasy market share, and while the industry currently has solid retention numbers according to Krejcik, DFS operators are going to have to deal with a different long term problem as…

4. DFS is Only Going to Get More Skillful

The DFS industry is currently in a period where savvy, knowledgeable, players can exploit the newness of the industry, and other players’ ignorance of proper strategy, and turn a massive profit.

According to Melissa Blau, it takes an average of 90 minutes for DFS players to set their lineup.

Furthermore, the best players devote countless hours to research every week. So if you’re setting your DFS in 20 minutes you are basically throwing darts with your eyes closed.

Poker experienced a similar age when its popularity exploded in the mid-2000’s, and anyone with a cursory understanding of strategy was able to turn a profit.

Unfortunately, these periods of plenty are short-lived, and often followed by several years of famine.

Unskilled DFS players (the blind dart throwers) will eventually fall by the wayside (perhaps attracted by the next big thing, disillusioned with losing money week after week, or for some other reason) and the skill differential between the remaining players will shrink.

When this happens DFS players looking to turn a profit will have to work much harder to earn less money than they do now.

And then there is the unknown, and you can be certain…

5. Daily Fantasy Sports Industry Changes are [Probably] Coming

Whether it’s the elimination of the current model that allows for virtually-unlimited entries, regulation at the state/federal level, having to compete with legalized sports betting, or any and all of the above, the daily fantasy sports industry is almost certainly going to have to weather some major changes down the road.

How the DFS industry handles these yet to be realized issues will likely determine if the industry is a stop-gap until other forms of online gaming are legalized and regulated, or if DFS becomes a mainstream gaming option.

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