The way forward – How the daily fantasy sports industry can flourish

I admit it – the first two articles of this series were downers. I discussed how the daily fantasy sports industry prioritized the wrong metrics and how the market leaders had much worse unit economics than they were touting.

This article will be different. It will talk about the future of the industry. As chaotic as the past three years have been, I am incredibly bullish about the future of sports gaming and specifically fantasy sports. Why? In short, because the demand is real and it is impressive.

By now, you’ll be unsurprised to hear that I think the salary cap format that FanDuel and DraftKings popularized is fatally flawed. There is a steep learning curve, it is too easy for pros to take advantage of casual players, the contests do not feel winnable, its quantitative nature makes it feel like work, and so on. In short, the gameplay is incredibly fun for a limited number of sharp, analytical sports fans who like to out-think and out-compete their peers – but it is not nearly fun enough for the hundreds of millions of sports fans who are just looking to enhance their viewing experience by having some money on the line.

And yet, as problematic as the salary-cap format is, nearly 10 million Americans have deposited their hard-earned money onto new platforms and have given it a shot. Yes, the vast majority of them churned out relatively quickly, but that level of adoption (even taking into account the ad spend) is impressive. US sports fans are hungry for options. Many do illegally bet on sports with bookies and offshore sites, but they crave alternatives.

Before going any further, I want to address the elephant in the room – legalized sports betting. If the Supreme Court rules that PASPA is unconstitutional and legal sports betting opens up nationwide, what does this mean for DFS? I do believe some users will simply prefer single-game wagering and will abandon the DFS format. But ultimately, I believe the DFS industry will grow its base of users in the years ahead. DFS 2.0 must be very different than DFS 1.0 (salary cap), but the potential remains enormous – even in a scenario where sports betting is available beyond Nevada.

The next step

People who believe DFS will significantly suffer under a legalized sports betting framework ignore two realities – the pace of regulation and the ability for the DFS industry to reinvent itself.

First, this should go without saying, but because so many people love to be overly optimistic about these kinds of things, we may as well be explicit: state-by-state legislation and regulation in the US will happen slowly. Yes, a couple states (New Jersey, Pennsylvania) may jump out of the gates, but most states will take years to discuss, approve, and implement new sports betting frameworks. Daily fantasy sports will remain the only game in town for nearly 40 states for another five years.

Second, while I don’t think salary-cap DFS is the answer, I think there is room in this enormous sports gaming market to create a compelling experience that can co-exist with sports betting. Take a look at social casino products in the U.S. For many players, the nearest casino with real-money slots is a short drive away. But people choose to play social casino because there is other unique value associated with it (entertainment, accessibility, social connections, etc.). There is no reason why DFS cannot similarly find a unique value proposition.

So what’s the solution for daily fantasy sports? First things first, the industry should abandon the notion that salary-cap DFS is the future. Many casino operators, both in Europe and in the US, saw the limitations of DFS early on, and it’s time FanDuel and DraftKings recognize that their less-than-impressive unit economics mean this format isn’t the golden goose they were hoping it would be.

That doesn’t mean daily fantasy sports is dead or that salary-cap DFS is going away. Some people will always want to play the latter, but there won’t be enough to grow the market in a meaningful way. That means new formats need to be explored, realized, and promoted.

“For this industry to become profitable and sustainable, it must explore and grow alternative formats”

Of course, there are some limitations on what a company can do to still qualify as fantasy sports. A contest qualifies as fantasy sports under UIGEA if amongst other criteria it incorporates accumulated statistics, multiple events, qualifies as a game of skill, and doesn’t ask about the point spread.

Ultimately, that leaves a ton of white space. Salary-cap DFS is one of thousands of variants that could’ve become the predominant form of daily fantasy sports. It won out not because it was the best, but because the market leaders prematurely scaled the format and stopped innovating. For this industry to become profitable and sustainable, it must explore and grow alternative formats.

DraftKings has finally started to think outside the box. The company launched a pick’em game earlier this year, stated it would consider offering a sportsbook in the future, and has now positioned itself as more of an entertainment company. Smart people will disagree on whether these efforts will be successful, but at least the company is trying different things. It is the only way to grow. The writing is on the wall for salary-cap DFS.

Other companies have been less innovative. FanDuel has focused on profitability over innovation in the past year – seemingly to get its ducks in a row to try to sell to the most optimistic bidder. Someone may bite, but my guess is that the buyer will have a hard time extracting much value out of the current company. Now that FanDuel has lost to DraftKings in the race for liquidity, FanDuel will be hard-pressed to maintain its user numbers or grow without dramatic moves and new gameplay. Whoever buys FanDuel needs to be prepared to roll up their sleeves to innovate and iterate to find a new format that works.

DFS is an industry that is far from settled. Innovation isn’t something that should be strived for, it is the only thing that matters right now.

At Boom Fantasy, we’re now on our fifth real-money format. We retired a couple formats that weren’t working well enough (in-game contests, knockout contests), and we doubled down on formats that are seeing promising early results (pick’em contests, jackpot contests). We have a few new things up our sleeve that we’re excited to try.

For many people, the jury is still out for DFS. Will the industry find its footing? Will there be big winners in this space? Can the industry co-exist with sports betting?

I’ve been in the DFS trenches for years and I have no problem calling out wishful thinking, and yet I am deeply optimistic and bullish. It’s become very clear what hasn’t worked and what won’t work. These are valuable lessons. Some companies will repeat the mistakes of the past, but other companies will learn from these errors and iterate until they find something that realizes the promise and the potential of the industry. I’m willing to bet on it.

Stephen A. Murphy is the CEO of Boom Fantasy, a leading pick’em fantasy sports platform that offers a daily $100,000 jackpot. It was named the Best Fantasy Sports Operator of 2017 at the EGR North America Awards. Prior to founding Boom Fantasy, Mr. Murphy was an online gaming consultant for MGM Resorts International, vice president of High 5 Games, and managing editor of Card Player Media.