How the daily fantasy sports industry almost killed itself (and why it still might)

As I approach nearly three years in the daily fantasy sports industry, I’m introspective.

DFS has risen. And fallen. Its legality has been scrutinized. And legitimized. Two companies spent $1.4 billion trying to make their brands ubiquitous with sports. One CEO has resigned. The other continues to say profitability isn’t important.

Dozens upon dozens of DFS companies have shuttered their doors. Some stole from players. Most just ran out of money.

And yet, with all the blemishes, there are unmistakable signs of opportunity.

With the Supreme Court set to rule on sports betting in early 2018, the remaining DFS companies find themselves at the front lines of what could be an explosive new market. Sports betting will generate $16bn in new annual revenue in the US within five years, according to a top gaming research firm. For several years, as states figure out their regulatory structures, DFS will continue to be the only game in town. DFS companies can take this head start and create valuable and lucrative companies that can be leveraged when the US gaming market fully opens.

However, there are signs the daily fantasy industry will continue to sabotage itself. In this series, I will explore some of the biggest mistakes DFS companies have made (and some of the mistakes companies are still making today). I’m not going to address all of the mistakes that have been discussed ad nauseam, such as the massive and grating ad spend and the ‘insider trading’ scandal, and instead focus on the less discussed (and more important) operational and strategic mistakes.

Note: I am far from an independent observer as the CEO of the startup Boom Fantasy. With that said, I know this industry pretty well by now and with a decade of real-money gaming experience, I think I am qualified to shine a light on some of the industry’s biggest errors. I point out these shortcomings not to ostracize my industry, but to try to prevent the industry from failing to become the viable and lucrative industry I know it can be.

The DFS industry has made (and continues to make) three critical errors:

-It has focused on the wrong metrics – specifically handle over net revenue.

-It has lied to itself (and others) about its unit economics.

-It has failed to innovate to entice a larger addressable market.

Mistake 1: Focusing on the wrong metrics

In the rapid rise of FanDuel and DraftKings that hit its apex in the fall of 2015, there was a fierce battle to have the biggest prize pools in the industry. These companies set higher and higher prize pools, upwards of $10 million for individual contests, because they knew that whoever finished in second place in this high-stakes race would be much less valuable.

As a result, they prioritized two metrics – prize pools and handle (handle = the total amount of entry fees a site takes in a set period)  – above all else.

This was an insanely bad decision for a few reasons:

-It’s very easy to manipulate those metrics. As a well-funded company, you can literally set whatever prize pool you want.

-Those metrics (prize pools and handle) don’t accurately measure the health and demand of a product. People will always chase free money, or what in the industry is known as ‘overlays’ (when the prize pool is bigger than the entries a site takes for that contest).

-An obsessive focus on growing prize pools and handle (at the expense of net revenue) can rack up huge marketing and overlay expenses. DraftKings would know – it’s one of the primary reasons they had an operating loss of $509 million (not a typo) in 2015.

As a result of these misplaced priorities, FanDuel and DraftKings expensively scaled a product that had no business scaling in its current format. Salary-cap DFS is not a mass market product. It’s complicated, it’s heavy on mathematics, it’s set up in a way that favors high-volume professionals over casual players… the list goes on and on.

From the beginning, the industry should’ve focused on net revenue growth. At Boom Fantasy, we define net revenue as top-line revenue minus overlays minus player promotions minus player comps.

Boom Fantasy screenshots

Net revenue is a great metric because it shows just how much your users value your product. If people are willing to pay for something, they value it. Focusing on net revenue would’ve allowed FanDuel and DraftKings to spot consumer trends faster and build a more entertaining product that had greater mass-market appeal. Instead, they have found themselves with a niche product that continues to bleed players.

Even top-line revenue is a flawed metric, because when a company gives away so much in free cash in overlays each month, some players will use that ‘funny money’ to play in other contests that generate revenue. If you’re making $100,000 in top-line revenue in a month and giving away $200,000 in overlays and comps to players (effectively having negative net revenue), you do not have a healthy business.

FanDuel and DraftKings have finally started to focus on net revenue out of necessity (as its investors have become less willing to continue to write massive checks).

Shockingly though, this lesson has not yet been fully learned by the rest of the industry. Other DFS companies are still making this same mistake today – focusing on vanity metrics over net revenue. Fantasy Draft, a FanDuel clone, continues to rack up large overlay expenses and distribute unprofitable comps to its top pros try to get bigger top-line numbers. With a monthly burn rate that may be approaching half-a-million dollars, the company continues to run toward the cliff – needing deep-pocketed investors to continue funding a money-losing operation or another company to bail them out. In my humble opinion, it’s not sustainable and you will see a course correction in the coming years.

Other companies, like WinView and PlayLine, continue to give away free cash each day to keep users on their platforms. Although they are not technically DFS companies (they don’t appear to be licensed in any US states yet), they have expressed interest in getting involved in the real-money space.

What the DFS market leaders discovered – and what companies like PlayLine, Fantasy Draft, and WinView will discover – is that user behavior changes dramatically when you stop effectively paying users to play.

Ignoring net revenue is always a poor strategy for a real-money gaming company. These vanity metrics (handle, prize pools, and top-line revenue) aren’t conducive to building a product that is so fun that players are willing to pay for it, and it hurts the industry because it creates an expectation amongst players that handouts are a requirement. In the end, this strategy hurts players too, because most of these companies will fail and the ones that do survive will need to increase their rake to astronomical levels to stay afloat.

While this article has been largely critical, I’d be remiss not to point out one of our competitors who did things the right way. Draft, founded by Jeremy Levine, is a company that opted not to focus on the vanity metrics. They didn’t offer huge prizes or many overlays and instead just focused on building a different and fun product. While they struggled to independently acquire a huge user base, they proved they could build a product that people were willing to pay for. Unsurprisingly, they are one of the few success stories in DFS, raising roughly $6-$8m before being acquired by Paddy Power Betfair for $48m.

Unfortunately, most companies have not been as wise.

In the next part of this series, I’ll discuss Mistake 2: Lying About Their Numbers. That will be published on Monday, Dec. 4.

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.