Game Over: Why Daily Fantasy Has Already Been Won

I debated posting this because it could bruise some egos and kill my dealflow. But with the recent DFS news, Fanduels $275M round & Yahoo’s entry into the space, I felt like the timing was right. I know a lot of people have strong opinions one way or another on this so happy to engage in some debate. I also chose to post it because I’m hopeful that forcing entrepreneurs to rethink the existing models, look at the historical realities of betting markets, and therefore reimagine the fantasy sports space entirely could yield some interesting outcomes. Here goes:


In late 2007, I invested in and helped my friend Chris Fargis launch Instant Fantasy Sports, what I believe was the second ever daily fantasy sports (DFS) site. The product was created by and invested in by online poker players, drawing inspiration from the wildly popular “sit-n-go” format of online poker sites.

We did a few things right and a lot of things wrong and were fortunate to be acquired by NBC Sports, where they subsequently re-branded the product as Snapdraft, jacked up the rake to 20-30% and effectively killed any interest.

In the summer of 2011, I invested in DraftDay, my former business partners entrant into the then (mostly uncrowded) daily fantasy sports space. Leveraging our contacts in the poker industry and the consumer trust from our CardRunners brand, we quickly vaulted into the #3 position in the DFS market, behind Fanduel. In fact, as of Spring 2013, I believe we were still the second or third largest DFS site. That, of course, all changed when DraftKings & Fanduel raised (what was then) massive rounds of funding and blew past our traction. We sold the company to MGT Capital (NYSE: MGT) in 2014.

Here are my thoughts having watched the betting industry (from poker to DFS to esports) for more than a decade.

DFS Has Already Been Won

Given my experience in DFS – and I’m not hard to track down on LinkedIn – I’ve received no fewer than two dozen pitches in the past year for startups in the space. Most of these pitches are for incremental improvements – a better drafting system, or new scoring procedure. Some are platform focused, for example designing new experiences around mobile. Some are geography focused. Others have creative approaches to low cost customer acquisition.

It’s my opinion that they will all fail.

Why? Because nearly every entrepreneur I’ve spoken to in the space gravely underestimates the liquidity advantage of existing incumbents. In betting markets, liquidity is simply everything.

Much like traditional marketplaces, where suppliers need to see real economic returns to justify becoming power users, betting markets are a VIP driven business where the sharks need to be able to earn a living to drive volume on the platform.

And Fanduel and DraftKings simply have this market locked up.

It’s not that I’m biased against daily fantasy, it’s that I have demonstrable evidence of this extraordinary “lock-in” from a comparable market: online poker. As of this writing, PokerStars has more players concurrently on its site than every other poker site on earth, combined (and there are thousands). Even five years ago, when the market was more volatile, there were only three dominant platforms: PokerStars, FullTilt and iPoker (Playtech).

To illustrate my point, here’s some research I performed on the online gambling space about its formative years of 2008-2011 (Y-axis is revenue in $Ms & X-axis is reporting period):

The first graph reflects all betting markets across the six publicly traded gaming platforms at the time (excluding Full Tilt & Pokerstars):

But while platforms #3-8 would suggest the poker market was contracting year over year, the two market leaders proved that it actually grew nearly 50%over a two year period. They were, in fact, simply building share as their ecosystem improved:

*The significant dip in Q2 2011 is due to Black Friday, the day the US government shuttered PokerStars and Full Tilt from US players.

One further constraint against new entrants: my golden rule of customer acquisition in real-money gaming is that it will never again be cheaper to acquire a customer than it is today.

The logic is really quite simple:

1.     Each incremental improvement in ecosystem liquidity yields higher customer LTV as high volume players have more places to put money to work and recreational players have a more entertaining experience.

2.     Platforms with a climbing LTV can afford to pay more for customer acquisition. The effect is that a customer that is highly unprofitable for platform X at $80 might be highly profitable for DraftKings with their existing ecosystem. Platform X can then elect to acquire this customer at a loss (hoping their LTV expands in the future) or pass the customer to DraftKings.

3.     Because of the LTV divide between entrants and incumbents, the higher LTV incumbents can afford to offer larger sign-up bonuses or VIP programs.

4.     Because of the LTV divide, an incumbent platform can afford to reach upwards for “guaranteed payout tournaments” (such as Fanduel’s Fantasy Football Championship.) Often the sites expect to take a short-term loss on these guaranteed tournaments with the hope that the resulting new customers will net a positive long-term return.

The effect is that as long as the DFS industry continues to grow (unlike poker, which is now contracting globally) customer acquisition cost grows accordingly. So while it may have theoretically cost FanDuel $5M to attract 100,000 real money customers in 2012, it might (for example) cost $25M to attract the same 100,000 customers in 2015. That provides a strong moat around these already liquid markets.

The Psychology of Sharks

Best in class online poker sites earned fifty cents in rake (revenue) for every dollar deposited on the site. And the high volume players (defined by a few variables I won’t go into here) held a Life Time Value approximately 500% higher than an average recreational depositor.

As mentioned, power players will drive your business. With that in mind, let’s explore some specific scenarios of how upstart (but failed) poker sites tried to attract player pools:

  • Prize Pools – Large prize pools are important as they attract recreational players hoping for a score, which in turn attracts sharks. But remember – sharks care about profitability, the ability to earn a living. A large prize pool is largely insignificant if the skill level gap is too small.

The problem with artificially creating large prize pools prior to cultivating a healthy ecosystem is that the people paying closest attention to industry advertising, or industry forums looking for new guaranteed tournaments are the sharks. But they are looking for expected value advantages. They will opportunistic cross platforms for large guaranteed tournaments, but will depart if the value isn’t there.

  • Lower Rake – In the online poker world, a number of entrants tried to compete on price. Most famously, WSEX offered large periods of rake-free poker to attract players to its room. Those offers served to attract the most price sensitive of players – sharks – looking to earn a living. As soon as they recognized the skill difficultly, they moved platforms.

Recreational players, who make up the bulk of the player base, but don’t drive the volume, are not price sensitive in this industry. Unless rake is simply usurious (20%+) its largely imperceptible on a one-off basis.

When you compete on price, you attract the sharks. The sharks will give the platform liquidity, temporarily. But even if a new platform is able to begin attracting recreational players (via advertising/marketing), the pro:amateur ratio remains highly imbalanced, causing the fish to lose at an accelerated pace. They won’t re-deposit or tell their friends and the sharks will soon leave.

  • Geographic Differentiation – Many operators have tried (and some succeeded) in building geographic focused real money gamingplatforms. LatAm focused. Or South African focused. Frankly, these do work – especially if you actively constrain non-local players from entering – which keeps opportunistic USA or Western European pros out. But they simply don’t scale to become large businesses.
  • Celebrity Endorsements – They don’t seem to work for upstarts but are an effective tool for dominant players. Pamela Anderson failed. Iconic poker star Doyle Brunson failed. And while PokerStars sponsors Rafael Nadar and Full Tilt allegedly offered Michael Phelps $5 million/year for an endorsement deal, these deals serve to bring additional recreational players into a healthy environment where they can thrive. They don’t work for a nascent platform where new players do not experience delight upon first engagement with the platform.

I am also skeptical of the emerging class of peer-to-peer, “bet your friends,” variants of DFS. While they provide for cheaper, accelerated customer acquisition (just sync your contacts list, for example), it violates the cardinal rule of online gaming: that high volume sharks will drive power-law style revenue, because it negates the theoretically infinite pool of players that tournament style apps offer. It is also exceedingly harder to scale a 1:1 betting game than a 1:many, and harder to create large, recurring prize pools. Even in the hyped run-up to Zynga’s 2013 $10 billion IPO, Words With Friends was only acquired for $50M while Draw Something saw a $210M exit. Neither became platforms.

Oh, BTW, Why I Might be Totally Wrong

Having written all that, here are the scenarios under which I might be wrong –

  • Black Swan Event – In 2006, Congress passed the Unlawful Internet Gambling Enforcement Act (UIGEA), a last minute attachment to the homeland security focused SAFE Port Act. The law formally forbade online gaming operators to service USA players, which forced then market leader (and publicly traded) PartyPoker to exit the USA market.

Privately held PokerStars elected to continue servicing USA players. Concurrently, Full Tilt Poker, then a mostly nascent platform, began marketing aggressively to US players on ESPN, Fox Sports and online.

The UIGEA was a cataclysmic Black Swan event which provided room for PokerStars to vault to market dominance and allowed FullTilt to emerge as a clear #2 player within 18 months, leveraging a huge advertising spend.

I personally see no comparable Black Swan on the horizon for DFS, but its occurrence could certainly change the status quo of the industry.

  • Media Distribution – PartyPoker wasn’t always the dominant poker platform pre 2006. From 1999-2002, Paradise Poker was the clear market leader.

What changed? In 2001, The Travel Channel began airing broadcasts of the increasingly popular World Poker Tour. In addition to sponsoring entire events on the tour, PartyPoker became a highly integrated and blanket sponsor of the Travel Channel and World Poker Tour. It worked.

I view this as the most likely opportunity for new entrants to DFS – especially if the games can be repurposed as a spectator sport. But that’s also why ESPN’s exclusive partnership with DraftKings is so valuable – because it closes off the most engaging sports media channel in existence.

Yahoo and Pokerstars (Amaya) had both made clear their intentions to enter the space for some time, with Yahoo in fact launching their DFS platform last week. Their existing footprint might enable them to quickly scale a healthy ecosystem.

  • Platform Change – Although Fanduel & DraftKings have rolled out mobile apps, they were neither conceived nor built for a mobile world. As I noted above, I am skeptical of the mobile challenge a friend apps but I admit there could well be an opportunity to build a healthy business in this niche – though I do believe it would be a smaller outcome, than the existing, multi-player tournament style offerings.

Or, frankly, the stage of the DFS market might simply far more nascent than I estimate it to be. If that were the case, it might only take $20-25M to attract a sufficient number of players to an entirely new platform. But I wouldn’t bet on that scenario.

Ultimately, the emergence of DFS will be the latest case study in building liquid betting markets. And although money continues to flow in at the seed stage, I believe the game has already mostly been won.

About the author

Ezra Galston
Ezra Galston

Consumer focused hustling @Chicago Ventures, Young Entrepreneur @Foundation Capital, Class 18 @Kauffman Fellow, and Chicago Booth MBA. Former professional poker player, with 4 years experience doing marketing/biz dev in the online gaming industry. Launched a "poker hedge fund" in 2011, a record label in College, and produced a festival screened short film in 2006.

  • Scott Philp

    Solid post Ezra. I feel there are still some massive opps in fantasy, but with such an inflated CAC, it’s a very tough proposition to drive meaningful scale and demonstrate a viable LTV across a very crowded DFS cash play market. Outside of the big two, i know some savvy data driven marketers are finding some great success in small pockets, but most typical marketing channels are priced so high they don’t make economic sense (if they are even available and not sold exclusively to one of the larger players). There is no doubt the cohort economics around a subset of whales in a DFS game is an unbelievable revenue driver, but the perceived adoption of several operators that casual players will even get close to a positive LTV vs. CAC at scale is a scary assumption to make. Obviously there is a huge branding war taking place amongst the leaders in the space, and we know that today the cost of signage and stadium sponsorships are a long term play to build brand equity and eventually be the ebay of this market, I get that. Salary has major issues with scale; outside of a pure long term CAC strategy combined with a heavy and well funded brand building model; salary is not social, sharps will overtime win majority and leave squares feeling negative on the experience and the technology is now almost a commodity. I give all the companies who are making it work huge props, but very challenging without a potential radical growth strategy on new platforms (fish where others are not), best of the best brand and digital marketers who understand true CAC vs. LTV with sophisticated BI systems that can give them an edge and finally as opposed to be being one of fifty that offer the same general offering, if you are convinced to make a play in this space, take the moonshot, go big and differentiate on a massive level, there are several variances of DFS cash games, but nothing has really blown me away to date, but i’m sure that will happen at some point soon. Actually, i take that back, I think what a couple of companies are doing in esports DFS is amazing….. I also feel that Yahoo is going to go off the charts as a serious player in a very short time. Unlimited advertising access to a mobile and desktop audience reaching hundreds of millions of monthly eyeballs is really going to start shaking up this market sooner rather than later… Also, it’s not about building a business to just exit, and the funding behind DFS has been unbelievable, but outside of a true IPO on a major exchange (and the craziness around that fun), and outside of the two major players, the comps for perceived third player and so on in recent transactions don’t seem to be in line with the hype. But I’m sure there will be some deals that turn out fantastic for some DFS operators that don’t raise astronomical rounds with sky high valuations, but have a solid business model and a great team that align themselves with a major media / distro partner that can scale through their internal channels and networks. Ok, the stream of thought is done – great blog, fyi – found it after reading Suster’s latest post, actually took his advice, no proof, typed away, etc…

  • Jason Garcia

    Very insightful post Ezra and I would agree that after the big 2, plus Yahoo, and Amaya, it’s going to be tough sledding for everyone else. Like @Scott Philp:disqus said, the salary cap format has its own issues, which is why we’ve created InGame Fantasy, a mobile-only app that exclusively features real-time drafting. We are looking to create a new segment of DFS by giving users the only experience where they can draft during games. So far, our app has proven to be very sticky with average session times north of 20 minutes. Really think we’re onto something so would love your feedback since you obviously know the DFS space. Thanks a lot — jason at

    • egalston

      Hey Jason – thanks for reading my piece & the comment, much appreciated. Will e-mail privately & good luck

  • RG Patents

    Hi, my name is Rafael Groswirt. My partner Oscar Peralta and I are that “dark horse” nobody knows about that is also entering this race of the handful for this $2.6 billion pie, but we believe its more like $4B and we hope to have something to do with even a further leg up on what seems to have endless energy of passion. I have no clue how I ended up going form sleeping through one game a week to watching every minute of the 5 games per week and getting left empty. Well we know what dit it. So this is our answer as fantasy managers and as software developers. I’m talking about No Limit Fantasy Sports. We are bringing to the table what you could call an extension of fantasy football. Deeper into statistics and using the 109 statistical categories we have live data for to create a fireworks of potential action between individuals and groups. Its basically putting the 2 as in exponential to FF. As the alter ego of those new games and also the One Week model we also have, we have created a news page modeled after the Wall Street Journal look and feel, with the crispness of the combination those amazing book readers look like. I think we also nailed that in many ways. Start here and work outward Yes Ezra, I also come from the poker world and was one of the developers of poker software. I dont think there was a sole that did not get caught up in that as we are now on FF, but in my case I like to express myself this way. Check this out.

    • RG Patents

      Ezra, I see a seat on my board with your name on it. We agree on that number, actually its a bit more. You need $50M to make a stand in that space, but we have a whole new and patent pending set of 5 new games and more on the way.

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