Debunking The Skill Gap Myth in Daily Fantasy

Daily Fantasy Sports are under a full on assault: allegations of “insider trading,” a hyper aggressive (if not overwhelming/annoying) advertising strategy, and multi-directional claims that DFS can’t be beat because it involves too much skill.

There are lots of legitimate concerns which I will address in future posts over the coming weeks. But the most damning – that DFS suffers from “too much skill” – is inherently flawed.

Here’s why:

Too Much Skill

A McKinsey study from September is making headlines after it noted that 1.3% of DFS players – the sharks – account for 91% of the winnings.

mckinsey

One of my favorite daily reads, Ben Thompson of the newsletter Stratechery, used that data to note the following:

In fact, as the McKinsey article concludes, the fact that Daily Fantasy does require skill is one of the biggest threats to DraftKings and FanDuel: the flipside of a few players earning most of the money is that there must be a counterweight — some number of big fish willing to lose and lose substantially.

Here’s the thing: while these numbers make for a great click-bait headline, in actuality it’s a non-issue. Why? Because betting markets fundamentally demand winners and losers.

One could make the claim that in a fairer world, the winners would win less and the losers would lose less. But let’s unpack that: for starters, the headlines are deeply skewing the numbers. While it’s true that the “Big fish” are losing 44x more than the “Minnows,” they are also playing stakes 66x higher. Keeping in mind that Fanduel spreads daily games with $1,035 buyins, the idea that affluent bettors regularly playing $300-$1k buyin lose $1,000 over the course of “half an MLB season” is not that surprising. If anything, based on my experience, it appears light.

Let’s also not forget that for the “minnows” who lose a full 50% of the money they deposit – $25 of $49 deposited – that wagering on DFS is entertainment. It’s a little known fact that traffic to online poker sites during the late 2000s was inversely correlated to new airings of American Idol: when the show came on across time zones, traffic would accordingly drop in those geographies. Low stakes betting is entertainment. And given the low buyin amounts (down to $1) I’d be shocked if, on an hourly basis, it were more economical for these players to go to the movies than lose at DFS.

I had a former member of the Full Tilt Poker Board of Directors in my office a couple of weeks ago. I asked him to verify the often-cited statistic that approximately 95% of online poker players were losers. He confirmed this. Going back to those McKinsey results…a full 15% of DFS players appear to winning – currently 3x the rate of online poker players.

But let’s take a step back and all agree on something else: DFS is in its absolute infancy. The level of scrutiny being placed on DFS, especially given its youth, is unparalleled by any other betting market (skill or pure gambling) in the history of the world. That means that a lot of the less salacious factual realities – though entirely normal in the adolescent development of any market – are being distorted as structural flaws. When in reality they are fundamental pre-requisites to building a healthy ecosystem.

As always, I draw a lot of inspiration from my years in the poker industry. And here’s what I observed: when markets are imbalanced, with strong financial incentives on either side, unless those markets demand some genetic prerequisite to entry, the financial opportunity will move those markets closer to equilibrium.

And here’s what I mean – in plan English. As an example, there are millions of brilliant, hungry, deeply incentivized college student with lots of disposable time and some disposable income. Many will experiment with DFS. Most will lose; some, however, will recognize that only 1.3% of players are using advanced statistical modeling and will hunker down for weeks building their own models until they start winning. The effect of this is that win-rates for the top 1.3% of players will begin to decrease. And instead of 1.3% of players winning 91% of all the payouts, the market will move towards 5-10% (my guess) winning 91% of the payouts.

The Historical Ecosystem Cycle:

In a recent Bloomberg Masters in Business podcast featuring Nate Silver, the most frequently used word when responding to questioning was: “historically.” History is paramount. And in the case of DFS, we have precedent of ecosystem evolution by looking at the history of financial markets, poker, and gaming. As noted my analysis is primarily influenced by the evolution of online poker.

Slide1

Two major trends will begin to develop: (a) A formalized, professional ecosystem of third party DFS training apps will begin to emerge, (b) The sites themselves will invest in educating players and normalizing skill levels. Case in point is that we’ve already begun to see this with Fanduel’s acquisition of Numberfire.

Here’s a breakdown of what really happens in these stages –

Stage One – Early Adopters:

  • DFS is currently holding somewhere between Stage One and Stage Two.
  • Early adopters – those who understand the game theory of lineup assembly and experimented early have a significant skill edge in DFS. The winners have benefitted greatly from the influx of players to the ecosystem.
  • An increased focus on DFS – between its media coverage, heavy advertising, and mainstream profiles of large winners (especially if they can build a spectator/televised component) – will cultivate an aspirational user base and begin to inspire players of all skill levels to improve their lineup performance.

Stage Two – Third Party Apps:

  • Consumer grade player analytical software and lineup generators will begin to make their way to market (I would know I’ve been pitched on several).
  • Subscription training sites, founded by pro DFS players will begin to emerge offering unique insights into lineup formation (I would know I helped to build Cardrunners – a similar business in the poker world). RotoAcademy is one example but there will be more.
  • Peer to peer coaching marketplaces connecting DFS pros directly with recreational players willing to invest in their lineups will emerge.

Stage Three – Platform Sponsored Education:

  • As platform growth slows because market expansion slows, the site operators will re-prioritize on maximizing customer revenues rather than raw customer acquisition.
  • The platform operators, cognizant of the increased revenues/rake as average skill level improves will launch their own efforts to draw the ecosystem closer to golden mean (where everyone breaks even long-term).
  • The operators will either: (a) Launch their own, recreational player focused, free to learn, educational platforms just like Full Tilt Poker Academy, (b) Will subsidize learning on third party applications such as Truly Free Poker Training and/or (c) Purchase late night programming slots on mainstream television channels such as Fox Sports to air informercial-like educational programming.
  • The effect of all this sponsored education is that the baseline performance of even low volume recreational players increases.

Stage Four – Platform Defection:

  • With the skill gap closing across the board two important shifts begin to take place:
  • Lesser winning players, who had previously fed off utter amateurs, no longer find it time-effective or profitable to drive volume on the platform. They are economically incentivized elsewhere and will leave the platform.
  • The winningest players on the platform who have built bankrolls of winnings in the millions of dollars will no longer be able to drive large ROIs on the platform because the stakes are not high enough. They will divert their attention off platform, either to professional sportsbooks or private markets that open.
  • These two defections serve to actually increase the skill gap on the platform as the winningest players and breakeven or lightly winning players leave the platform. In an ideal world where the market continues to grow and customer acquisition remains stable, this shift actually creates an opening for the next generation of players to move from “minnow” to “shark,” replicating the cycle of the ecosystem.

The Structural Issues:

There are legitimate structural claims against DFS, most importantly that novice players receive no protection from high stakes sharks in that multi-entry allows for lineups to be replicated without friction across buyins.

That said, this blog assumes (and I am taking for granted) that those structural issues (which are real) can be solved, either by limiting the number of entries per day (as Fanduel has done) or by creating a more dynamic pricing system or by eliminating identical lineups. Or, in reality, by some solution I haven’t even considered.

I don’t know how they’ll be solved, but I believe they can be. The purpose of this blog is to disprove the detractors who believe DFS’s skill gap is permanent. It is not. It will evolve.

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.

  • Ashley Chase

    You suggest the skill gap between existing DFS players will narrow as the industry matures but the bigger problem (now facing online poker) is that the skill gap between existing players and new players will increase. This is the issue facing online poker now, new players have zero shot of depositing $50 and running it up. In the industry’s infancy it was fairly common for new players to run up their initial deposit (at least for a couple of weeks!). So i completely disagree with your view that the skill gap will reduce as the % of new players on the site each week will make up a significant % of overall players and the skill gap between them and existing players will be huge (and bigger than it is today) as players get better.

    • egalston

      Sorry for the delay – it’s a fair critique but I would disagree there again. While it’s certainly more difficult to run up a bankroll nowadays in online poker it’s by no means impossible, and those who are accomplishing it, are putting in lots of hard work. On the flip side, the knowledge base & skill of the average recreational player has now increased to the point where they can comfortably play for many hours (and be entertained) by making fewer fundamental mistakes. If you’ve noticed the games are tighter all around, that’s not just because they;re shark infested…it’s because the amateurs aren’t as bad as they were in 2006 before poker theory became more well known.

      That’s how I see it anyways.

  • Kevin Footballgeek

    Great article and spot on. I actually run a 3rd party training application. As a top 100 ranked player I felt that I could help new “minnows” avoid the sharks and play profitably by teaching the bankroll management and lineup construction methodologies I came up with when I started in DFS back in 2011. I’m available for interviewing purposes 🙂

  • GJTGJTGJT

    There is no skill gap, unless you count being the group with 500 LUs to the minnows 1 skill, and in a way, I guess it is. Sorry, 1.3% are winning so much because they are drowning the entries, it’s very interesting how our industry leaders think this is the “skill” they want to promote…Let me pose this question, would you enter a 1500 dollar year long league where one guy controlled 4 teams to your 1? Of course not, it would be idiotic. They are the guys willing to venture the most money, which takes guts, but I’m sick of the lying that these guys up top are the “greatest”. I watched Fanduels WBC, the top 2 guys very rarely beat me in 3 and 5 mans when I played, but I would never attack the qualifiers like they do because I think it’s just silly and unchallenging.

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