The ads sound good, but the odds are long for daily fantasy players
Do you want to make a fortune while watching sports? Play daily fantasy games. It's simple, right? That's what the ubiquitous FanDuel ads tell me. But they're promoting themselves. What does an objective outside observer say? Well, here's Bloomberg Businessweek.
"Enormous TV screens with live National Football League feeds cover the walls of the ballroom at the Cosmopolitan Hotel in Las Vegas. A sound system blares the broadcasts of all the various games at an ear-shattering volume. Couches and bar stools are scattered around the 14,520-square-foot space, which is playing host today, Dec. 14, to the fifth annual FanDuel Fantasy Football Championship. The 100 finalists -- many of them wearing NFL garb, most of them loud, all of them male -- know one another by their handles, which tend to the sophomoric (Wanker14, ambassador_of_awesome). A guy in a Tony Romo jersey jumps out of his chair and yells, 'Oh my God, make a play!' after a pass is dropped. Some contestants have brought their wives or girlfriends; some came with buddies. The crowd is taking full advantage of the open bar. A Playboy Playmate attempts to mingle, but no one notices. By 5 p.m., FanDuel, the fantasy-sports betting site, will give away $7 million in cash prizes. The first-place winner will get $2 million."
Sounds great, but you had to rise to the top of a contest with 59,000 entrants to get to this point. And rest assured, if FanDuel is paying out $7 million -- and maybe spending another $1 million promoting and paying for the bash -- they're raking in way more.
But I'm kind of starting in the middle here. For those not familiar, here's the deal: FanDuel and a handful of smaller rivals have created daily fantasy games. Instead of getting locked in for an entire season, you create a new team every day -- or in NFL play, every weekend. Instead of drafts or auctions, it's a salary cap system. Every player has a value attached, and you attempt to squeeze as many points out of your dollars based on the stats the players produce.
If it sounds like fun, well, it's terrific fun. If it sounds like a great way to make some cash … well, you should probably invest in FanDuel if/when they go public. Here's their revenue numbers
(hat tip to Todd's Take).
Can anyone say "exponential growth"? It's best to look at quarters versus their corresponding quarter a year earlier -- so, wow. Q4 2014 revenues are up 400% vs. Q4 2013.
They "rake" in about 10 cents on every dollar spent on one of their games, which makes perfect sense. A 50/50 game generally works as follows: Everyone pays $110 to enter, the top half of the players gets $200 back, and the other half loses their $110. Grand prize games have similar payouts -- they just give bigger scaled prizes to fewer players.
Daily fantasy games are not considered gambling and are thus perfectly legal in most states. It's a "game of skill," they say. It's a distinction without merit in my honest opinion, but whatever, not arguing that now. The NBA has a tie-in deal with FanDuel, but that's not really a conflict considering Commissioner Adam Silver also wants legalized gambling (or at least says legalization is inevitable, and he's on board with it).
It's all roses for FanDuel right now, but for us mere mortal fantasy players, the math looks terrible. Their rake is the equivalent to betting a sporting event at -120. That means you risk $120 to win $100, which implies you need to win about 55% of the time to make money. A typical NFL spread is priced at -110, which translates to a need to win 52.5% of the time. And you can find -105 lines in spots. Baseball games are almost always a "dime" wide -- sometimes even a "nickel" -- and I would note handicapping a baseball game uses almost exactly the same analysis as valuing the players in that same game for daily fantasy purposes.
Of course, it's not a perfect competition. If you bet a game, you're betting versus a number, whereas if you're playing daily fantasy, you only have to beat other fantasy players. Thus, it's sort of a mix of sports betting and online poker. But that doesn't bode very well at all, considering the path that online poker took.
Remember way back a decade ago, when Chris Moneymaker won the World Series of Poker and everyone opened up a PokerStars account on their laptop? It was fun while it lasted, but the cream quickly rose to the top in the form of "sharp" players and "bots" (not to mention Black Friday).
The same dynamic is happening in daily fantasy, minus the asset freeze. Guys can write algorithms for these games in their sleep. They'll eat up the casual folks well before we do.
Dollars to doughnuts, daily fantasy indeed follows a similar trajectory to online poker, although most likely over a longer time frame. It's easy to fund an account, and it's easy to lose small amounts of money and chalk it up to entertainment. The Bloomberg Businessweek article (rightly) mentions a need for FanDuel to attract both high rollers and minnows to their games. But at some point, you've eaten the last minnow. Then what?
Really long story short -- I don't mean to dissuade anyone from playing these games. They're a blast and they make watching a sporting event that much more interesting. Just keep your profit expectations realistic, as the odds are steep.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.