This is of the most competently argued and insightful articles about the current state of Daily Fantasy Sports industry that I have ever read. It was written by Chicago Ventures Senior Associate and long-time Daily Fantasy Sports investor Ezra Galston – someone who clearly knows this space far better than I do.

That’s why it’s with humble ambitions that I, for the sake of getting a better grasp of the vertical myself, will spend a couple of hundred words disagreeing with him.
I have never met Ezra, but after getting wind of the fact that I’ve expressed frustration over some of the arguments brought forth in his article, he asked me to elaborate.

In short, Ezra argues that DFS has already been won 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.”

Liquidity is king. All hail the king.

The reasons I disagree with his conclusion are:

1. I do not believe ”power users” drive DFS businesses longterm

2. Online poker and DFS are richer experiences than betting. The advantages of game liquidity is just one of several factors governing people’s preferences.

3. DraftKings and FanDuel’s current liquidity isn’t sustainable. As such, this is not the liquidity situation a new entry in the market has to be setup to compete with.



In a skill based multiplayer wagering game it is a borderline futile and categorically treacherous exercise to measure individual LTVs in order to gauge how valuable a player is to your business. In order to do so, one has to adjust for impact on liquidity, winnings and player behavior. Which is hard.
When people make comparisons to other verticals they forget, I feel, to recognize than what makes multiplayer games like online poker and DFS unique is that one player’s actions affects another player’s spending and play habits. If some winning guy has an impressive LTV of X, he is bound to have reduced another player’s potential LTV in the process.

If you base your acquisition spending on LTVs calculated merely as ”fees collected minus promotional spend” you’re running your DFS business’ long-term margins into. the. ground.
I should know.
This is what it took us in online poker years and years to figure out and find ways to tackle.

In a multiplayer skill game there is a certain natural state dictated by the specific conditions of the game that the liquidity will always naturally settle in. To establish a functioning liquidity one does not have to recruit a healthy mix of players (I often hear this). You only, theoretically, need to recruit one type of player. The game takes care of the rest. In a highly competitive environment sharks may find themselves reduced to casual players and in juicy environment casual players will rise to become power players. This is why I always claim that you never have to worry about action volume. As long as some sort of skill gap is in effect (which, if you’re reckless, it may not be) some players will rise above the rest and win. And anywhere someone wins, action follows.

Instead, all your focus should be on deposit and withdrawal volumes.
And since many players with a high (apparent) LTV don’t deposit a single cent on a monthly basis they don’t, as a general rule, drive the business.



Here’s what Ezra writes about the advantages of offering more liquidity:

”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.”

I disagree for two reasons:

1. The positive effect on the number of gameplay opportunities that a higher liquidity normally has is mitigated by two DFS specific traits:

  • The number of available opportunities hinges primarily on the number of sports games. The frequency of NFL games is not impacted by the size of DraftKings’ player base.
  • While online poker is distinctly synchronous, DFS is asynchronous. You don’t have to wait for another player to show up in order to play. You can play whenever regardless of player liquidity.

2 . The positive effect on the entertainment value for casual players is far from given. More players can, in fact, have the opposite effect on the experience.

  • More players means means the risk of tournament crowds too big for recreational players to fit in their busy schedules (not applicable on DFS of course).
  • More players means the risk of losing the social aspect of play. You’re forever lost in a vast pool of opponents you have never played against before.
  • More players can strain the GUI to the point where things like game selection becomes frustrating.
  • More players means more good players which in turn reduces your chance of performing at a level where you at least get a sense of accomplishment out of your play. “Congratulations, you finished 14756th on our weekly leaderboard” is not particularly encouraging.

While DFS struggles to qualify as a game (due to lacking interactivity) it’s a far richer experience than sports betting. I had a go at analyzing DFS inherent ”fun” qualities here.  You have more choices to make, the GUI is more complex etc.
This makes DFS less prize / prize pool sensitive than sports betting. Players simply have more aspects of the experience to consider when choosing one site over another.
As a comparison, I think people tend to  underestimate how much just serving a better online poker experience was the cause of Pokerstars’ rise both post and pre UIGEA.

Lastly, the positive entertainment effect of playing for bigger prizes is not linear. For a casual player unconcerned with exact ROI and overlay $ the effect resembles a staircase. Simply put there are certain mental thresholds between which the actual guarantee doesn’t really matter. ”Life-changing money” is an example of such a threshold. Which casual player on the verge of deciding whether or not to spend his or her time and money joining a DFS contest makes different calls depending on whether the contest promises $4 or $5 million in prize money?
If the choice is between two sites and the player favors one over the other for other reasons the extra million does not, I believe, automatically make the player switch.



My third and final point of criticism of  Ezra’s conclusion that DFS has already been won revolves around around the, in my opinion, unstable nature of the liquidity advantage DraftKings and FanDuel have built up.

A new potential entrant into the market “only” has to plan to compete with incumbents under conditions which the incumbents can sustain. And I see several signs that the current frenzy isn’t sustainable.

Before I point these signs out however I have to first explain how I prefer to measure sustainability.

From Ezra’s article:

”Best in class online poker sites earned fifty cents in rake (revenue) for every dollar deposited on the site.”

This value (revenue per deposited dollar)  that we named ”Take” back when we started measuring it in our poker room around… 2007/2008(?)  measures the revenue efficiency of a game. Coupled with deposit numbers it tells you how much money you can potentially make from your current player pool. It’s a great measurement.

The 50 cents per dollar (correct) digit hides a significant spread. From certain cash games through MTTs to Sit & Go tournaments, take varies from as low as 20 cents per dollar up to 80 cents per dollar. You’ll even find isolated games in an online poker room that features virtually zero take (negative even).
One of the big switches that occurred in poker (too late) was a switch in focus away from favoring high-activity players to favoring high-performing games. Sites (finally) understood that what players played mattered significantly to their bottom lines.
Having a liquidity advantage in contests that produce very low take is not worth that much long-term.

Now back to the indications that the current liquidity is not sustainable:

1. We’re only in week three of the NFL season and DraftKings has already decided to significantly slash the prize pool guarantee in their Millionaire Maker from $10M to $7M. I challenge anyone to find a similar case with Pokerstars.

2. In addition to the significant overlays already hitting the big incumbents, they are handing out free tickets, left, right and center. So the actual overlay situation is likely significantly worse than public data from sources like Superlobby suggests.

3.  The current guarantees are only maintainable by allowing skilled players with massive bankrolls to enter hundreds of lineups. While Ed Miller (@edmillerpoker) had a point on twitter the other day that this behavior may actually decrease the skilled players’ overall edge, I’d be very curious to see what the take is for these contests. As the skill gap goes up, take goes down. Big, individual payouts also tend to have a devastating effect on take due to how likely they are to be withdrawn.

If one is to compare DraftKings and FanDuel’s liquidity position right now I prefer a comparison with Full Tilt Poker over one with Pokerstars.
Full Tilt Poker did a lot of things right. They positioned themselves beautifully (as the home of the pros) and took advantage of great software to become Pokerstars only real threat. But in the end it turned out that they cut so many corners in order to establish and maintain this position (funneling money from the site to broke pros who had to populate the tables for example) that it all crumbled.

I obviously don’t think that’s what will happen to DraftKings and FanDuel  but if they keep going like they have been lately I think someone planning to compete with either come 2017 will be competing with very different outlets. Outlets you can absolutely compete with.