Over the next several weeks, SportTechie is bringing Daily Fantasy Sports to the forefront.
In the first installment, Joshua Meredith dove into how Daily Fantasy Sports works and its technological background. You can read it here:
Today, in Part 2 of this series Meredith looks at the intersection of Internet Poker, Gambling and Daily Fantasy Gaming.
The Come-Up, The Intersection, Down The Rabbit Hole
April 15, 2011.
If you play Internet poker, you are very aware of this date. It has been dubbed the “Black Friday” of poker, where the government seized three of the largest “American” poker sites and put a major dent in the industry.
To claim that the Daily Fantasy Sports industry is only growing because of the decline of the poker industry cannot be substantially quantified. Daily Fantasy has existed on some level since 2007, but the argument that they are benefiting from “Black Friday,” is logical and can be somewhat supported by this assertion: both games are targeting the same person and Daily Fantasy is perfectly legal.
The target audience can be defined as the following, someone you have or have not interacted with in your life:
Young males under the age of 35, millennial’s, who have credit cards and are not afraid to deposit money into a game on the Internet. They are people who have two giant computer monitors on their desk and who can work every function by a click of the keyboard. They are willing to commit dozens of hours every month to reading, researching and learning advanced metrics and mathematical strategy. They want excitement of a game on an hourly and daily basis, and they want to get it from their computer.
Are some of these individuals moving from poker to Daily Fantasy Sports? Whether or not they are, the Daily Fantasy Sports industry is targeting them on a daily basis and it is obvious that the future of their industry might hinge on these players moving mediums. The Daily Fantasy Industry doesn’t want to be in the shadows of Internet poker, it’s on a quest to reach the peak poker once sat on.
The Intersection:
The first question that comes to mind when you log onto any of the major players in the Daily Fantasy Sports industry is: this is legalized Internet gambling, right? It’s an uncontrollable question. As was previously discussed the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) carves out an exception for all fantasy gaming. This exception coupled with the fact that both sports gambling and Internet poker are illegal, sets up the perfect situation for the entire daily fantasy gaming industry.
“The is a reason its legal, we could definitely throw the word hypocrisy in their, but the legality is convenient for this business model to thrive because in some way it 
fills the vacuum that is formed by the people who want to play poker but can’t legally and the people who want to bet on sports but can’t legally,” said Joe Peta, renowned gambling expert and author of “Trading Bases: A Story About Wall Street, Gambling, and Baseball (Not Necessarily in That Order).”
Peta asserted: “It is the intersection of those two activities (sports gambling and poker) there is no doubt about it.”
The cross-pollination between Internet poker and Daily Fantasy is also visually apparent.
“Clearly the guys that setup these sites they are very familiar with the poker business model because the sites look exactly like the poker games did,” Peta said. “‘Of course’ they want to be the next Poker.”
The industry may also not be shying away from its connection with poker. Many sites offer some form of “free” game to give players a chance to learn the ins-and-outs of the game. Additionally, many sites are running “free rolls” something that the poker industry did successfully for years to gain new players and drum up action among its free players. Additionally, international “online poker in India has become very popular as well. Finally, another tactic Daily Fantasy has taken from poker is the use of deposit bonuses and free add-ons.
“There is obviously a lot of overlap with poker players, sports fans, sport bettors, and then there are a lot of people who are just in to fantasy and sports,” Mark Nerenberg, Chief Product Officer at DraftStreet.com admits. “Its definitely a high user group that is also in to poker.”
“There are definitely similarities…there is also a similarity with trading stocks, or derivatives, essentially. Two are legal and poker isn’t, all three in my opinion are calculated risk, so it depends on what your definition of gambling is,” Nerenberg stated. “The differences between poker and fantasy, is that you have a little bit more control, you could argue. Everyone has a chance to take the players they want, you’re not at the hands of a random deck of cards.”
With legality seemingly not an issue, Peta believes that an increase in exposure could lead to a backlash.
“I don’t have any doubt that the way they are setup now is legal, but one of the most famous legal quotes ever is ‘sunlight is the best disinfectant’ well in this case ‘sunlight’ is the worst thing that can happen to these sites,” Peta discussed in relation to increased appeal and the fact that if people start leaving their jobs to play online it can only lead to bad things.
Peta also discussed New Jersey’s quest to legalize sports gambling in relation to Daily Fantasy.
“I think Bud Selig has steadfastly stated in depositions given in the New Jersey case, [Selig] said ‘I couldn’t even comprehend how fantasy baseball is gambling.’” Peta continued: “all he needs to see in the press is people making six-figures a year playing fantasy baseball and that will change, so in that sense I think that they should be worried. I don’t think that should stop them, but that’s where I could see problems developing for them.”
Nerenberg however must operate with an ever growing two-sided coin, the risk of greater exposure and potential legal issues and making sure that his customers are happy.
“Certainly as we grow, as an industry, it is going to get more attention. We can’t operate being afraid to get bigger.” Additionally Nerenberg says that DraftStreet’s highest current buy-in is $420.00, but stated that when demand grows and his players demand it, they fully expect to up the stakes to a $1000.00 buy-in.
The business models of poker and Daily Fantasy are so similar that they seem like common bedfellows. Users are paying a website to allow them to face off against users. In exchange for this service, the website gets a small service fee, which multiplied over tens of thousands of users becomes a sizable number. One uses a deck of cards, the other uses professional sports. They have taken a divergent path legally, allowing the first wave of entrepreneurs in Daily Fantasy to build a thriving industry. If the two industries meet further down the line, it might be a question of law in how they continue to interact in the marketplace.
Down the Rabbit Hole
“Ultimately the end-game I think is the world’s of Nate Silver, Warren Buffet and Tony Soprano are all going to intersect and I think we are getting to that and some of that is being reflected in daily fantasy sports.”—Joe Peta
As the three largest sites continue to grow, DraftStreet, DraftKings and FanDuel, the next logical issue is how are outside business factors going to affect them and their competition. It is widely known that many of these websites are taking seed money from Wall Street and that where the industry goes from here becomes more of a financial capital game.
“[This is a] huge business model out their for anyone who wants to take advantage of the fact that American men and women love critical reasoning,” Peta exclaimed.
Peta believes that the investment from the major players on the Internet is just around the corner for Daily Fantasy Sports. Specifically, he stated that Yahoo, Zynga or even a fringe player like BitCoin could acquire Daily Fantasy websites. Many insiders have speculated that Yahoo’s recent acquisition of Bignoggins Productions, a fantasy app maker, might be the first step in them entering the daily fantasy sports business.
“The exit strategy for the sites that have the largest share now, would be to continue their brand under a Yahoo umbrella. To me Yahoo has an advantage over the other sites…like ESPN because we all know that ESPN isn’t going to get into the gambling business,” Peta said. “Yahoo it would make a lot of sense for them.”
IAC, who owns websites from Ask.com to CollegeHumor.com recently made an investment in DraftStreet. Nerenberg was bullish when it comes to raising money through investors.
“There is talk about other big companies getting involved as well, so it is definitely looking good.”
Peta, whose background is on Wall Street, believes that they are going to use this as an investment vehicle. Additionally, the fact that Daily Fantasy Sports doesn’t have any competition is intriguing to Peta.
“This game is purely an electronic game, unlike poker it can’t be played in a sit down style. Nobody in Vegas is going to attract 100 guys to sit down and play daily fantasy baseball.”
But Peta believes that if the major players in the fantasy business, the likes of Yahoo or CBS were to enter the daily fantasy sports world without acquisition, that the current players would be in for a tough battle.
“That is a real threat, because then you have a site that has brand awareness in the fantasy world and could certainly open itself up to daily games. That is the main threat.”
With investment into the current sites going strong, only time will tell if one of the major forces in the more traditional fantasy sports world are going to join the fray. But it must be noted that for this to happen, they would have to buy-in to the idea of having legalized gambling in their portfolio.
Post Script
Maybe it’s the idea of Pete Rose, which puts such a negative stigmata on sports gambling. Daily Fantasy Sports is the first Internet gambling, which has been sanctioned by the government. They are on the front-line of fighting the idea that sports’ gambling is bad! Will it survive the gaze of the anti-gambling lobby because sports have a more random outcome than a deck of cards or the roll of the dice? Does it survive because Daily fantasy sports has become a numbers game, using highly critical reasoning?
These are all questions that this industry will have to face as it grows outward and upward. While it tries to reach the heights that Internet poker once reached by using strategies employed by its brethren, it is has the tricky balancing act of trying to stay at arm’s length from a deck of cards.
Come back for Part three of SportTechie’s investigative series as we look at how modeling, analytics and variance play a major factor in Daily Fantasy Sports.
In Part 3 of this series will establish the links between Daily Fantasy and Wall Street Analytics and how modeling is influencing the industry.