Daily fantasy sports (DFS) is currently the hottest wagering ticket in the United States, hundreds of thousands of users signing up to place bets on one-day and weekly contests.
The commercials are flooding broadcasts, and the marketing campaigns all signal how easy it is to win.
“Fantasy baseball on FanDuel is easy,” one spot says. “Just choose a league, pick your team, and get your cash winnings the next day.”
But like most things advertised, a little consumer investigation is needed before making a purchase, and as it relates to DFS, the results are a tad concerning.
According to a recent study, 91 percent of all daily fantasy baseball payouts were collected by just 1.3 percent of players during the first half of the MLB season.
That’s due to skilled gamblers taking advantage of “overlays,” the DFS networks paying out higher prizes than the total funds they collect.
Overlays & Sharks Critical
DFS operators, primarily the market leader DraftKings and rival FanDuel, are willing to eat overlays as the industry is still relatively young. The investment is all about attracting the largest amount of users to support a thriving future.
Andy Frankenberger, a two-time WSOP bracelet winner and former Wall Street equities trader, says the strategy is sound.
“It’s like Lyft or Gett offering $5 or $10 rides anywhere in Manhattan, even though they lose money,” Frankenberger tells CNBC. “At some point the overlays will turn into cash surpluses.”
How are the sharks winning all the games?
First off, they’re submitting hundreds or even thousands of entries to contests with guaranteed prizes that aren’t likely to reach their field limit. When there’s an overlay, the DFS entry fee is actually more valuable than the posted buy-in.
Ed Miller, an MIT-trained engineer, and Daniel Singer, senior advisor for McKinsey & Company Global Sports and Gaming Practice, said in their investigation that since DFS payouts favor the top one percent, a person who submits only one entry has extremely low chances of being in the money.
So-called “minnows,” players whose entry fees average less than $49, are experiencing a more than 50 percent loss on their investment. Sharks, those who spend over $9,100, are profiting at rates upwards of 27 percent.
Although the sharks reap the vast chunk of winnings, the demographic also accounts for the most losses. “The DFS economy depends heavily on retaining the big fish,” the study stated.
Gambling or Skill
Frankenberger is one of many pundits who believes if DFS is considered a game of skill, then certainly poker should be too.
“Love DFS & believe in the USA, land of the free, there should be DFS & online poker,” he tweeted Friday. “But skill edge clearly greater in poker, not even close.”
Sports betting is considered gambling due to the spread theoretically making the decision of which team to choose simply one of chance, assuming the bookmaker is doing its job appropriately.
DFS players must select a roster of individuals to form a competitive fantasy team, and instead of competing against the line they compete against other participants.
Since each pro athlete able to be chosen comes with a valuation dictated by the DFS operator, Frankenberger thinks the format more closely resembles traditional sports betting.
“It’s a joke that between online poker and daily fantasy, poker is the one that’s widely prohibited,” he said. “Anyone who thinks poker is not a game of skill probably hasn’t played much poker.”