DFS industry /

The dilemma of skill & what it means for the Daily Fantasy Sports industry’s future

The daily fantasy industry seems to be in a precarious situation.

On one hand, the designation of daily fantasy contests as games of skill is central to their legality. The fantasy sports exemption in the Unlawful Internet Gambling Enforcement Act stipulates that outcomes must reflect the knowledge or skill of the participants, and most states require that real-money contests be considered games of skill to be legal.

The topic appears to be central in the legal analysis launched in August by the Nevada Gaming Control Board, whose director said that DFS games “blur the line” between skill and chance.

But in other corners, the issue of skill vs. chance seems all but decided, with segments of the population proselytizing against daily fantasy sports based on the premise that there’s actually too much skill involved; that newcomers stand no chance to be little more than chum for the industry’s sharks.

Some have even suggested that the ubiquitous ads for FanDuel and DraftKings, which promote the “Average Joe Winners,” may harm the companies’ legal standing.

Taking all that into consideration, what should we make of the results from last weekend, when a fantasy first-timer won $1 million?

Also on FanDuel last week, 15 of the top 20 finishers in the site’s largest NFL contest had fewer than 10 career wins. Meanwhile at DraftKings, the top eight places in the $10 million contest were won by users who submitted a single entry while some high-volume players submitted more than 400.

Was it an anomaly? Is it evidence that the ads are not “a lie?” Is it both? Is it neither?

Or is it a matter of the inherent differences that exist from sport to sport?

“My guess is that you’re seeing a lot of new people near the top of the leaderboard this week, mostly because a huge percentage of the field is new people,” said Ed Miller, MIT-trained engineer and author of numerous best-selling poker books. “The marketing campaign is driving lots of new people to the site, they’re depositing, and they’re playing, and they’re filling up these contests.”

Skill vs. chance

In July, Miller co-authored an article for Sports Business Journal that examined data collected from the first half of the 2015 Major League Baseball season. An oft-cited statistic from that report stated that 91 percent of the winnings were won by 1.3 percent of players during the time the data was collected.

That would appear to be strong evidence for those who proclaim daily fantasy baseball as a game of skill.

But does the same hold true in other sports?

Justin Fielkow, an attorney who specializes in the sports and entertainment fields, said that the question could have relevance when daily fantasy contests are analyzed from a legal standpoint.

“In theory, each particular contest offered would be subject to individual scrutiny,” Fielkow said. “So with each particular game or sport, it could matter. It could absolutely have an effect.”

So even with the understanding that one week’s results in a handful of contests represent a minuscule sample size, could they be held as evidence that the element of chance prevails in daily fantasy football?

Seth Young, the Chief Operating Officer of Star Fantasy Leagues, says no, because—among other reasons—a lack of experience does not necessarily equate to a lack of skill.

“As far as newcomers coming in and winning, I’m not sure if that’s going to be relevant for the skill vs. chance conversation,” Young said. “Just because they’re new to a site doesn’t mean they know less about sports than somebody who might’ve known about the site for three years.”

Young and Star Fantasy Leagues conducted a study during the 2014 NFL season that showed skillfully built lineups won 69.1 percent of the time over unskilled opponents. He feels confident in those results and believes they would carry over similarly in other sports.

“I think at the end of the day, it’s all still skill-based, as we showed with our studies,” Young said. “We started with football, because we thought it was the most volatile sport in terms of the scoring and the predictability, and we still showed that it was based in skill. So I think if you were to pit one of the best baseball minds against somebody coming in completely cold in a season-long competition in daily events, you would find that new person would probably not win too often.”

The skill-gap problem

What Young describes and what Miller’s study found are important in terms of the legality of daily fantasy contests. But in terms of the DFS business model, it may also be problematic.

The skill-gap issue is one that’s familiar to daily fantasy operators. More than just criticism, the skill-gap problem is a threat to the long-term health of the industry. The concern is that casual players won’t win often enough to continue playing. When these “fish” leave the pool, the sharks are soon left to play against one another, lessening their edge until the point that they are no longer earning reliable profits, at which time the sharks leave and the entire system crashes.

In the Sports Business Journal article, Miller and his co-author Daniel Singer wrote:

For a real-money contest to achieve sustained popularity, it needs the right balance of skill versus luck. Chess is popular but almost no one plays it for money, because it’s far too skill-based; the better player wins almost every time. Poker thrives because an amateur can beat the best players in the world.

Miller said he would hesitate to push the data any further than he and Singer did in the original article. Nonetheless, the conclusions reached would seem sufficient to support the argument that daily fantasy baseball is a game in which the best players have a marked and consistent advantage over less-skilled or casual players.

Might that be less true in other sports?

The one-on-one element of baseball and the data it produces might lead one to believe that those with the ability to read, understand and interpret that data through various means would hold a greater edge over the common player than in a sport like football, where advanced data metrics lag behind.

Miller doesn’t think so.

“My opinion is that sharp players crush MLB,” Miller said. “I would agree with that. I’m quite certain of that. And I don’t think there’s any question that casual players lose less at NFL, but I think that’s because casual players make up a much larger percentage of the NFL player pool. … but my guess is that that effect is also going to increase the advantage of the sharp player.”

That was also the opinion of a high-volume DFS player who shared his thoughts on the matter with DailyFantasyTalk.

I think as a percentage of total buy-ins in play, that football is more weighted towards top-heavy, “lottery-style” contests with seven-figure prizes. There are also more recreational players in DFS football as a percentage of total buy-ins. So football might be a sport where a DFS pro can have a higher edge, but since there is loads more variance due to the top-heavy prize pools it can take several seasons to start to see any edge begin to pay off.

And Fielkow pointed out that beyond the simple demographics of the NFL contest player pools, there might actually be more skill required in producing consistent winners in football.

“The reason that football might be different is not so much that chance or luck comes into play, it’s that there are more factors to be considered that influence the outcome,” Fielkow said. “Analyzing an offensive line is not just analyzing it as a single unit. You have to analyze each of the individual linemen and their skills and who they’re facing.

“It’s not chance, it’s just that there are more factors. I wouldn’t attribute those things to luck, necessarily. Maybe it’s just more difficult to predict. Maybe it requires more skill to predict those things because there are a lot of things you have to take into account in order to have a successful prediction.”

What does it mean?

Daily fantasy sports is left trying to maintain a delicate balance. To be legal, it must protect its status as a game of skill, and the fact that the best players win so often could be held as evidence that skill dominates over chance.

But the industry also needs newcomers to win. Though players may continue to willingly lose money for the entertainment that daily fantasy provides, depending solely on that outcomes sounds like a tenuous plan for long-term growth.

The various legal reviews currently active around the country—and the possible Congressional hearing on the topic—should provide greater clarity on what types of fantasy contests are considered skill games, but the skill-gap problem is one the industry will have to figure out on its own.