Andrew Tottenham - June 9, 2016

Is It Just Fantasy? The Future Of DFS in Europe?


A few weeks ago I was on a panel at a breakfast briefing organised by my old friend, David Schollenberger from Healys. It was a lively debate on the topic of Fantasy Sports and eSports and the part of the briefing with the most divergent views was whether Fantasy Sports will be a main stream betting activity in the long term and if it can compete head to head with fixed odds sports betting.

Here in the UK we have one of the most liberal, mature and highly competitive betting markets in the world. You can bet on every type of sport and more or less anything else (snow falling on the roof of the Met office on Christmas day, the name of the next Royal child, the movement of share or currency indices, etc. etc.) and use any channel to do so. With the hullabaloo surrounding the legality of Daily Fantasy Sports (DFS) in the US DraftKings has announced its intention to launch a UK facing site and has made an application for a pool betting license from the Gambling Commission.   It will be interesting to see whether in the face of all of the existing sports and other betting opportunities in the UK Fantasy Sports can capture a significant share of the market.

Most Fantasy Sports operators believe their product will carve a large chunk out of traditional fixed odds sports betting in addition to creating a new population of Fantasy Sports players (bettors). My view is the opposite, Fantasy Sports, in competition with traditional betting will be a niche product. It will find its market and become part of the panoply of betting products.  To understand why I take the view that Fantasy Sports will not become a disruptive force in the betting market, I think we have to understand why people place bets.

Firstly, people need to have an opinion, “Will O’ The West will win the next race at Utoxeter” or “the Jets will beat the Giants by five points” or “Murray will beat Djokovic” (dream on!). This opinion can be and usually is based on nothing more than a hunch or that they have always supported that team or player. No detailed research supports their opinion. Secondly, their opinion needs to be sufficiently strong that they are prepared to place money on the outcome. But once they have decided to bet the speed of placing the bet becomes important, no more so than with online betting.

The actual placing of a bet is a no more than a transaction, it is not a social activity. Once they have made up their mind customers do not want to spend time on the mundane, they want to find their betting opportunity and place their bet as fast and as easily as possible. Online betting operators invest vast sums to make the transaction as convenient as possible. Complex sites which are difficult to navigate and/or have slow loading pages lose out. With the advent of truly mobile betting convenience is all. This is similar to buying any product online; online retailers try to speed the buying process such as “one click” from Amazon or storing credit card details for future use with consequent returns.

Fantasy Sports betting is something quite different. It certainly requires an opinion. In fact, it requires many opinions; opinions about which players will be the best picks for a fantasy team. Players have to build teams within salary bands and to have any chance of success they have to be able to predict the future performance of the players in their fantasy “team”. It really requires a lot of thought and time to pick a team. No easy feat.

In the early days of betting exchanges, it was thought by some that because of the keener odds that they generally offer exchanges would become the betting sites of the future. Betting exchanges are sites where people can place or lay a bet; to bet for or against some future event.  For example, I might believe that Murray will lose and offer 1 to 2 that Murray will lose. Somebody could take the other side of that bet and bet 1. If Murray wins I have to pay them 2, if Murray loses they pay me 1. Of course, the exchange takes its fee. The exchanges have had some success but have not really put a dent into the fixed odds business. They have attracted a number of different types of bettor. Some are bookmakers looking to hedge a position (reduce their exposure) or lock in a profit either by laying off some part of their position or by offering a new position on the other side of the bet. Another type is a very skilful bettor who researches the performance and the odds being offered and bets accordingly. Sometimes it is pure arbitrage or they believe the odds offered do not reflect the outcome, or they can trade in and out of positions, exactly like any trader on the financial or commodities markets. So long as the exchange or exchanges are sufficiently liquid they can make a profit. Some of these expert bettors are supported by algorithmic software that tells them which bets to make or take and how much to bet. Because the exchange is not making a book, rather they are putting two parties together to make a bet between them and taking a commission for the service this puts the average bettor at a disadvantage. The skilled knowledgeable bettor can win consistently at the expense of the average bettor and so the margin against an average bettor on an exchange is much worse than for an expert (or software supported) player. Remember on exchanges you are betting against each other.

If I were to place my bets randomly on a fixed odds site over time I would do no worse than lose the bookmakers margin. If all bettors on an exchange were equal the same random betting strategy would lead over time to each bettor losing the commissions paid to the exchange. But all players on an exchange are not equal, some are very good and this ability dramatically increases the margin against the novice bettor. This is one of the reasons I believe that betting exchanges have not taken the betting industry by storm even though quite often on some bets they offer better odds. It is possibly true that betting exchanges have made traditional bookmakers trim their margins but it has not become a mainstream product.

This brings me neatly on to my point. It is true that Fantasy Sports doesn’t have to require any real skill or knowledge to place a “bet”, you could just pick a team at random from a list of players and away you go. The US industry in its fights with the various States’ attorneys general put great store by the fact that it is a game of skill and therefore legal; I think they misunderstand the legality of skill games for money but that is another article. But to be successful requires a degree of skill or knowledge and some of the Fantasy Sports bettors are extremely skilful. A study by McKinsey & Co of Fantasy Sports players in mid-season 2015 found that 91% of winnings was won by 1.3% of the players (bettors) – you put in $100 and get back $9.  To put it another way 98.7% of players are sharing 9% of the prize pool between them, not a very enticing story. And that is one of my points. To have any chance of success you must have quite a lot of skill. The vast majority of players will lose consistently unless skilful players are handicapped. If you handicap the skilful players, they will not be able to win and they will stop.  If you do not handicap the skilful players, the unskilled players will get turned off by the high odds against them winning anything and you will need a pool of new players (fresh meat) churning at the bottom to feed the skilled players. This is similar to online poker where an elite of skilled players eat inexperienced, newbie players for breakfast, lunch and dinner.

Proponents of Fantasy Sports also say that creating a team makes you more involved in the game. The difficulty I have with this point of view is that your fantasy team will be made up of players from different teams playing different games, possibly at different times. The statistics used to determine the points awarded and thus who wins the prize pool are not immediately obvious as you watch the game. If it is not a daily fantasy game you might be half way through the season and your fantasy team is so far behind you have no chance to catch up and still have the rest of the season to play out – where is the involvement in that? Given the horrendous odds an average player faces, I do not think the “involvement” will last very long. A bettor with a bet on a single team will have more interest in that game than if he had placed a “bet” on a fantasy team that includes one or two players in the actual game that he is watching. A single bet on a single team or horse is simple and creates an easy to understand proposition; if that horse wins, I win.

It is my belief that if sports betting were to be made legal in the US many of the unskilled players would migrate away from Fantasy Sports to fixed odds betting. It is the simplicity and relatively low margin (their money lasts longer) that attracts them. This would not mean the sudden death of Fantasy Sports. But prize pools would get smaller and the skilled players that were left would not enjoy the level of winnings they have been accustomed to.

Legalisation of sports betting will be on a state by state basis, if at all.  The first test is the 3rd Circuit which is hearing New Jersey’s appeal against a previous ruling that its bid to legalise sports betting was illegal. If they are successful other states will move to allow sports betting but this will take time. Once traditional sports betting is established in a State Fantasy Sports activity in that State will decline until it finds an equilibrium. Fantasy Sports will have a place; in the absence of traditional sports betting it will grow until unskilled or inexperienced players realise it is a proposition where you rarely win and eventually just like online poker it will peak.

This from the man who in the late nineties thought that online poker would never take off!