Ongoing DFS Scandal Illustrates Downside to Advertising Blitz

Alex Weldon : October 6th, 2015
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If you’ve got a functioning internet connection and any interest in either sports or online gaming, then you’re probably aware that a big scandal in going down in the world of daily fantasy sports (DFS). At the center of it is DraftKings content manager Ethan Haskell.

The scandal unfolded in two parts. First, Haskell, in writing one of the pieces for the DraftKings website that he was responsible for as part of his job, accidentally included draft-percentage statistics that were not meant for public viewing at that time. The final games of the contest had not yet kicked off at the time that Haskell posted the information, meaning that anyone who saw it potentially had the opportunity to make late trades in order to use that information to their advantage in the contest.

On its own, this error would have been manageable – an apology was quickly issued, along with a promise that an extra layer of checks would be put in place to make sure no information would be released before the appropriate time in future.

In an astounding case of poor timing, however, Haskell found himself winning $350,000 in the very same week, in a similar contest on rival site FanDuel. As yet, it has not been proven one way or another whether he used privileged information about contests at DraftKings in order to make his decisions at FanDuel, but the fact that he had nearly simultaneously demonstrated, in public fashion, that he had early access to such information certainly makes plausible deniability a much greater challenge.

The DFS advertising wars

What makes this scandal particularly problematic for DraftKings is the extent to which they were already in the public eye, by their own doing. If daily fantasy sports had been developing at a more natural pace for a fledgling industry, no one except current players, people in related businesses and those who follow the gaming media would have been likely to hear about it. It would still have been a major setback, but one which could be recovered from, once the necessary adjustments had been made, and something that would eventually be forgotten.

Instead, this is a story that has now, within 24 hours, already made the New York Times, ESPN and the CNN “news ticker.” As I write this, I see on Twitter that it’s now getting a full segment on CNN.

The only reason that this is the case is that both FanDuel and DraftKings – but especially the latter – have both raised and spent absurd amounts of money ensuring that they’re household names in the United States. In fact, around this time last month, when this year’s NFL season was about to kick off, DraftKings even reached the top of the charts in terms of weekly advertising expenditures, ahead of the likes of AT&T, Warner Bros. and Geico.

Failure to live up to the hype

In many ways, what is currently happening to DraftKings specifically and daily fantasy sports in general resembles an industry-level equivalent to what happens on an almost continual basis in other advertising-intensive businesses, but at the product level.

In big-budget, blockbuster movies and video games, for instance, it’s considered extremely important to have a strong opening weekend. As a result, the marketing machine needs to be up and running early to build hype, always many months but sometimes even one or more years before the product itself is actually scheduled for launch. Inevitably, this means that the company is spending a lot of money and effort promoting something without having any way of knowing whether it’s actually going to turn out to be any good or not.

When the product ends up being a flop, not only is all the money that has been spent on marketing wasted, but the product can actually end up having negative value for the company in terms of its image, because it’s far better to fail quietly than to fail spectacularly. Once the fans have experienced high expectations and crushing disappointment once, they’re much less likely to buy into that company’s hype the next time around.

In the case of DraftKings and FanDuel, however, the implications of a high-profile failure will be much more far-reaching, because their marketing campaigns are not just selling the public on their company’s specific product, but on the concept of daily fantasy sports in general. If, after all the efforts they’ve gone to in order to build a multi-billion dollar industry out of essentially thin air, the two of them suffer a dramatic implosion, that could easily be it for the industry as a whole; should another company try to come along and give it a second try, it certainly won’t be as easy as simply learning from the mistakes of “DFS 1.0″ and correcting the problems. Should these first-wave companies suffer this kind of catastrophic failure, rebuilding consumer trust will be a monumental, likely impossible task.

The scandal is only one of many problems

If DraftKings and FanDuel fail to convert their massive advertising expenditures into user base, revenues and – ultimately – profitability, it will be easy to point to this week’s scandal as the point of failure, but the fact of the matter is that the current DFS model has always been problematic. It’s beyond the scope of this article to go into all the problems in great detail, but the biggest and most egregious has to do with the massive guaranteed prize pools, and where the money for those pools is coming from.

In poker, when you have a guaranteed prize pool tournament, the prize money is coming more or less equally from all the players involved. When the PokerStars Sunday Million guarantees $1 million, you know that there are going to be at least 5000 players each ponying up $200 (or else winning their way in via satellites, etc.). Obviously, re-entry tournaments complicate this somewhat, but it’s rare for even professional players to fire more than three or four bullets, and the number of players doing so is small; players’ first buy-ins still make up well over half of the total prize pool in most cases.

In DFS, on the other hand, the overwhelming bulk of prize pool money comes from the highest-spending 1-2% of players, while the money of the most casual players is only a drop in the bucket. Meanwhile, both sites are still in a loss-leader phase, where guaranteed prize pool contests frequently feature overlays. The profit margins for the high-volume players seem quite small, and therefore contingent on those overlays. It’s not clear, then, how the sites eventually plan to meet their guarantees on a regular basis and stop providing overlays; increasing the pool of recreational players won’t help because they provide so little, but the highest-contributing players have no incentive to increase their volume further, as it would only eat into their own profits.

The picture of the overall ecosystem is therefore a bleak one, in which the vast majority of players lose at a huge percentile rate, but contribute very little to the winners’ profits in the process, because they play such low volume. The highest volume players, meanwhile, are slight winners, as they are in poker, but much of that profit comes not from the losing players, but directly from the site in the form of overlay.

This isn’t necessarily an insurmountable problem – anyone with a background in game design or economics could suggest some partial fixes, at least – but it is a very fundamental one, and one that certainly should have been addressed before anyone started spending nine-figure sums bringing the industry into the mainstream. With this week’s scandal increasing both the intensity and cynicism with which the public will be scrutinizing these sites in the coming months, it’s likely too late to make major changes to the underlying model.

Is this week then the beginning of the end for DFS? Maybe, but maybe not. Either way, however, both DraftKings and FanDuel should now be thinking of ramping down their marketing efforts for the time being, and focusing on damage control, because any additional attention they bring on themselves in the next few weeks is likely to be of the negative variety.

Alex Weldon (@benefactumgames) is a freelance writer, game designer and semipro poker player from Montreal, Quebec, Canada.

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