Eilers Research: Daily Fantasy Sports

Written By PlayPicks Staff on November 2, 2014 - Last Updated on June 27, 2018
Eilers Research

Last week we tried to peer into the future of the daily fantasy sports industry by projecting out revenue numbers for FanDuel into 2015. In this article we speculated on the potential growth that FanDuel could continue to experience. We also briefly mentioned that no research had been done into DFS industry growth except by Eilers Research. Our curiosity was spiked however so we continued to look into any research that has been done about the daily fantasy sports industry. Nothing was coming up except for Eilers Research who describe themselves using the following language in their About section.

 

Eilers Research, LLC is a boutique research firm focused on servicing the gaming equipment, technology, and interactive gaming sectors within the global gaming industry. Our products and services include market research, equity research, and consulting services designed specifically for land based & online casino operators, equipment & technology suppliers, social gaming operators & suppliers, gaming regulators, and investors.

 

After looking into the products that Eilers Research offered, I couldn’t resist purchasing the study done on Daily Fantasy Sports. The report is absolutely fascinating and worth every penny that they are charging. For those of you who are not inclined to dish out the coin to pay for this research I will highlight and talk about some of the key points that can be found within this study. The study dives into the Background and History of daily fantasy sports and traditional fantasy sports in general. Most of the background information on the overall industry comes from the Fantasy Sports Trade Association (FSTA) along with various industry demographics of participants who make up both the traditional and daily fantasy sports industry. Some of the most interesting information from the report comes in the comparisons done between the daily fantasy sports industry and the US Sports Wagering Market and also the US Online Poker Market.

 

Daily Fantasy Sports Comparison to US Sports Wagering Market

 

Eilers Research estimates that the total amount wagered on sports in the USA in 2013 was $164 billion dollars. They estimate that slightly over $160 billion of this total was done through illegal avenues within the USA.

 

US Sports Betting
US Sports Betting

 

This means the illegal sports betting market in the US was approximately 44x larger than the regulated US sports betting market in CY13. Our US (illegal) sports handle estimate of $160.3 billion compares to other 3rd party estimates that range from $100-$380 billion (our estimates are based on a comparative market analysis, using the UK as a benchmark, with key variables being penetration rate & average annual wagers per player). We believe analyzing the US sports betting market (both regulated & illegal) provides a potential framework for deriving the DFS market size potential. For example, $3.6 billion was wagered (legally) in Nevada in CY13; this compares to an estimated $1 billion in player entry fees on DFS sites in CY14. In other words, sports betting in Nevada will likely be 3.6x larger than the amount of money wagered (i.e. player entry fees) in DFS sites across North America. Relative to the US black market for sports betting, DFS entry fees will account for less than 1% of the total amount wagered offshore and through illegal bookmakers in CY14.

 

The last two sentences of that quoted text is absolutely mind boggling. If the amount wagered illegally on US Sports Betting markets is 44 times larger then the regulated market in Nevada and the Daily Fantasy sports industry is not even scratching the surface as to the amount of money wagered in the US Sports Betting Markets then it should be safely assumed that we have a ton of growth potential. As both of these markets have seen sharp increases in participation since the UIGEA act of 2006.

 

Daily Fantasy Sports Comparison to US Online Poker Market

 

It is well known that the US Online Poker Market peaked approximately 1 to 2 years after the UIGEA went into effect in 2006. The final nail in the US Online Poker market occurred on April 15, 2011, affectionately known as Black Friday. Although some participants still play on unregulated sites, it clearly has shrunk drastically in size with some online poker players having migrated into other endeavors. One of these is assumed to be Daily Fantasy Sports which has an extremely high demographic of former poker players. Eilers Research gives its reasons for why it thinks Daily Fantasy Sports are a fair comparison to the US Online Poker Market.

 

We analyze the US online poker market for a few reasons: 1) DFS essentially has the same business model and 2) our research suggests an increasing number of US online poker players are migrating to DFS. According to the study “The Market for Online Poker”4, there were roughly 1.4 million Active Online Poker Players in the US in CY10 with an average US rake to operator of $681 per person. Similar to the US Sports betting market, we believe this data set can serve as a useful benchmark in terms of formulating the size and opportunity for DFS. For example, if we assume the number of Active Daily Fantasy players will reach the same levels as Online Poker that would assume we are at roughly 29% player penetration rate.

 

This is a very fair and safe assumption made by Eilers. Almost every big time daily fantasy sports player that you come in contact with has some sort of roots in the Online Poker Market. There is a distinct crossover between the two markets and as such they are effectively framed the same. As long as regulation does not negatively impact Daily Fantasy Sports as it did to the Online Poker Market we should continue to see growth attributable to the decline of Online Poker. Although the two markets are similar there are many reasons as to why online poker had significantly easier time operating as a profit as opposed to most daily fantasy sports sites which are still operating at a loss. The main reason and thing most tend to forget is daily fantasy sports is at best a once a night (or even once a week in the case of the NFL) activity. Meaning contests typically start at one time during the day and those are all that are ran. With the Online Poker Market it did not matter what time of day it was if you wanted action then there was always a table waiting for you. For this simple reason it is much harder for daily fantasy sports sites to produce the type of revenue that we once saw from the online poker market.

 

 Daily Fantasy Sports Industry Projections

 

The most interesting information provided by Eilers Research in their paper on Daily Fantasy sports is the projections it sets up for the industry from now leading out to 2020. In it they offer three different projections, one based on a bearish outlook, one based on a baseline outlook and the last based on a bullish outlook. Since there are so many factors that are impossible to account for at this time with daily fantasy sports still being in the infant stages of its growth, it is extremely interesting to see the three different possible scenarios that Eilers presents. The primary factors that they take into account and base their projections off of are hold rate or rake, number of paid active members, and total annually spent per paid active member. They have based these off of detailed forecasts that they were provided by FanDuel and DraftKings. They also assume a third “Other” site that will emerge but will only take a very small percentage of the industry away from FanDuel and DraftKings.

 

Bearish Scenario

 

The Bearish Scenario that Eilers outlines involves some things that are out of everyday daily fantasy players hands. Things like regulation or legislative pressure along with various legal challenges similar to what the Online Poker Market faced. These sort of things would obviously have a negative impact on the growth of the daily fantasy sports industry as a whole if they came into fruition. In this scenario FanDuel would have a market share of approximately 58% (it is estimated that they have close to a 70% share right now) with DraftKings at 40% and another smaller 3rd site to have only a 2% market share. The total entry fees paid by all players would be close to $6.4 billion dollars by 2020 whereas in 2014 it is estimated to only be at $966 million. This scenario would also have close to 1.66 million active paying players in 2020 up from an estimated 403,000 in 2014.

 

Baseline Scenario

 

The Baseline Scenario that Eilers outlines involves no changes in regulatory rulings or any legal struggles in the next few years. This means that the states that do not allow daily fantasy sports would continue not allowing it and the ones that do allow it would continue to allow it. In this scenario FanDuel would have a market share of approximately 50% with DraftKings at 46% and the third site that has really yet to emerge holding onto 4% of the total market. The total entry fees paid by all players would be close to $14.5 billion which is almost 2.5 times as much as the bearish scenario forecasts. Unique active players would be at almost 2.5 million users which would be roughly 6% of total traditional fantasy sports players.

 

Bullish Scenario

 

The Bullish Scenario that Eilers forecasts involves a very stable regulatory environment and has the certain states that currently do not allow daily fantasy sports activity to reverse their ruling and allow daily fantasy sports. This has some potential to happen as FanDuel is lobbying hard to reverse rulings in Iowa currently and believe they have a strong foothold to do so. The total player spent in this bullish scenario would be close to $30.7 billion which is over twice as much as the baseline scenario. In this scenario unique active paying players would reach 5 million which is also twice as much as the baseline scenario. This would require almost 12% of the current total fantasy sports players to come into the daily fantasy sports market. The number of tradition fantasy sports players comes from the FSTA.

 

The Future

 

Overall the three projection scenarios all have significant outside forces that could help usher in that specific scenario. It seems that a stable regulatory environment is the biggest key to if we will continue on a bullish trajectory or not. Those types of issues are out of players hands. As long as legislation like UIGEA does not usher in a Black Friday for the daily fantasy sports industry then we should at least meet the baseline expectations of Eilers over the next 5 years. It is a very enlightening look into the future of the daily fantasy sports industry. I hope you all enjoyed the summary article on the fantastic work that Eilers Research has done to come up with this report.

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