The market for daily fantasy sites (DFS) will surely slow after the news that some employees may be using insider information for their own benefit. Before that shocking development, DraftKings and FanDuel were on an upswing in entries. During the first weekend of the NFL season, the two biggest DFS in the marketplace took in $60 million worth of entries. That is double the amount of bets placed in Las Vegas. Obviously, FanDuel and DraftKings don’t take the entire entry fee, but they generate value through what is called a rake (a percentage of entry fees). The rake can vary with the amount from smaller entry fee games being 10 percent and higher entry fee games of about 5-7 percent.
Some quick back-of-the-envelope math reveals that in the NFL’s 17-week season, DraftKings and FanDuel could take in over $65 million in revenue for just hosting the competitions. Other than providing fans with a daily fantasy community and managing the back-end systems, the DFS could sit back and collect their money. Take the $60 million in entry fees from week 1, multiply it by 80 percent to be a bit conservative — unless the DFS companies have 100 percent return or even see growth with its customer base — extrapolate out for 17 weeks with a roughly 8 percent rake, and FanDuel and DraftKings make $65.28 million off $816 million in entry fees. Note: This doesn’t take into account mid-week contests for baseball, basketball and hockey.
Now, a sizable portion of that take is presumably in jeopardy because of insider trading questions.
Far too much money was floating around for the companies to think someone wouldn’t take advantage of their insider knowledge on other daily fantasy sites (which include USA TODAY Sports’ FantasyScore). Although DraftKings denied any wrongdoing, the perception of impropriety is out in the public eye and is getting a lot of coverage. This is what happens when gambling — sorry, a “game of skill” — is legal, but regulation lags. We shouldn’t be surprised.
Michael Colangelo is Managing Editor of The Fields of Green and Assistant Director at the USC Sports Business Institute.