DFS operators look for ways to generate more revenue
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More Rake, More Slates At DraftKings: The Changing Nature Of Daily Fantasy Sports

DFS rake
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DraftKings has spent some recent weeks fiddling with its NFL contests, and some portions of the daily fantasy sports community are not pleased with the developments.

Users began paying increased rake — the percentage of entry fees kept by the site — across some daily fantasy football contests on the site in Week 4, and the move did not go unnoticed on Twitter. Contest offerings were restructured, too, with slates split apart and concentrated into smaller pools of games.

DraftKings says the changes were made with the community’s best interests in mind. It also recently announced that the site would now publish rake for all of its public contests:

The community, though, is not so sure.

DraftKings throws a pizza party

The whole incident started out with a bit of fun. On Sept. 22, DraftKings co-founder Matt Kalish announced a competitive eating contest/promotion on Twitter:

There were thousands of interactions with the tweet, and DraftKings says it has approved over 170 winners so far. That’s $17,000 in free Millionaire Maker entries just for eating pizza fast on camera. The promotion runs through the end of October if you’re hungry.

In the days that followed, though, Kalish’s Twitter account was tied up with more pressing issues. DraftKings released the NFL salaries and contests for Week 4, and there was immediate backlash.

Rake increase, slate reconfiguration spoil the party

There’s some hyperbole in the alert above, but the concern is valid.

DraftKings’ small, sweeping increases to rake were made quietly before Week 4. FanDuel made a similar move, with some of its contests now raked as high as 16 percent. The pizza party didn’t do much to soften the sting, and DraftKings bore the full brunt of the pushback.

There was more news in the lobby, too. DraftKings continued its experiment with its NFL contest structure, which has included tweaks to the Pick’em board and more diluted guarantees.

The most recent adjustment involved removing the Sunday Night Football game from the main slate — the one with the week’s largest contests. And NBC has the rights to flex some games into the late slot, so the premier game will now be off the table in most weeks.

Kalish was promptly put on trial in the public square. He’s the de facto spokesperson when public perception needs to be contained, and it’s a spot he’s been in before. DraftKings has made a number of recent changes that were poorly received.

  • The refer-a-friend system from which many derived significant income was scrapped in favor of a rewards overhaul.
  • The bulk of 50/50 contests were shifted to double-ups, which look similar at a glance but are raked higher.
  • The slate assignments seem to be perilous for the casual user, too, with extra ways to collect rake.
  • And now the pick’em format threatens to turn the game into one with high variance and a low edge.

Much of this has not gone over well with segments of the DFS community.

The community’s take

Rake increase

A lot of people who make their living from DFS see the changes as a pure money grab.

The direct rake increase is the easiest to attack. By taking more fees off the top of contests, DraftKings puts a dent in the return on investment of every single user. And by skewing that increase toward casual contests, the little guys are the ones paying the biggest price.

Anyone who’s played a low-limit poker game knows how hard it is to beat the rake in the long run. Without a constant influx of new players, the table dries up and the house ends up as the big winner. Increasing the rake accelerates that process. And there isn’t exactly a constant influx of new DFS players at the moment.

DraftKings also invests significant resources in other products (like DKTV), athlete endorsements (like Beast Mode), and extravagant live experiences (like all of them). Some of this money could be reallocated to actual costs, thus reducing the rake needed to operate.

Rake disguise

Rake disguise is another long-standing point of contention that has recently reemerged.

And it’s one that is now addressed by DraftKings publicly showing users what the rake is. (FanDuel does not do this.) It would be nice if DraftKings — and every0ne, for that matter — took that transparency one step further, publishing the rake right on the contests, because not everyone is going to be visiting that page.

If the $333 Wildcat were a poker tournament, most would assume it’s $300+33 (with $33 going to the house). As a DFS contest, though, it’s $299.70+$33.30. It’s only a fractional increase, but it becomes significant over the course of thousands of entries. In that one contest, DraftKings skims an extra $1,500 from the player economy 30 cents at a time.

This is even more pronounced at the lower stakes, too, where the casual players hang out. The $33 Kickoff Special is actually $28.30+$4.70. By DraftKings’ design, that extra $1.70 of rake is hard to spot unless you know what you’re looking for. The week’s largest $3 tournament is raked at 15.9 percent, the maximum for any contest in the lobby.

The relatively unskilled players — which is the majority of them — will therefore have their bankrolls depleted by the operator at the quickest rates. So the low- and mid-stakes contests will get smaller and tougher to beat over time.

Slate splitting

Overt increases aren’t the only way DraftKings is trying to generate more rake, though.

Shifting SNF to a separate slate allows for more contests to churn over as users roll their afternoon winnings into evening entries. More contests across more slates equals more opportunities for rake. And with that rake on the rise, money is being funneled out of the community more quickly than ever.

Shorter slates reduce the edge that the skilled players possess, too. Lineups become more similar to each other with fewer players to choose from, and variance increases in a profound way.

DraftKings’ take

Kalish was a busy man in the days the followed, and he did his best to lay out the company’s stance.

According to Kalish, DraftKings doesn’t rely on surveys or tweets from the most vocal members of the community to dictate what its players want. It uses data. And the data shows that the majority of players prefer shorter slates.

By pulling Sunday Night Football from the main slate, East Coast players don’t have to stay up until the wee hours to sweat their profits. The main slate pays out before the late game starts, providing more opportunities to jump into additional contests. And the secondary slates are the ones that are growing.

And as for the rake? Let’s call it “commission” first of all. And DraftKings’ commission is still lower than its main competitor, FanDuel. The top dog in the industry could justifiably be charging the highest rates to play, but it’s not. Not quite.

In addition, nobody does more for the growth of the DFS than DraftKings does. Kalish explained as much in a previous conversation with LSR:

We’ve invested more than any DFS provider to create the best platform with the most sports and contest types, the largest prizes and the biggest active player base.

While we understand our players want the lowest commissions possible, in order to continue offering an unmatched level of service and innovation, we have raised our rate by less than 1/3 of a percent in aggregate, which enables us to make important investments to grow the industry.

Since the company is not yet profitable, padding the bottom line is not a concern. There is no bottom line. The commission increases are designed to provide the fuel for continued growth and innovation.

Fees collected are reinvested into the product, and more commission equals more innovation.

The truth lies somewhere in the middle

It goes without saying that the primary goal of both parties — the company and players — is to make money from daily fantasy sports.

As an investor-funded operator, DraftKings must at least chart a path to profitability. Rake — commission — is the main way it generates revenue. It is in its best interests, at least in the short term, to rake contests aggressively.

Players seem to understand that, and they’re willing to pay reasonable fees to the sites which spread the games they seek. But when that rake is masked or increased — or when it’s handled the way it was by DraftKings — it’s seen as a direct attack on their bottom line and an insult to their intelligence. And the long-term effects are hard to ignore.

DraftKings does what it can to pitch changes as being beneficial for the community. And some of the changes it makes genuinely are. It removed late swap from NBA contests, which most agree is helpful to casual players. And it imposed fairly tight maximum entry limits, particularly in the low-stakes realm.

But some of the decisions are hard to defend from that stance. The rake increase is a clear attempt to generate more revenue. The slate shifting is a little more arguable, but the points in opposition are valid nonetheless.

While the players perceive that money is being taken out of their pockets, Kalish is quick to remind them that DraftKings offers almost half a million dollars per month in freerolls for its frequent players. No other site comes close to that number.

It also paid out more than a half-million dollars in overlay through the first five weeks of the NFL season. DraftKings would argue that it’s being particularly ambitious with guarantees, although the misses may just highlight a letdown in expected traffic.

There are certainly no plans to roll back the rake increases, but being more transparent about them is a a part of the plan.

Immediate implications and beyond

As changes emerge, some prominent users are expressing their doubts about the future of the platform. A lot of them have protested directly, too — by touting competitors’ sites, reducing their DraftKings action, or pulling their money altogether.

https://twitter.com/aejonesleggo/status/912127869643608064

Jones, who won the industry’s largest-ever payout, has been one of the most outspoken about the direction in which DFS is headed. In an appearance on InsideDFS with host Dan Strafford, Jones expressed skepticism about DraftKings’ motivations:

DraftKings has just done a lot of things that are probably either incompetence or maliciousness. And because of how well-run DraftKings has been shown [to be] in the past, I’m assuming they’re maliciousness.

Beyond perception, the actual implications of the changes extend beyond just the immediate economy of DFS, too.

Daily fantasy sports operators walk a fine line across the edge of sports speculation. One one hand, they pitch their platform as a skill-based contest. On the other, they continue to make format changes which increase variance and reduce users’ edges.

Strafford, for one, has a hard time resolving the two stances:

We have these skill players, these pros, who win more often because they’re really good at this. They’re really good at what they do, so let’s look at them. While on the other side, they want to market that anyone can win. They want to market that anyone can be the next Aaron Jones… That’s a tough thing to square for me.

Jones expects the trend to continue, too. He says DFS is becoming a “sports-based lottery” and that the skill edge will be reduced to about 1.5 percent by the time these trends level off:

I’m pretty confident that, one year from now, DraftKings looks back on 2018 win rates and they have to prove to a court that it’s a skill game — I don’t think they can.

Such a legal challenge on those grounds seem unlikely to come, as more and more states have determined DFS is a skill game and not gambling by law.

Even a skilled sports bettor has a larger edge than one or two percent, and Strafford picked up on the perception issues that might cause:

As the Supreme Court discusses sports gambling, as the state of New Jersey brings it and you have that discussion — this is obviously going to influence this space. Influence what daily fantasy is. Influence what fantasy at large is. Season-long, all of it.

New Jersey, where DFS is now legal, is challenging the federal sports betting ban in the US Supreme Court.

Image credit: Jana Shea / Shutterstock.com

Eric Ramsey
- Eric is a reporter and writer covering regulated US gambling, sports betting, and DFS. He comes from a poker background, formerly on staff at PokerNews and the World Poker Tour.
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