So it seems like a good time to start a conversation and see what everyone thinks.There's been a lot of talk about DFS in the industry and even on our boards and as I've said many times I'm all in favor of the growth of daily fantasy sports. I think it brings more people into the industry -- especially first time players -- and it's getting the leagues and pro teams to embrace this growing industry. We also have a cottage industry now of writers evaluating every single player, every single matchup, EVERY SINGLE DAY!! It's amazing how all of these splits and analytics are now becoming mainstream talk on the radio, on TV, in print. I hope it continues to grow and flourish.
That being said, the one issue facing this space is that eventually these game providers have to make money. And I think they will or you wouldn't be seeing all of these high-profile Venture Capital groups and leagues investing in them. Total revenue for DFS more than doubled last year to over $1 billion and that will likely double again this year as the major companies continue to get deeper reach into all of the major sports. Again, very exciting.
But payouts in DFS are 90 percent or more, depending on whether each contest is sold out or not. That's a lofty bar and it's unlikely that anyone will go lower than that any time soon. With a 10 percent margin before any expenses, it doesn't leave much room for profit. I mean, even at $1 billion, you're looking at $100 million in net revenue and the cost of marketing is in the tens of millions of dollars, if not more. Technology, partnerships, referrals, credit card fees and more eat up a lot of that, which is why these companies keep raising money. That 90 percent bar just seems so high that you wonder if there's any way down from that or is the consumer now engrained with that payout structure, like the 10 percent vig in Vegas?
I look at the high-stakes market for comparison. Remember, when Lenny and Emil introduced WCOFF in 2002 the payout was 75 percent and there were no Events Fees or co-manager fees. It really was the highest payout in the industry and they ate the costs of food and beverages and space at the MGM Grand in Las Vegas. When we introduced the NFBC and NFFC in 2004, we also paid out 75 percent with no added events fees and we were at that point for all of our live events for 5+ years.
The "in" for the competition was to offer prizes at 80 percent or above and that's what happened. Soon it was like 82-83 percent and hosting live events became so expensive that to cover some costs game operators had to charge Events Fees and co-manager fees. It raised the bar for high-stakes operators as well and made it tougher to turn a profit with all of the other expenses still involved in running your games and marketing those games. You can do the math on every high-stakes contest and see who is making ends meet and who isn't with their prize guarantees. Some of it is wild.
I trust that increased volume will turn the corner for DFS and by topping $1 billion each company should be able to turn the red into black. But I still wonder about that 90 percent bar. It's great for consumers, but there will always be a lot of expenses in that remaining 10 percent. It will be interesting to see how this all plays out, but I trust the top DFS companies will figure it out. Volume, volume, volume, for sure.
What's your thoughts on the DFS marketplace? Can that area of the market creating the most revenue turn a profit in the next few years and then always grow from that point? Will the payout bar always remain at 90 percent or above? Is the next "in" a 92-93 percent payout? Inquiring minds want to know. It's a slow news day, so let's talk.
Thanks all.
