Daily Fantasy Sports – Why sites need a salary cap to stay in business

prokopyshen.com agrees with the 40+ US State Attorney Generals who believe that daily fantasy sports sites offer a game of skill which means that players can use real money in the games.  Which, in turn, means the sites can rake the bets to cover their costs and make a profit.
Operators of daily fantasy sports sites know that this is special position of privilege, and so their customers should take some time to appreciate what this means to their daily fantasy sports team selection strategy part1 and part2.
All of the daily fantasy sports sites that offer games to USA residents will use a salary cap.   They will affix a salary to every player in the pool for that game.  You can be certain that the sum of the salaries based on a strategy of selecting all the “best” players will greatly exceed the salary cap. 
First, think about this for a bit.  If you are the CEO of a daily fantasy sports provider, it would be so much easier to not have a salary cap or even salaries.    There would be much less expense as you dont need a team of sports analysts to pick the salary, business processes to load the salary in to the site and customer service representatives to handle the invetible questions or errors that crop up.  Just let any of your customers pick any player for any position and team and let the points decide the winner.  Why not?
The reason is that if you are the CEO of a daily fantasy sports site, you will want to do all you can to preserve that opinion of those 40+ US State Attorney Generals to make this a game of skill.  If by your negligence, you make your game one of luck, your business will draw some attention and possibly be shut down.  To make a game of skill, you need to be certain that your site continually demonstrates at least these three game characteristics beyond any doubt: 
(1) Players will know in advance – meaning before committing any money  - what the payoff will be.  You can be assured that the payoff and prize table will be just one click away detailing the exact payoff in certain and unambiguous terms.
(2) Players will also know in advance how the game will be scored.  This means that that the scoring method is well spelled out in advance and could be independently checked by by a person with reasonable skills.  This means clear rules – like you award the kicker 1 point for every point after a touchdown in a NFL game.  After a game, it should be easy enough to independently check how many points after a touchdown a kicker succeeded in.  While prokopyhen.com believes this is an area of grey at some sites, that topic is a blog post for another day.
(3) Finally, to make this a game of skill – not chance – as the CEO of a daily sport fantasy site you need to make the pool of reasonably competitive players your customers can select from as large as possible and with a mechanism that allows your customers to select them using a skill.  Now enters the salary cap and the business of setting the salary of a player.
Point (3) above requires more examination and discussion which is the point of this article.  Skill means that an individual can be measurably better and more proficient at a task with defined outcomes then others who do not possess the skill.  Accepted measures of possessing a skill include an education degree, licenses from a state regulator, results from an examination or a certification by a professional body regulated under a statute.  Doctors, dentists, oil pipeline welders and bridge engineers all meet the requirements of being skilled in this light.  But unfortunately to the daily fantasy sports site CEO, none of these traditional means apply to their customers.
A secondary approach to the demonstration of a skill is empirical.  Your case for stating that your site offered a game of skill will be helped immensely if you can show business records on these points:
(1) There is some identifiable group of customers of your site that are measurably better then others at the game.  This is why sites keenly track and have customer leader boards.  It is to show that there are players who are consistently good at the game being offered.  While sites really need and want these users because (a) they generate a lot of game action and (b) will show that there this a game of skill, they are also very well aware that offering any type of edge to these customers in the game will be detrimental.   For an example of a full time player who likely is skilled  see Going Pro : The Mathematics of  being a Full time Daily Fantasy Player like Condia .
(2) That there is diversity in the results from your game.  Bluntly speaking, this means that there is a diverse group of users who select teams that are not wnning.  It means that users are applying their own experience, training, intuition, random number selectors or who knows what to create a broad range of teams that do not win.  This is why daily fantasy sports sites track the popularity of individual players.  They do not want to see everyone picking the same team.  They really need to create a game that encourages their customers to have as diverse team as possible which is a reflection of the skill of that customer.
Creating a game with a salary for each player and a salary cap is the mechanism for a daily fantasy sports site to make this happen.  This has several virtues that all support the CEO’s need to show that this is a game of skill:
(1) It requires the customer to evaluate the player in a value calculation by considering the (a) the raw ability of a player to create scoring points for the game versus (b) the salary assigned to that player.  The value of player is usually thought of as number of point created divided by the cost of that player.
(2) By setting a low salary cap, it forces customers to pick players other then the most favorite.  The ideal situation for the CEO is to show that customers almost evenly pick players from the pool creating highly diverse teams. 
The number of combinations of players for a team in a daily fantasy sports game with a salary cap is stunning.  And the daily fantasy site CEO truly believe that the more the better for his case if any of those 40+ State Attorney Generals start asking questions.
What does all of this mean for the daily fantasy sports player who wants to be on the leaderboard at the expense of the players who are less skilled?
Player salaries are set by the daily fantasy sports site to encourage diversity in teams submitted by customers.  Obviously there is no connection to between the salary on a daily fantasy sports site and that players salary.  It is simply a mechanism to encourage the users to perform a value calculation to spread the field.  The fantasy customers who comprehend that some players are bargains and others are overpriced will be strides ahead. 
Track what your site does from game to game in terms of salary assigned to players you follow.  The players who get a raise are too popular and the operator of the daily fantasy site wants to discourage selection.  Whenever a player is given a raise, it indirectly means the value of all the other players have increased.
Second, understand that the salary is set well in advance of the game, and most importantly, days before the injury status of any player is available.  Example: A key NFL RB is unexpectedly unable to practice but after the salary is set.  Now the #2 RB on that team is likely to get a lot more runs, and because his salary was set before the injury, he becomes much more valuable and useful in your team.
For more information on fantasy sports team selection selection see part1 and part2
If you have comments or suggestions on this, please ContactMe .   Good picking !