DraftKings King of the Hill Tournament was announced earlier today with the usual hoopla that abounds with their twitter announcements. The Round #1 Qualifier (a $10 buyin – 1288 entry) for the 1st Contender spot goes off tonight. The Round #2 Qualifier ($100 buyin – 124 entry) goes off tomorrow to find the first two contestants to compete for the 10K H2H prize on Saturday. The math surrounding the payouts for this event has been debated back and forth so we thought it would be worth exploring in depth with a few different examples.
The payout of each Qualifier is a ticket to the KoTH H2H match, the payout of each H2H is $10,000 and a ticket to the next KoTH H2H where you will compete against a “challenger” who won a Qualifier ticket into the KoTH from the previous night (valued by DraftKings at $11,200). The last KoTH winner will receive the $10,000 payout along with the cash value of the seat for the final qualifier of $11,200.
Valued by DraftKings at $11,200. This sentence has caused much confusion even from the DFS players who are currently crushing the highest DFS stakes. How is this calculated? DraftKings has used what is known as a perpetuity in the investment world. From Investopedia:
A constant stream of identical cash flows with no end. The formula for determining the present value of a perpetuity is as follows:
If we assume a 50% heads-up win rate, it is ($10k*.5)/.5 = $10k exactly. And then you have to factor in the secondary prizes which brings us to the value DraftKings has of $11,200. But how likely is it that those secondary prizes are going to hit?
Some heads may already be spinning so it maybe best to start with the most basic example and go from there. Lets start by assuming DraftKings will run 100 KoTH Head to Head Matches for the next 100 days. To get 100 H2H matches they will need to run 101 Qualifiers. The additional one comes in at the beginning when they run 2 qualifiers. We will assume no overlay for any of the 101 qualifiers. If DraftKings sticks to their existing structure for the qualifiers:
We will assume that they will rotate qualifier structures to appease the small stakes players who want a shot at this experience. So if it is changed every other day then on average DK will take home ((12,880 + 12,400) / 2) = $12,640 daily from the Qualifiers
So $12,640 * 101 Qualifiers = $1,276,640
They Pay out 100 H2H winners $10,000 and the last winner gets 11200. We will also add on the $5,000 estimated value to the overall winner for the trophy and watch.
(100*10,000)+11,200 + 5,000 = $1,016,200
So Payout (1,016,200) / $$$ taken in from DK (1,276,640) = 79.59% giving us a rake amount of 20.41%
This of course does not take into account if any player rattles off a 3, 5, or 10 win streak. Which may or may not happen. And that is where the risk comes in. If no player rattles off a 10 win streak then DraftKings is poised to make a pretty penny off of rake on this unique contest.
If we take our same example from above and assume that no player goes on a 10 win streak but some go on a 5 Win Streak, we still only add approximately $10,000 more to DraftKings payout amount. Because whether 1 or 5 people have a 5 day win streak DraftKings will still only payout the World Series package to one person. ( The winner of that contest will receive a World Series™ package including airfare and hotel accommodations (approx. MSRP $10,000).
So running our math again. $1,016,200 + $10,000 = $1,026,200
Payout (1,026,200) / $$$ taken in from DK (1,276,640) = 80.38% giving us a rake amount 19.62%
If we want to assume that 1 person does hit the 10 game winning streak and hits the VIP Sports Experience of a Lifetime valued at $50,000
So running our math again. $1,016,200 + $10,000 + $50,000 = $1,076,200
Payout (1,076,200) / $$$ taken in from DK (1,276,640) = 84.30% giving us a rake amount of 15.7%
And now we are moving closer to the rake we are starting to get used to seeing around the industry. But even still that would be on the high end of most tourneys since it has started to be tracked by dailyfantasylobby.
All in All the KotH is a unique contest which could see DraftKings have to payout more then they intend to but could also see them net a pretty penny if no one gets on a hot streak and the qualifiers offer little to no overlay. With how fast the $10 qualifier #1 filled it does look like DraftKings will avoid overlay for the time being. The novelty could wear off and overlay could start to come into play especially with a prizepool shaded so heavily to the top. With all of the discussion we have had recently around the industry about the issues with these top heavy prizepools it is surprising to see DraftKings continue even further on down that path by offering a 1288 entry tournament with exactly 1 spot being paid out. High risk / High reward but remember you also still have to win a head to head match in order to see any profit from beating that field. I cannot think of too many things more disheartening for a small stakes player then winning a tournament with a valued seat of $11,200 only to lose the head to head matchup and take a loss at the end of the day. Talk about a roller coaster ride of emotions for a small stakes players. If this is your risk tolerance then fire shots at the Qualifiers but I will be observing this battle from the sidelines.