The scene has been described by fantasy players as simply intoxicating.

A Las Vegas ballroom. Music pumping. Endless food and drink available on demand. Attractive local models posting player picks in ultra-competitive fantasy leagues. Top prizes extending well into six figures. Boasting and trash talk rising to epic levels.

“There’s such an adrenaline rush,” said Stacie Stern, general manager of Arizona-based Head2Head Sports. “The excitement and anticipation that surrounds all of this is really big. And so many

The Fantasy Football Players Championship had more than 3,000 registered teams last season. Photo by: Fantasy Football Players Championship

people involved say it’s one of their best days of the year, that the live fantasy experience is really unlike anything else.”

Such is the atmosphere surrounding high-stakes fantasy sports, a small but fast-growing segment of the multibillion-dollar industry.

More than 32 million people in the U.S. and Canada play fantasy sports, according to the most recent data available from the Fantasy Sports Trade Association, the vast majority of them participating in some sort of free or low-fee league. But a sliver of that market, perhaps less than 10,000 people, play in high-stakes leagues that typically carry entry fees of more than $1,000 per player.

It is these leagues where the most intense and accomplished fantasy players go to get their competitive juices flowing.

“If you think you’re pretty good, you want to go up against the best of the best,” said Lindy Hinkelman, an Idaho pig farmer who has won more than $300,000 in the last three years playing high-stakes fantasy baseball. “That level of competition is something I really enjoy.”

Several companies operating in the high-stakes fantasy business are looking to expand their profiles and take advantage of that keen player interest. The National Fantasy Baseball Championships and National Fantasy Football Championships, majority owned by sports data powerhouse Stats LLC following an early 2011 purchase, each have since generated company-record registrations during their most recent seasons. Leagues there cost as much as $10,000 per team to play, and the combined operation has grown to about $4 million in annual revenue.

Similarly, the New York-based Fantasy Football Players Championship saw its number of registered teams nearly double last fall from the previous season to more than 3,000. Industry veteran Emil Kadlec, owner of Fantasy Sports Publications Inc. in New Mexico, is preparing a return to the high-stakes space this coming football season with the creation of Full Time Fantasy, running a series of games with a top prize of $200,000. Others including Stern’s Head2Head Sports, which operates at somewhat lower price levels, are replicating the Las Vegas draft party experience in other cities, including a long-running event in Dallas in partnership with ESPN Radio.

And various entities, including the National Fantasy Baseball Championships and National Fantasy Football Championships, are exploring how to expand the media profile of high-stakes fantasy, including potential new radio, television and online video ventures.

Though fantasy sports executives are loath to make any comparisons between their industry and gambling, the aspiration here is to make the live events of high-stakes leagues a media content play similar to televised poker. Aside from occasional one-off specials on regional sports networks, local radio and outlets such as the NBC Sports Network (formerly known as Versus), high-stakes fantasy has had no major mainstream media presence.

“You can see the potential of our live draft results and how that content could be valuable to any mass market medium, whether that’s radio, online or hopefully one day TV,” said Greg Ambrosius, National Fantasy Baseball Championship and National Fantasy Football Championship founder, and general manager of fantasy for Stats LLC.

But the varied initiatives still arrive against a troubled backdrop. The largest high-stakes fantasy operator, the Missouri-based World Championships of Fantasy Football, filed for Chapter 7 bankruptcy in November after failing to pay more than $1 million in player prizes, and generating more than $4 million in losses.

High-stakes operations benefit from a player base that often enters multiple leagues. Photo by: Fantasy Football Players Championship

The collapse of the World Championships, stemming primarily from poor cost controls and an aggressive expansion campaign that was grossly undercapitalized, represented a prominent black eye from which the industry is still recovering. The saga was the subject last fall of an ESPN “Outside The Lines” segment. And several lawsuits are pending against the World Championships, including one from the Missouri attorney general’s office.

“The WCOFF demise was perhaps the biggest black eye in the history of fantasy sports,” said Paul Charchian, Fantasy Sports Trade Association president. “We fortunately haven’t had a lot of scandal in this industry, but there was obviously this one, and sadly, it was actually quite avoidable. It was a bad business plan poorly executed. And it’s caused a lot of collateral damage, and damaged the trust level of some players.”

Low margins, loyal players

For all the spectacle and intensity surrounding high-stakes fantasy, it’s actually a rather low-margin business, providing in many instances a far smaller profit percentage than traditional online fantasy leagues operated at scale.

Most high-stakes leagues pay out at least 80 percent of total player entry fees, leaving the remainder to fund company operations. Some can even exceed 90 percent in payouts to winning players.

One particular example is the National Fantasy Football Championships’ exclusive Diamond League for fantasy football. Carrying a $10,000 entry fee, the 12-team league pays a $60,000 top prize, plus additional bonuses for winning the regular-season portion of the campaign. Total prize payouts in the league amount to $114,000 out of the $120,000 in collected entry fees. The Diamond League for the National Fantasy Baseball Championships, similarly, pays $140,000 in prizes out of $150,000 in collected entry fees.

By comparison, low-cost, fee-based leagues by larger operators can carry a profit margin well in excess of 30 percent.

“It’s definitely a different model than the large companies running leagues at scale,” Ambrosius said.

High-stakes leagues such as the National Fantasy Baseball Championships pay out more than 80 percent of the player entry fees they receive. Photo by: National Fantasy Baseball Championships

Advertising is an additional revenue component for some leagues. But given the small scale of high-stakes fantasy to date, corporate spending is not a significant budget item.

But many high-stakes operations remain profitable, due to lean business operations, and perhaps most important, a highly loyal and recurring base of players with many playing in multiple leagues. Operators described annual drafts in fantasy football and baseball as akin to a family reunion.

“The core of high-stakes players have definitely become sort of like a family,” said Kadlec, who helped found World Championships before selling it in 2007, prior to the company’s financial ruin. “There’s the fun of playing itself, to be certain. But a lot of what people also enjoy is getting together each year, seeing how everybody is doing and reconnecting.”

Players come from all walks of life, ranging from high-end professionals to self-described professional gamblers and more unusual backgrounds such as Hinkelman. But they generally are male, between 25 and 60 years old, and boast incomes in excess of $100,000 per year.

The low margins and diminished scale of high-stakes fantasy have kept Yahoo! Sports, ESPN and CBS Sports, the three most dominant companies in fantasy sports, essentially on the sidelines.

CBS Sports has the largest profile among the major operators in paid fantasy leagues, with 60 percent of its leagues carrying some type of entry fee. It offers fantasy football leagues with entry fees as high as $500 and top prizes of $3,500. But executives there said they have no plans to expand significantly this segment of the business.

“We’re looking for games that can attract millions of people,” said Jason Kint, CBSSports.com senior vice president and general manager. “We’re really focused on the commissioner-style products, and what people are essentially paying for with us is a software fee, the hosting of the leagues, live scoring and so forth.”

Industry standards

In the wake of the World Championships collapse, the Fantasy Sports Trade Association is now trying to establish a set of industry guidelines to assist both players and purveyors of high-stakes fantasy sports. The trade association has no authority to prosecute offenders. Rather, the goal is one of education. A published set of guidelines is expected by the spring, in advance of this fall’s fantasy football season.

“A lot of people are asking tough questions, rightly so, and our goal is to get everybody smarter,” Charchian said. “The space has been so wide open that having a consistent set of rules of the road, we think, should be very helpful.”

But there remains some division as exactly how to proceed, and what defines safe conduct. Some high-stakes fantasy companies escrow their entry fees, and make a public point of doing so. In essence, the message to consumers is that another World Championships-style demise can’t happen because the operators themselves cannot access the money until it is time to pay winners.

“We believe the escrow is an important factor for our players, the knowledge their money is safe,” said David Gerczak, Fantasy Football Players Championship co-founder.

Others have contended the escrow could place unnecessary limitations on company funds, and raises questions on the safety and reliability of the attorney or company escrowing the funds.

“The escrowing is not a clear-cut answer,” said Head2Head’s Stern. “You have to be sure of the background of who has the money, just like you need to be sure of the background of the league you’re playing with.”

In the meantime, the industry continues to lick its wounds from the World Championships and reassure angry players.

“Sure, it was bad to see my old company go down,” Kadlec said. “But the real painful thing was having players, my friends in many cases, not get paid. That’s the thing that still gets me.”

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When Nigel Eccles joined his five partners from the Internet startup Hubdub at the popular South by Southwest Interactive festival in Austin, Texas, in 2009, it was to bury an idea that only three months earlier had brought in $1.5 million from investors.

While well-designed and artfully executed, Hubdub was a Web-based game without a business model, or at least a sustainable one. Players predicted the outcome of news events, earning points when they were correct. But there were no payouts or, more importantly, pay-ins. While embraced by key distributors such as the Huffington Post and Reuters, with a player base that grew to about 250,000, Eccles knew the company would run out of money long before it could generate the advertiser support to sustain itself.

The site’s founders snapped this photo as they laid the groundwork for FanDuel in 2009 in Austin, Texas.

“We’d spent 16 months, working day and night and weekends, and we had pretty much failed,” Eccles said, reflecting on the seemingly unlikely path that led him to fantasy sports and the launch of FanDuel, a game that allows users to compress their play into a single day.

“We weren’t making any money and I was going to get yelled at at the next board meeting. We knew we had to go back to investors and say ‘This isn’t working,’ which is never good. We wanted to be able to say, ‘This isn’t working, but we’ve got this other thing.’

“So we had to come up with what the other thing was.”

South by Southwest (SxSW), a creative venue with a reputation as an incubator, seemed like an ideal place to do it. Though all of Hubdub’s founders are from Scotland, they launched the site in the U.S. and saw the States as the primary market for whatever venture would replace it.

Perched on picnic tables in the backyard of a house they rented for SxSW, the partners contemplated where they might go next. They knew they wanted to launch another Web-based game. They knew from Hubdub that sports and entertainment both attracted players. And they knew from their still fresh Hubdub wounds that they did not want to rely on advertisers for their revenue. Whatever game they hatched had to be premium: Pay for play. It wasn’t long before they landed on a target.

“We came at it from an entrepreneurial point of view and pretty quickly latched on to fantasy sports as the opportunity,” said Warrick Taylor, a Hubdub investor and adviser who now serves as the company’s vice president of business development. “Here’s a market that was ripe for disruption. We analyzed the market size. The legal aspects. The more we looked at it, the more it became obvious that this was the direction to go.”

By the time they left Austin, the partners had decided to scrap Hubdub and attack fantasy from an angle that few were pursuing: A daily game that would allow players to pay an entry fee one day and collect their winnings the next, rather than drafting and then managing a roster throughout the season.

The first game they prototyped was a player pick ’em, where users would predict who would rack up better stats in a head-to-head matchup — Brady vs. Brees, for example. None of them particularly liked that, so they moved to a more traditional format where entrants ranked players and filled out a roster via an autopick draft. Three months after soft-launching under that format in 2009, Eccles received an email from a player who had a suggestion.

“He said that the idea was cool but the format was all wrong,” Eccles said. “My first thought was: ‘What does this guy know?’ But I started talking to him and realized he knew a lot. He suggested a salary cap format. There’s a lesson there about listening to your users. He was right.”

From that suggestion, the current game, FanDuel, was born.

FanDuel plays similarly to traditional salary cap challenge leagues, with users choosing players based on set salaries, filling out a roster while staying under the cap. Scoring also mirrors standard games. The shift to a daily format is the critical twist. Rather than drafting and then managing a roster throughout the season, players can compete daily, paying an entry fee, filling out a roster and accumulating stats from a slate of games — a day in baseball, basketball or hockey, or a weekend in football. Payouts are determined at the end of the last game.

Users can play lower cost, head-to-head games where, for example, they each put up $10 and the winner gets back $18. Or they can join larger leagues and compete with more players for bigger payouts. FanDuel takes 10 percent from each pool and distributes the rest of the money among the top finishers.

TheUsers can play low-cost, head-to-head games or join larger leagues.

“The daily games are perhaps the biggest innovation in the last 10 years in the fantasy space,” said Chris Russo, founder and CEO of Fantasy Sports Ventures, which late last month was purchased by USA Today Sports Media Group. “You’ve got 30 million fantasy players out there spending money. That’s a very large market. So when you’re answering into a different part of that market that could be untapped, the potential could be significant.

“The number of people playing [daily fantasy games] today is probably in the hundreds of thousands. But there could be tens of millions more to bring on board.”

FanDuel wasn’t the first to operate a daily fantasy game. It came two years after a mom-and-pop operation called Fantasy Sports Live and one year after Snapdraft, a game operated by recently shuttered Fanball.com. But FanDuel was the first daily operator to emerge in any significant scale, getting in front of large swaths of sports fans by white-labeling its game through large distributors — most notably the websites of nine U.S. newspapers, including the New York Post, Philadelphia Daily News and St. Petersburg (now Tampa Bay) Times. FanDuel paid out $10 million last year, up from $1.5 million in 2010.

Driven by the success of FanDuel, parent company Hubdub has raised $6 million in venture funding, including $4 million in its last round, which closed in November. Eccles said the company should turn profitable this year, though that timetable could change if they elect to spend more on marketing as they face increasing competition.

While Eccles and the game developers remain in Scotland, based in space rented at the University of Edinburgh, FanDuel has opened a corporate headquarters in New York. It now has 18 employees, including 10 engineers to make sure the game runs smoothly and players are paid promptly.

Those reliable daily payouts are crucial, Eccles said, considering the history of fantasy sites that started out offering large cash prizes in their first year but tailed off rapidly. They’re also the point from which many of the questions regarding the future of daily fantasy stem.

Among FanDuel’s offerings is that simple, head-to-head game in which two people each charge $10 to their credit cards or PayPal accounts, with the winner collecting $18 and FanDuel keeping 10 percent.

That sounds a lot like bookmaking.

In fact, Eccles is well-versed in the inner workings of online wagering sites, which are legal in the U.K. He launched a betting site called Flutter, which was acquired by Betfair, the world’s largest such exchange.

Eccles and others say that daily fantasy, when operated properly, is legal in the U.S. thanks to a fantasy sports carve-out written into the Unlawful Internet Gaming Enforcement Act of 2006. Under the carve-out, to qualify as fantasy, a game must be based on stats from players in more than one game and the size of the payout must be revealed before users enter. FanDuel meets both of those parameters.

Some states also apply a skill test, allowing only games that are predominantly determined by skill rather than chance. Eccles said that, while the courts have offered varied opinions on what qualifies as chance or skill, the company is comfortable that its game is the latter, based on studies of how often players it identifies as high skill defeat those of lesser skill.

“Our investors have seen us be pretty conservative with our approach on what is or isn’t legal,” Eccles said, pointing out that FanDuel goes dark when there aren’t at least three games on a league’s schedule. “I think they’re comfortable with where we are.”

Because daily fantasy plays out at a pace more akin to traditional wagering than seasonlong fantasy, Eccles said he expected the site might see a migration of online poker players when U.S. regulators shut down several large sites in April.

“We saw nothing, which was a surprise to it,” Eccles said. “We often thought that this could be a substitute activity for people who no longer had access to online poker or sports wagering. But all the research we’ve done says that it’s not. Our users are huge sports fans. They’re all existing fantasy players. They’re no more likely to be sports gamblers than anybody else. That was a huge surprise to us.

“The thing that makes our users different from the rest of the fantasy market is that they’re a younger demo. That’s good for us. And, frankly, it’s good for sports.”

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■ Farmer brings home the bacon
The fantasy sports industry has long coveted its version of Chris Moneymaker or other big winners in the competitive poker world, a superstar who can elevate the mainstream profile of the industry. The answer to those wishes may have

Pig farmer Lindy Hinkelman may have a dirty occupation, but he cleans up when playing fantasy baseball.. Photo by: AP Images

arrived from tiny Greencreek, Idaho, in the form of Lindy Hinkelman.

A pig farmer by trade, Hinkelman has won more than $300,000 over the past three years playing in the National Fantasy Baseball Championships.

The subject of several mainstream media profiles, Hinkelman has no deep secrets on his fantasy baseball success and does not spend much time online. He watches a large amount of baseball, typically more than four hours per day during the summer, and makes a specific point of not drafting players who have just signed large contracts.

“I’ll let other guys take care of guys like” Prince Fielder and Albert Pujols, each of whom signed deals this winter worth in excess of $200 million, said Hinkelman, who typically plays five or six different high-stakes teams each year. “I spend a lot of the winter researching guys, looking for the breakout and bounceback candidates. But this is something I really enjoy.”

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■ Name’s sake
In many leagues, a fantasy team is only as good as its team name. Fantasy league team names are often inspired by pop culture, innuendo or a player’s name. Below is a list of popular team names from various fantasy sports, as compiled and voted on by users of the site TeamNames.net. TeamNames.net offers a random team name generator to assist fantasy league players with creative suggestions.

Hoops! I did it again!
The Sons of Pitches
Victorious Secret
Plaxidental Shootings
Wii Not Fit
The Beer View Mirrors
Somewhere over Dwayne Bowe
Rubber Puckies

See the full list at: TeamNames.net/fantasy/top-101-fantasy-team-names

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■ Do the math
There is the tried-and-true image of fantasy sports players poring endlessly through magazines and websites, searching for kernels of useful data to win their leagues. Ziguana.com, a Los Angeles-based startup, seeks to break through the clutter by offering customized fantasy analytics tailored specifically to players’ individual league settings.

The company recently won the Rookie of the Year award for 2011 at the Fantasy Sports Trade Association’s winter conference, and is a charter participant in CBSSports.com’s new open-source fantasy sports developer platform.

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■ Judgment day
Experiencing conflict within your fantasy sports league? The Supreme Court of Fantasy Judgment will provide arbitration and guarantee a ruling within 24 hours, for $15 per dispute.

According to their website, Fantasy Judgment is a “veritable pantheon of fantasy sports experts dedicated to impartially resolving all issues, disputes and conflicts within the confines of fantasy sports leagues.” Belong to a particularly contentious league? Unlimited dispute resolutions packages are offered for $100 per season (FantasyJudgment.com).

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■ Celebrity sightings
As fantasy sports have become increasingly popular, more celebrities have begun playing and making their obsession known via Twitter.

Model and actress Brooklyn Decker showed her competitive spirit in tweets about the fantasy team she co-owned with Kelly Erickson, a production assistant with Happy Madison Productions.

Brooklyn Decker Photo by: Getty Images

Decker tweeted to Happy Madison actor and producer Allen Covert: “@KellyEE and I are taking you down in fantasy this week … should we put a wager on it?”

Decker and Erickson later lost to actor David Spade in their fantasy league playoffs. Erickson posted: “Romo getting injured guaranteed @DavidSpade victory … Congratulations, you win.” Spade retweeted Erickson’s comment and added: “Don’t get cranky Cam delivered. Sry Brooklyn.”

Other famous fantasy sports players include actor Paul Rudd, actress Demi Moore, actor Jerry Ferrara, actress Elizabeth Banks and comedian Seth Meyers.

— Compiled by Cailyn Bankosky, SportsBusiness Daily; Eric Fisher, SportsBusiness Journal

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