SBJ/February 6-12, 2012/In Depth

FanDuel delivers daily dose of fantasy games

Founders use lessons learned from failed venture to bring a fresh approach to fantasy sports

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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