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Volume 21 No. 30
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Daily fantasy pushes to continue growth streak

After more than 60 years in existence, fantasy sports has seen its foundation dramatically altered by a younger sibling.

The family newcomer — daily fantasy — is fun, popular and easy to get along with, and has quickly become a favorite child. But many wonder if the charm of youth will endure. So daily fantasy operators are acting aggressively to ensure that last year’s mainstream arrival was just the beginning.

Few business advancements have had as much effect on an industry as daily fantasy has over the past year, and the early signs of 2015 show no slowdown.

Boston-based DraftKings, one of two major daily fantasy game operators, is actively developing a Series D venture capital round that would exceed $100 million and value the company in the neighborhood of $1 billion, executives there said. A closing is expected sometime this spring.

New York-based FanDuel, DraftKings’ key rival, is said to be mulling a similar major fundraising move, industry sources said. This comes after both companies received significant funding rounds just last summer, worth a collective $111 million, that catapulted them into prominence.

Those prior funding rounds — $70 million for FanDuel and $41 million for Draft-Kings — nearly eclipsed the entire history of venture money in fantasy sports up to that point, and involved major entities such as New York investment bank The Raine Group and NBC Sports Ventures.

Daily Fantasy sites have poured money into sponsor deals (like FanDuel’s deal with the Magic) and advertising spots.
The numbers surrounding daily fantasy are staggering. FanDuel, the largest player in the space with $57.3 million in 2014 revenue, is eyeing at least a tripling this year that would take it to nearly $200 million. DraftKings is projecting $150 million in revenue for 2015, five times its take last year. The revenue totals are comparable with some of the more successful U.S. sports digital media entities, but were created in just a fraction of the time. FanDuel is less than
8 years old, and DraftKings formed just three years ago.

The forthcoming funding rounds also help set up potential initial public offerings next year, and give executives an opportunity to assess the future.

“We’re spending a lot of time thinking about what’s next,” said Jason Robins,

DraftKings chief executive. “We’ve begun a process where we’re looking at a lot of different options. But the key thing that remains is that this space presents a huge amount of opportunities. We’re not only changing how fantasy is played, but more fundamentally, how fans engage with sports.”

Robins acknowledged the pending Draft-Kings funding round is arriving much sooner than originally expected, but is designed to keep up with the surging growth of daily fantasy and presents another chance to work with top-tier investors. He also marvels at how just 18 months ago, he struggled to get the attention of almost anyone in a position to support the company.

“The summer of 2013, I was out there all over town, trying to get $50,000 checks, begging people,” he said. “Now it’s totally flipped around and people are knocking my door down trying to get involved. It’s sort of weird because it was a lot cheaper to buy in back then.”

Related story: Sites try to keep avid players from running off newbies

Fueled with surging revenue and more venture funding, daily operators now realize they must continue to place winning bets. The aim for daily fantasy in 2015 is to elevate the space this year well beyond its current level of 2 million players, representing less than 5 percent of the entire fantasy sports business. That means signing more team and league partnerships, such as DraftKings’ recent alignment with the UFC, and more aggressive advertising across sports media, particularly during this fall’s peak fantasy football season.

So far, daily fantasy has shown itself to augment traditional fantasy sports rather than threaten them. The total population of fantasy sports participants in the U.S. and Canada surpassed 41 million last year, according to the Fantasy Sports Trade Association, a record total and more than twice the 2007 level. But the shorter games bring an audience predominantly in their early and mid-20s, about a decade younger than traditional fantasy sports players and precisely the youthful fan base that every sports property covets.

“There’s sort of a virtuous circle now that’s surrounded the daily space,” said Nigel Eccles, FanDuel chief executive.

Earlier this year in Las Vegas, daily fantasy completely dominated the proceedings at a winter conference of the FSTA, the key business group serving the fantasy industry, and it wasn’t hard to understand why. The factors are easy to see: Meteoric business growth, a young and affluent fan base, and huge expansion possibilities domestically and abroad are intoxicating.

“If you’re in this business, it’s pretty much impossible to not be touched by daily somehow,” said Paul Charchian, FSTA president. “Daily has completely changed the visibility of the industry, and through all the team and league partnerships they’ve done, it’s legitimized fantasy in a lot of ways. Daily fantasy is the best thing that’s happened to this industry with the possible exception” of the CDM Fantasy Sports lawsuit in 2005 that made player statistics usable without a commercial license.

But there will be the inevitable growing pains hitting daily operators, as the industry grapples with securing a fair playing environment for all participants (see related story), works to ensure nationwide availability, and tries to create a clearer distinction from gambling, even as gambling itself begins to receive a warmer embrace from sports leagues.

“We’ve continued to focus on making sure fantasy, all forms of it, is fully recognized as a game of skill,” said Peter Schoenke, president and co-founder of fantasy content operator RotoWire and head of the FSTA’s lobbying committee.

MONEY MATTERS

A key part of the appeal of daily fantasy lies in its format, with single-day or single-week leagues as opposed to leagues that last an entire season. The other key differentiator from commissioner-style fantasy leagues is the cash prizes. While daily fantasy operators do offer free games, the vast majority of consumer interest lies in cash-based games, and FanDuel alone paid out more than $564 million in prizes in 2014.

Top games now offer seven-figure prizes, and it’s common to see “daily fantasy millionaires” support themselves either predominantly or solely by playing daily fantasy games. The short-form games have also helped get a fantasy player who previously played only football in seasonlong formats to try other sports. DraftKings says roughly half of its football players from last fall are still actively involved in another sport.

Daily fantasy’s quick play and big payouts have drawn a desirable young demographic to the FanDuel (above) and DraftKings sites.
Daily fantasy has existed for nearly a decade. But only in the last year, with that combination of aggressive marketing, large-scale prizes, and significant mobile penetration, has it catapulted. Even FanDuel, the market leader with more than 1 million paid active users, had barely 40,000 just two years ago.

“Daily fantasy is really an extension of our more connected lifestyles,” said Adam Krejcik, managing director of digital and interactive gaming for Eilers Research, which has extensively studied the daily fantasy space. “You think about all the other things out there that are really big on mobile and provide instant gratification like Uber, GrubHub, Tinder and so forth. These are all things that resonate strongly with the millennial generation, and daily fantasy is very similar. … We’re still just scratching the surface of where this could all go.”

The heavy cash component of daily fantasy has also amplified the legal environment around the industry. In most states, fantasy sports is defined as a game of skill, and the Unlawful Internet Gambling Enforcement Act of 2006 created a specific federal carve-out for fantasy. But five states ­— Arizona, Iowa, Louisiana, Montana and Washington — do not allow paid fantasy games, and only free games are offered there. Lobbying efforts continue in those states to allow for all types of fantasy games.

But as the dollars around daily fantasy continue to soar and cash-strapped public bodies look for more ways to generate revenue, a specter of increased legislation remains, even as leagues and teams increasingly embrace the space.

Photo by: FIREFLY PHOTOGRAPHY
As a result, many involved in daily fantasy have spent time in recent months trying to explain the nuances of the business to elected leaders. The FSTA, in addition to its traditional lobbying efforts, has also helped support a new website, fantasysportsfreedom.com, that promotes more open, legal fantasy gaming. The FSTA is also actively discouraging the use of overt gambling-type terms such as “rake” in marketing of daily games.

“We’re trying to help the entire industry as much as we can, both in terms of time and money,” said Eccles, recently elected with Robins to the FSTA board of directors. “A lot of it is also trying to use our contacts and make connections. We’re partners with the NBA, for example, and we’re trying to use that partnership and make introductions to the right people. We’re also looking to put emails out to our user base in the relevant areas to get them to support fantasy in their state.”

Daily fantasy’s reputation in the sports industry and the public at large has also boosted the ability of FanDuel and DraftKings to write checks and align formally with pro teams and leagues. The two companies together are now partnered with dozens of entities, and the NBA holds an equity stake in FanDuel. Perhaps more important, though, FanDuel and DraftKings have shown themselves to be active corporate partners before and after the transaction. Activations have included prominent stadium and arena signs, the creation of daily fantasy content across multiple sports, and a bevy of digital marketing components.

“These guys have invested in the sport and built a meaningful product around it,” said Mike Mossholder, senior vice president of global marketing partnerships for the UFC, which has a deal with DraftKings. “Their fan base lines up strongly against ours. That is precisely the kind of company we want to partner with. They actually built a UFC product and had it up and running before we even had a deal with them. That shows a ton of faith in the sport.”

BIG BOYS

With all the activity around daily fantasy, the natural question becomes who else enters the space, and speculation points to established players of traditional fantasy and digital sports media such as ESPN, CBS and Yahoo all taking a close look.

Dozens of entities are operating in daily fantasy, with the only major technical barrier to entry coming from the ability to process live game scoring, payments and prizes. But with a combined nine-figure head start in funding and commensurate marketing, FanDuel and DraftKings take up a whopping 96 percent of the daily market.

For now, the answer from the media giants has been primarily to accept significant ad buys from the daily fantasy operators or strike marketing partnerships. NBC, which owns fantasy content site Rotoworld, took a further step by investing along with parent company Comcast in FanDuel rather than build its own daily game. The move built on a foray in the now-shuttered fantasy operator SnapDraft.

“Nigel’s built a powerhouse, and we’re big believers in this space,” said Rick Cordella, NBC Sports Digital senior vice president and general manager, and a FanDuel board observer. “Our interest in this goes to the highest levels of the company.”

The same could be said for ESPN. A working group there under the direction of John Kosner, executive vice president of digital and print media, is studying how the sports media titan should be further involved in daily space. A clearer direction is expected later this year.

Chief Executive Jason Robins at DraftKings’ offices in 2013, when revenue was $4 million. It’s projected to be more than $150 million in 2015.
Photo by: W. MARC BERNSAU / BOSTON BUSINESS JOURNAL
Both FanDuel and DraftKings believe it’s likely too late already for a major new entrant into daily fantasy and that the space has largely centered on the Coke and Pepsi of the industry. Not all observers agree, though.

“I would think it would be a mistake to assume that you’re going to have these kind of growth curves overall for daily with the same kind of market share breakdown. That doesn’t seem logical this early in a market,” said Steve Byrd, a sports media consultant and former Stats LLC executive, and also a new FSTA director. “You’re already

beginning to see some new entrants come into daily with different kinds of play formats. So I don’t think the game’s over by a long shot.”

Traditional fantasy leagues run by media entities, however, typically do not have extensive experience escrowing and paying out large amounts of player prize money on a continual basis, which is fundamental to what the daily operators do.

“If ESPN came in, I think it would be with a slightly different product,” Eccles said.

As a result, the more likely scenario is some type of equity investment or large-scale partnership.

There is also the question of the NFL, by far the most popular league for fantasy sports and the main U.S. sports league to yet strike a league-level deal in daily fantasy. The NFL last fall opened up the sponsorship category on a team level, and five clubs quickly struck deals, two with FanDuel and three with DraftKings. But as of now, the category remains closed on a league level, and opinion on the subject among team owners is mixed.

Krejick of Eilers Research predicted at the FSTA conference that the NFL will ultimately elect to invest in both DraftKings and FanDuel rather than hitch its wagon to just one of them. Any such deal would almost certainly propel even more rapid growth in the space.

“After considerable debate, the NFL decides on a joint investment in both FanDuel and DraftKings rather an exclusive partnership,” Krejick wrote in a recent white paper.

In any event, the six months between now and the start of the NFL season promise to be full of further changes for daily fantasy.

“There are so many things that have accelerated beyond even our most bullish projections,” DraftKings’ Robins said. “It’s rare to see an industry, regardless of type or genre, growing this fast.”