Fantasy Giants Might Have Gambled Their Future on a Single Season

It is amazing how much change can occur in just twelve months.  Last year before the beginning of the 2015 National Football League season, online daily fantasy sports was nearly unknown to a majority of Americans, law enforcement agencies and the media.  Until that fateful first Monday night game of the year, when we were all smacked upside the head with a gazillion commercials on the joys of fantasy by FanDuel and DraftKings.  In bold, but possibly fool-hearty attempt to grow its customer base, DraftKings spent $21 million on television advertising in that week; it was the nation’s number one advertiser with 5,800 commercials in seven days. The advertising campaign worked. In September alone one million new customers signed on with DraftKings.  FanDuel did not spent quite as much or get as many new players, but it was close; however each of those new players was very expensive.

The advertising barrage increased brand recognition and the number of users enormously.  But the cost of the ads was enormous—an estimated $174 per new user at DraftKings and $123 per new user at FanDuel, according to Eilers & Krejcik. —which meant operating losses at both companies last year. Alexandra Berzon, Wall Street Journal, 8-2-16

That September media blitz was like a tsunami and it threatened to engulf the entire gambling industry and change the nature of gambling on sports forever.  However, on the way to the bank and glory both FanDuel and DraftKings ran into a little trouble – the New York Attorney General.  The AG put the brakes on fantasy sports in New York and soon other states followed suit.  For New York and most states, the question of whether fantasy sports was a contest of chance or skill was central.  The New York AG said it was gambling and that started the ball rolling against the two companies.  They could not engage with anyone living in New York, it was a major financial and legal blow to both companies.  However, they did finally catch a break when the state legislature passed a bill defining it as a game of skill and legal in New York.

Gov. Andrew Cuomo has signed a new law to allow the resumption of daily fantasy sports in New York. The measure calls the popular online contests a “game of skill.” That legal definition resolves the central argument in a lawsuit brought against the country’s two top fantasy sports companies by the state attorney general. He had likened the online matches to illegal gambling operations based on chance.  Associated Press, 8-3-16

Since last September, some twenty states have reviewed the issue; but so far only five have found it legal or passed legislation to legalize daily online fantasy sports.  In the major of states fantasy sports games are still considered gambling and not a games of skill and therefore illegal without specific permission and licensing.

Over time, the legal status of daily fantasy sports games and indeed all sports betting may change.  But as football fans wait eagerly for the first Monday night game, FanDuel and DraftKings might not have the staying power necessary to stay in the game until those changes take place.  According to the Wall Street Journal, in June of 2015 FandDuel had $275 million in cash, but by May of this year, it was down $50 million.  While DraftKings probably has more cash than FanDuel, both desperately need more legal jurisdictions for them to survive and become viable, profitable businesses.  Key to their success are California, New York, Texas, Florida, Illinois, Pennsylvania and Ohio as those seven states have 44 percent of the nation’s population.  Unfortunately, thus far only New York has legalized it and that just happened.  The governor did not sign the bill until August 3rd.

After inundating sports fans with a barrage of commercials during last year’s football season, fantasy-sports websites FanDuel Inc. and DraftKings Inc. are cutting back sharply on their advertising, as they seek to rein in spending and limit the impression—partly created by their own ads—that they are peddling a form of gambling… Flush with cash from media-company investors FanDuel and DraftKings together spent an estimated $500 million on advertising last year… FanDuel had a cash balance of about $50 million in May, down from $274 million last June.  Alexandra Berzon, Wall Street Journal, 8-2-16

The situation is uncertain, but one thing is certain; televised professional football in September will not be swamped by DraftKings and FanDuel the way it was last year.  Although New York is now safe ground, the advertising will still have to walk a line trying to demonstrate the skill required for the game.  That is a difficult task; the top level winning players in the daily games are very skilled, but the majority of players are not skilled enough to eliminate the gamble.  They are playing a game of chance where the outcome is heavily weighted toward the upper echelon contestants.

However, the true gamblers in the game of daily fantasy sports are DraftKings and FanDuel.  Starting a new business is always a gamble, but a business with no clear legal status is a very risky venture.  When those two jumped onto the national stage last year, they may have unknowingly been putting all of their chips on that one season.  Of course, neither DraftKings nor FanDuel thought it was a gamble.  They believed it was a contest of skill and they were only playing the game against each other.  But, that is not the way it has played out. Instead their venture turned out to be a wager placed on a contest with vague, uncertain and ever-changing rules, like playing crochet in Wonderland.  This year instead of duking it out to see which will become the richest, the giants of daily fantasy sports are struggling to survive.  A year ago, they were cash cows capable of dominating sports broadcasting, but no longer.  Now it is questionable if either DraftKings or FanDuel has the resources to hold on until California, Texas, Florida, Illinois, Pennsylvania and Ohio legalize their game.


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