Last January, newly anointed fantasy kingpin FanDuel awarded a $1 million grand prize to Iowa resident Travis Spieth for winning its pay-to-play fantasy football final event.
Last month, eager investors — including NBC Sports and Shamrock Capital Investors — awarded FanDuel a grand total of $70 million in just one round of Series D financing, raising their total financial backing to $86.2 million.
Guess that answers where the funding for this year’s grand prize will come from.
Daily pay-to-play sites such as FanDuel and DraftKings (which has raised 76.4 million in venture backing) are distinguishable from traditional fantasy sports leagues, which usually entail a preseason buyin followed by a postseason payout; but only after a 16-week season is completed. For daily fantasy sites, participants can buy in and assemble a fantasy team for 24 hours, and the winning contestants receive an immediate payout from the site.
This high-turnover, quick-pay fantasy model yields a much higher customer acquisition rate because it doesn’t require the long-term four-month commitment that a standard fantasy league would. So with a market of more than 33.5 million fantasy participants, FanDuel and DraftKings are capitalizing on innovation by providing fantasy enthusiasts with an alternate method of play.
“It wasn’t like we were coming in to try to displace an existing market,” DraftKings CEO Jason Robins said. “We were coming in and trying to convince people who were already passionate about this to participate in a different way from their season-long leagues.”
It’s a pretty simple (and brilliant) start-up model. Lets see, a $70 billion fantasy industry, a market of 33.5 million potential participants, and a single format where players buy in and get paid once over four months.
See any room to carve out a niche for profitability somewhere in that equation?
Sure, why not multiply the number of paid entry fees by at least 17 (per week, for football) and give people a chance to win money every single day or week instead of once a season?
Multiple entries? Absolutely.
It’s easy to see the appeal of the daily game, too. Season-long fantasy football leagues can be terribly frustrating at times.
Even if a team runs the table in the regular season, one bad week in the playoffs and its all for nothing. Not to mention, an early season injury can derail a team’s chances of winning before the season even begins (i.e. Jamaal Charles in ‘11 or Tom Brady in ‘08). Even those who remain loyal to the season-long format but miss out on their league’s playoffs will have the itch to keep playing fantasy in some fashion through weeks 14-17 after they’re eliminated.
Why not put a hundred bucks down and draft a new team? Why not a thousand? A couple thousand? It’s possible. Daily game entry fees can range anywhere from $1 to $5,200 on some sites.
The legality of daily pay-to-play fantasy games remains an issue of debate. Specifically, does this new format falls within the guidelines laid out in an exception to the Unlawful Internet Gambling Enforcement Act (UIEGA)? FanDuel has a link on its site dedicated exclusively to explaining why the daily format and services provided (i.e. accepting entry fees, dispensing payouts and taking a cut of it all) is not a violation of any online gambling laws.
Regardless of potential legal issues, the recent trend of massive corporate involvement, including USA TODAY and Sports Illustrated, is an indication that daily fantasy games are here to stay. Endorsement from these mainstream sports entities will help cement the stability and growth of this relatively new arm of the fantasy industry.
While FanDuel and DraftKings have an early industry edge due to their jump on the market, as the popularity of pay-for-play formats grows, other fantasy providers such as Yahoo! and ESPN are likely to follow in the footsteps of USA TODAY and Sports Illustrated in the not-so-distant future.
Why? Because they’d literally just be leaving money on the table if they didn’t make daily play available to their current customers.
Not only will standard-only fantasy sites lose the chance to grab a firm market share of a rapidly growing industry, they will lose a sizeable portion of their original fantasy consumer base on the back end. People will undoubtedly change their primary fantasy website provider to one that offers both daily and season-long formats, if only for convenience. Not to mention the people who’ll be lost simply because they visited another site to explore daily fantasy options, and then ended up staying for any combination of other reasons.
They came for X, and stayed for Y; plus whatever variables may lie in between.
“It’s a fairly straightforward economic model,” co-founder of Bet America (another daily site) Thomas Dwyer said. “We all agree it’s not gambling, it’s not poker, but the business model is similar. Can you acquire a user for X amount and have him stay and play with you to generate revenues of 3 to 4 times X amount?”
FanDuel expects at least 500,000 participants on their site this year. They’re projected to payout over $400 million in cash prizes and the value of the company has surpassed $4 billion. So what do they plan to use their most recent influx of capital investment towards?
Customer service, site technology, and of course…marketing.
In a relatively new market that’s projected to grow exponentially over the next five years, industry leaders will fight hard for early supremacy in acquisition of both the current and incoming consumer base. If this were a boxing match, FanDuel took round one against DraftKings, 10-9 on the scorecard. But as more and more big-player corporations begin to throw their weight around in the daily fantasy ring, this once two-man boxing match is setting itself up to look something closer to a 20-man royal rumble.
Entry fees into the industry come at a high price, but the potential payout for the corporate victors could be extraordinary.
See any appeal in that kind of quick turnaround, high risk-reward scenario? Irony at its finest.