How many times have you seen that DraftKings commercial on TV this year? One..maybe two million times? Ever wonder why they are advertising so aggressively? Its’ because Draftkings spent more on television commercials than any other company in the U.S. this past week.
DraftKings is one of new generation of hyper growth, well-funded gaming startups in Daily Fantasy Sports rapidly changing American sporting culture. These companies want you to bet on your favorite players or team through their app each night when you turn on your TV. Here’s a spoiler alert…people like betting. These TV ads are exposing more and more people who may casually bet on games to try Daily Fantasy Sports….which means those ads are working.
With hundreds of millions in venture capital and hockey-stick growth in users and revenue, daily fantasy sports (“DFS”) companies like DraftKings, FanDuel and their competitors are challenging federal gambling laws and shedding light on the billions of dollars bet illegally by Americans each year in the shadows. These DFS companies are pushing the conversation about how we watch sports and what constitutes gambling in the age of mobile.
A bit of background
According to an ESPN survey, 118 million Americans, or roughly 38% of the population admitted to betting on sports in 2008 [NCP Gambling]. Non-betting, yearly-based fantasy sports users (think your office’s ESPN Fantasy Football league) have grown at 25% since 2011, with the Fantasy Sports Trade Association reporting an estimated 51.8 million players in the US and Canada in 2015.
While traditional fantasy league play is centered around drafting a team once prior to the start of the season, DFS offers daily drafts with the added benefits of immediate cash prizes that are available the same day. Even though the industry is less than five years old, market leaders FanDuel & DraftKings are expected to pay out over a billion each in prizes to fantasy-obsessed players this year while spending tens of millions on advertising to keep building the market. Only a small subset of traditional players play daily, but Eilers Research CEO Todd Eilers estimates
“that daily games will generate around $2.6 billion in entry fees this year and grow 41% annually, reaching $14.4 billion in 2020.”
The growth has investors racing to get in on this new legal goldrush too. VCs and major media companies have bet big on both of FanDuel and DraftKings, investing over $300 million into each company over the last year. FanDuel has raised $361 million from media companies like Comcast Ventures, NBC Sports, and Time Warner Investments. Not to be outdone, rival DraftKings has raised $375 million total, including a $300 million dollar round led by Fox Sports. Media companies and venture investors aren’t the only ones who have taken notice; pro sports leagues want a piece of the action too. DraftKings’ last round included investment from Major League Baseball, Major League Soccer, the National Hockey League, and the Kraft Group, owned by Robert Kraft of the New England Patriots. In 2014, FanDuel announced an exclusive partnership with the NBA in exchange for an equity stake in FanDuel.
While fantasy sports have experienced a meteoritic rise in growth and investment, not everyone is enthusiastic about its impact on culture and business — and we’re not just referencing politicians and social conservatives.
Gambling is gambling… right?
“Of course (DFS is) sports betting. It doesn’t mean that it’s subject necessarily to the same laws. You’re risking money on something of an uncertain outcome, and to me that sounds like gambling” said Joe Asher, US CEO of one of the world’s largest betting and gaming companies, William Hill in this USA Today article earlier this year. It’s clear Mr. Asher would like to see DFS companies play by the same laws his company has to service. It’s not hard to see why bookmakers and Vegas casino operators are worried about the impact of millions of customers making bets daily from their phones and not in their casinos and sportsbooks.
Fantasy sites can legally pay their players because the federal government does not define fantasy sports as gambling. Daily Fantasy Sports companies like FanDuel, DraftKings & others operate under legal law because fantasy sports are classified as a game of skill and not chance. The Unlawful Internet Gambling Enforcement Act of 2006 included “carve out” language that clarified the legality of fantasy sports. It was passed by Congress and signed into law on 2006 by President George W. Bush. The Act outlawed online poker and sports betting, but lobbyists from the professional leagues successfully pushed to have fantasy sports classified as a “game of skill.” The Act has opened the door for daily fantasy sports companies to offer a faster paced, higher stakes fantasy game. As long as daily fantasy companies make prizes known in advance and the results are based on real statistics — not outcome point spreads — it is legal to play in all but a few states. Most states permit the games, with the exception of the following five: Arizona, Montana, Louisiana, Iowa and Washington.
While established gambling entities struggle with where and how consumers gamble, the people who actually make the sporting entertainment are reexamining their relationship with gambling…specifically their relationship gambling revenues.
Just look at the evolution of Robert Bowman, head of MLB Advanced Media (and potential future baseball commissioner) who was slow to adopt Daily Fantasy. Just two years ago, Bowman was a vocal opponent of daily fantasy. Bowman has since reversed his position, and Major League Baseball signed a sponsorship with DraftKings as the “Official Mini-Game of MLB.”.
So why the sudden change of heart? Kenny Gersh, EVP of Business at the MLB’s media branch said “Expanding our exclusive partnership with DraftKings will bring new and exciting ways for fans, particularly younger fans, to play daily fantasy baseball.” Leagues recognize they can leverage consumers cravings for fantasy content into higher ratings, more viewership & engage fans during non primetime games. For a sport that is having trouble attracting a younger audience, it seems like a natural move for the MLB to make.
The FTSA data supports this position as well, citing daily fantasy sports players consume 40% more sports content after becoming players. The theory being that it no longer takes a primetime game to engage a fan if, for example, DFS players now have an exciting reason to watch the Sixers play the Hornets on a Tuesday afternoon.
Other league officials like NBA Commissioner Adam Silver went full monty on betting by advocating for full legalization and regulated sports gaming in the New York Times. Silver first called for congress to find better ways to capture lost revenues through the estimated “$400 billion is illegally wagered on sports each year” which is a cause both Congress and the Leagues could care about. Then Silver got a bit more myopic, “Gambling has increasingly become a popular and accepted form of entertainment in the United States” said Silver, making a not-so-subtle claim that betting on sports is just derivative revenue made off the intellectual property they (all sports leagues) create.
Follow the money & the laws will follow
Ultimately, we’re just playing catch up with the UK and most of Europe. Take the The English Premier League which has embraced gambling, running a legal sports book in Wembley Stadium. There are also thousands of sports betting shops regulated on behalf of the government’s Department for Culture, Media and Sport. Soccer stadiums contain gambling kiosks. Publicly traded UK companies make legal online gaming easily accessible from home, via your computer or on the go with mobile apps. The UK government generated £1.7bn in tax revenue from gambling in 2012–2013, with the the gambling industry in the UK employing over 100,000 people. In total, gambling generates more than $9.6 billion in revenue, close to 0.5% of the nation’s GDP.
It’s not hard to see how politicians can get behind changing the law with these kind of tax revenues at stake for their constituents…not to mention the campaign donations from all the people and companies who could benefit from the change in the law.
As changes in American culture and policy continue to evolve, the illegal sports betting market could bring hundreds of billions of dollars into the gaming business. With the pro leagues embracing daily fantasy sports, consumer interest exploding, and entrepreneurs bringing new game types to this emerging market, we’ve only begun to scratch the surface of the upcoming sports betting boom.
Big thanks to Mike Tatum for his editing and help on this post, as well as TJ Weigel, Matt Neely, Travis Staton and Nick Cole
This post originally appeared on Forbes