While many people may not realize it, fantasy sports have been played since the 1980s. Fantasy sports are games where individuals act as owners to build and manage teams that compete against other fantasy owners. Traditionally, these games were played between friends and took place over the course of a regular sports season.
Over the past 10 years, fantasy sports have seen a rapid proliferation in users and has become one of America’s most popular pastimes. It is estimated that 57 million people in the United States are participating in fantasy sports in 2015. Existing fantasy leagues include football, baseball and basketball as well as less popular sports, such as golf and car racing. While many of these services are free to play, fantasy sports have still become one of the most lucrative and fastest growing industries. As the appetite for fantasy sports has grown, alternative one-day models have provided new opportunities for growth.
Economics of Fantasy Sports
If you are a millennial and a sports fan, chances are you have joined or are currently in a fantasy sports league. Yahoo! Inc. (YHOO) estimates users will spend nearly 30 billion minutes annually playing fantasy sports on its platform. Clearly, given that fantasy sports generate $15 billion in annual revenue, this activity has not flown under the radar. According to the Fantasy Sports Trade Association, the average individual spends $465 per year. Alongside entry fees from contestants, platforms make money through advertising. Recently, ESPN (DIS) and DraftKings, a prominent company within the industry, agreed on an exclusive partnership to feature the latter's advertising across all of ESPN’s channels. (See also, Betting On March Madness? Watch Out For The Tax Man.)
Daily Fantasy Sports
Part of fantasy sports’ success lies in one-day and week-long contests serving as an alternative to season-long games. FanDuel, a leader in this space, has recently surpassed a $1 billion valuation. Daily contests operate in a similar fashion to regular fantasy sports except the entire contest takes place over a much shorter time frame. Another stark contrast between the two models is that daily contests use actual money, whereas platforms like FanDuel offer large cash prizes after a longer period.
Once a contest or multiple contests are chosen, participants are able to construct the ultimate fantasy team for that day’s or week’s games. Instead of competing against 10 friends, participants face off against hundreds of other users in the same contest. Once the games are complete, the user with the highest accumulated points takes home a cash prize. While this sounds eerily similar to sports gambling, many states classify daily fantasy sports as a game of skill. As a legal activity, daily games are expected to garner $2.6 billion in annual entry fees this year and $14.4 billion by 2020. (For more, see A Quick and Dirty Look at Sports Gambling.)
FanDuel has seen rapid growth in the past five years and has effectively cornered the daily fantasy market. With its recent Series E financing round, FanDuel secured $275 million in funding, resulting in a valuation north of $1 billion. With many states banning sports betting, FanDuel and its competitors are a part of a growing segment that allows users to legally wage money on sporting events.
Typically, FanDuel generates revenue by collecting a percentage of user entry fees. In 2014, the company led all daily fantasy companies with $620 million in entry fees. Of that sum, FanDuel pocketed $57 million in revenue from its 1.1 million users. This represents a quadruple increase in revenue from the prior year. This year, FanDuel expects to give away $2 billion in prize money, with users paying anywhere from an average entry fee of $7 to as high as $5000. Like traditional fantasy sports, a majority of FanDuel and daily fantasy players partake during the NFL season.
The Bottom Line
With its exploding popularity, fantasy sports has become much more than a hobby. Currently, the fantasy sports industry generates billions in revenue, and that figure is growing. For those no longer satisfied with winning bragging rights over friends, the cash prizes offered by an increasing number of platforms has become an appealing alternative. In particular, FanDuel has emerged as a leader in daily fantasy leagues, offering millions of dollars in weekly cash prizes. The company's recent success and funding has led to valuation north of $1 billion.