The days where sports were the seasonal obsession of a few men around the TV screen are over. Now women and men, teens and grandparents alike are all participating in fantasy sports. Two startups, FanDuel, and DrafKings, capitalized on the growing number of sports fans looking for a quick and easy way to get involved with fantasy leagues, by introducing short-term fantasy sports.

Through a loophole in the law against gambling, fantasy sports rake in hundreds of millions a year. (For related reading, see: Fantasy Football: A Two Billion Dollar Market.) After a Series E funding round that raised a whopping $275 million, FanDuel joined the list of tech “unicorns” with a valuation of over $1 billion. FanDuel and DraftKings operate in 43 states and boast networks of over 6 million players. (To learn more, read: Fox Investing in Fantasy Sports Site DraftKings.)

Investopedia Explains ‘Fantasy Sports’

In fantasy sports, users of the service create their own teams by selecting players from the NBA, NHL, NFL and college squads. The users then play against other teams for a chosen amount of time, whether it’s one day or the entire season. Their players receive a number of points for certain performance indicators (i.e., tackles in a football game). Ultimately, their points compete with either their friends in a private league or against strangers in a public league via the fantasy sports operator.

FanDuel and DraftKings: Revolutionizing Fantasy Sports Leagues

FanDuel and DraftKings took the long-term commitment out of fantasy sports by paving the way for widespread participation in short-term fantasy sports. The option to participate during any given day disrupted an already lucrative industry. The structure takes away the risk of choosing a bad team and getting stuck with players all season. For fans that love the game, it’s a chance to relive the entire season all over again, every day. (For background information, see: A Quick And Dirty Look At Sports Gambling.)

FanDuel and Draftkings lead the industry in one-day fantasy football leagues. Users play for real money at stake, in leagues starting at a $1 commitment. There are no associated subscription fees. Both of these services continue to grow at a fast pace.

How Do FanDuel and DraftKing Make Money?

FanDuel and DraftKing must generate revenue to outweigh the huge cost associated with the bandwidth required to take on extreme traffic spikes during prime sports hours. Adam Krejcik, the managing director of digital and interactive gaming for Eilers Research, estimates FanDuel’s TV advertisement spending at about $20 million, resulting in an average costumer–acquisition cost of $68, according to Forbes. Despite the high acquisition cost, Krejcik predicts FanDuel makes $100 off each customer, per season.

In 2018, DraftKings generated $14 million in revenue, while FanDuel generated $10 million. FanDuel and DraftKing make money off of player entrance fees. Teams choose payout structures, many of them paying out cash to a few winners.

The companies also make money by partnering with other big names like NBC, Sports Illustrated, Comcast, and Sporting News. Professional leagues see tremendous potential to engage existing fans and acquire new ones.

The Future of Fantasy Sports

FanDuel’s acquisitions signified an exciting future for daily fantasy sports. The sports analytics company numberFire helped FanDuel “pursue a vision that goes beyond fantasy sports,” according to Tech Crunch. CEO Nigel Eccles stated that the ambition has broadened from merely a fantasy sports company to the mission of making sports more exciting through a tech-based approach. FanDuel also acquired AlphaDraft.

DraftKings and FanDuel attempted to merge, but the merger was terminated because of the FTC's claim that the company would be considered a monopoly, with a combined 90% of the U.S. DFS market. Paddy Power Betfair acquired Fanduel in 2018, in which the company became FanDuel Group.

Legislative Battles

Where there’s gambling going on and money to be made, there’s sure to be legislative hurdles. FanDuel’s website states that it’s “plain and simply” legal to play fantasy football as long as you are a Canadian or American over 18-years-old. Fantasy football has been considered by law a “game of skill” and is thereby exempt from the Unlawful Internet Gambling Enforcement Act of 2006. Despite this loophole, many regulators seek to challenge these sports games entrepreneurs.

The New York Supreme Court ruled this December to let state Attorney General Eric Schneiderman halt the daily fantasy football services from operating in the state of New York, reports ESPN. The ruling comes from the definition of illegal gambling by New York state law, which deems DraftKings and FanDuel as illegal betting websites under a law that prevents citizens from “risking something of value.” The fantasy football operators claim that the allegation is false, since their users take entry fees and not wagers. Both companies have filed lawsuits, appealed the order and made a motion to stay the decision. A New York judge approved, giving the fantasy football providers the green light for another day in the Big Apple.

In 2017, both FanDuel and DraftKings paid $1.3 million in a settlement with the Massachusetts Attorney General to resolve allegations of unfair and deceptive practices.

The Bottom Line

Fantasy football operators Fan Duel and DraftKings allow users to act as managers of an imaginary football team, picking players and receiving scores based on actual performance indicators.

The two providers capitalized on the growing market for quick and easy fantasy sports – fans can relive the entire fantasy season whenever they please, multiple times within one true season. A lucrative business model depends on valuable partnerships with media companies, individual investors and big names like ESPN and the NFL. DraftKings and Fanduel also make money on advertising and entry fees. The future of the two companies will be affected by legislation, which in the case of New York State will challenge the legality of the services on the grounds of illegal gambling.