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. “The numbers of those participating are exploding,” says Fox 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 now joins the list of tech “unicorns” with a valuation of over $1 billion. FanDuel operates in 45 states and boasts a network of over 1.1 million players. The website, FanDuel has approximately 75% of the daily fantasy sports market, the rest belonging to its rival DraftKings. DraftKings is also valued at over $1 billion and has a wealth of high-profile investors such as Patriots owner Robert Kraft and Fox Networks. (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 will receive a number of points for certain performance indicators (i.e. tackles in a football game). Ultimately, their points will be in competition 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 leads 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 are growing at a fast pace. FanDuel boasts a contest lobby of over 25,000 one-week fantasy football leagues every week within the past 2015 season. Teams range from 2 to over 13,000 players, with entry fees of $1 to $10,000.

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.

Last year alone, DraftKings generated $30 million in revenue, while FanDuel generated $57 million, according to BostInno. 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 most recent acquisition—the third this year alone, may signify an exciting future for daily fantasy sports. The sports analytics company numberFire will help 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. (For related reading, see: How Big Data Has Changed Sports.)

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.

Other states such as Illinois and New Jersey are proposing closer regulation of these online providers. (To learn more, see: DraftKings and FanDuel Meets Harsh Reality.)

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 now 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 off of 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. 

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