Welcome to the Big Time
The implosion of the daily fantasy industry is a bro-classic tale of hubris, recklessness, political naïveté and a kill-or-be-killed culture.
At its peak last summer, a daily fantasy get-rich-now commercial aired every 90 seconds on television. Combined, industry leaders FanDuel and DraftKings plunged more than $750 million into TV commercials, radio spots, digital ads and other promotions. In the weeks leading up to the 2015 NFL season, the two startup companies spent more on advertising than the entire American beer industry.There's a game within the game that requires a different set of skills," actor Edward Norton says in the voice-over as quick-cut video images show young men and women bathing a dog, jogging on the street, sweating in a sauna -- all while staring, hyperfocused, into their smartphones."There's no offseason. This is a play-as-much-as-you-want, whenever-you-want fantasy league. And we don't just play -- we are players. We train. And we win ..."
Now those men and women are jumping, cheering, fist-pumping -- each celebrating mammoth, seven-figure jackpots.
"This isn't fantasy as usual. This is DraftKings. Welcome to the big time."
Daily fantasy's meteoric rise -- breathtaking for its breakneck speed, avalanche of investors' cash and ever-spiraling valuations -- spurred the two companies' endlessly annoying, record-shattering arms race for new customers and industry dominance. In only three years, DraftKings zoomed from an idea hatched by three buddies in a Boston barroom into a nearly $2 billion company, replete with comparisons to overnight Silicon Valley unicorns like Uber and Snapchat. FanDuel was right there too. The two companies processed a combined $3 billion in player-entry fees in 2015.
he companies were everywhere: logos emblazoned in ballparks, on NBA floors, on NHL boards and in ESPN studios. They became the darlings of the major American sports leagues, media companies, dozens of professional teams and a deep bench of investors -- from Comcast and Google to private equity firms and a pair of the NFL's most influential owners, Jerry Jones and Robert Kraft.
But as quickly as it boomed, the industry bottomed. One year after their headiest moments, FanDuel and DraftKings are still not profitable. Both privately held companies' valuations have been sliced -- by more than half, according to some estimates. The companies have hemorrhaged tens of millions of dollars in legal and lobbying expenses. (DraftKings' attorneys fees once ran as high as $1 million per week.) And the fog bank of the industry's uncertain future has made it nearly impossible for either company to raise new money. (FanDuel's auditors have raised "significant doubts" about the company's future if more states do not declare daily fantasy sports legal.) Three federal grand juries -- in Boston, New York and Tampa, Florida -- have alerted one or both companies that they are under criminal investigation. A merger -- once unthinkable to many -- is on the table.
It has been, by any measure, a spectacular fall.
The industry's implosion began with a series of tactical mistakes made by a pair of bitterly hostile startup companies that all but dared federal and state authorities to shut down the sites over concerns the games constituted illegal gambling. Outside the Lines interviewed more than 50 company executives, current and former players, legislators, lobbyists, lawyers, investigators and industry consultants and found that the companies' troubles were triggered, in part, by a toxic combination of young executives' hubris and ignorance, reckless risk-taking and raw political naïveté. Infused with a false sense of security from FanDuel's and DraftKings' surging valuations and soaring revenues, the companies' co-founders and CEOs -- Nigel Eccles, 41, of FanDuel and Jason Robins, 35, of DraftKings -- waged a self-destructive, kill-or-be-killed race toward industry supremacy and a life-changing payday that they now acknowledge was crazy for all of the cash it torched, the wrong messages it sent and the legal and media tsunami it unleashed.
For years, the two companies' leaders had been warned by investors, lobbyists, consultants and even some players about a coming day of reckoning. Yet they relentlessly promoted their games as a means to get rich quick when they knew only a tiny percentage of their customers were winning more often than losing. They failed to aggressively move against big-bankrolled players who dominated newer players, sometimes with predatory behavior or technological advantages. And they allowed their own employees to play -- and win millions -- on their rivals' sites, despite their having access to odds-improving proprietary data.
"This industry blew up so quickly -- no one adequately planned or prepared for it," says Gabriel Harber, 29, a former high-volume player at DraftKings and FanDuel. "[The executives] didn't make the substantial investment on self-regulation and the regulatory side that was obviously needed. ... Every PR person and lawyer should be fired. How could you let your client engage in this kind of crazy advertising if every legal loophole wasn't closed? How stupid can you be?"
THE DAILY FANTASY industry has an unwitting -- and unlikely -- founding father: George W. Bush.
On Oct. 13, 2006, President Bush signed the Unlawful Internet Gambling Enforcement Act. UIGEA was intended to reverse the momentum of America's internet gambling boom by prohibiting banks from processing bettors' credit card deposits with illegal betting operations. With the blessing of the major sports leagues, a carve-out in the law was made for the wildly popular season-long fantasy leagues that an estimated 57 million Americans now play. But the drafters of UIGEA were silent about daily fantasy contests because no such thing existed. By 2007, however, a handful of lightly played daily fantasy websites had opened in the United States, but overseas, things were moving much faster.
A group of sharp entrepreneurs from the United Kingdom, some of whom had worked as online poker executives, started considering the possibilities. An entrepreneur named Nigel Eccles had concluded, correctly, that season-long fantasy leagues were far too slow for action-junkie millennials, who thrived on instant gratification and who'd soon routinely watch sports on TV while glued to a second screen, usually their smartphones.
So in July 2009, Eccles and his colleagues launched FanDuel in Edinburgh, Scotland. It was a spin-off of Hubdub, their failed prediction site on which users bet virtual money. Unlike Hubdub, FanDuel would accept real-money wagers.
A soft-spoken, lanky Brit, Eccles had printed out a copy of UIGEA and studied its fine print. From day one, he concluded that the law would provide "safe harbor" for daily fantasy games. In early meetings with potential investors, Eccles was a passionate evangelist for daily fantasy sports as a game of skill, similar, he liked to say, to a golf tournament, a 5K race, a chess championship or a spelling bee. His initial pitches steered clear of gambling parlance: "Bets" were not wagers but "entry fees," and competitors were not vying for "jackpots" but preset "cash prizes." "We can show with FanDuel that the high-skill players will win predominantly," Eccles would tell investors, the media, anyone who'd listen.
The chase for financing was slow going at first; the initial investors were Ian Ritchie, a Scottish software millionaire, and Kevin Dorren, a Brit who founded a meals-on-wheels diet service. Eccles nearly gave up when investors' cash dried up. But he and his co-founders pressed on, and by the end of 2011, FanDuel had combined smart product design and savvy marketing to establish itself as the industry leader. The company's later financial backers, like Mike LaSalle of Shamrock Capital Investors in Los Angeles, were hooked by Eccles' vision for explosive growth, with a target of 20 million to 30 million active users within several years.
During their first meeting in Manhattan in April 2014, LaSalle says, he was particularly impressed that Eccles wasn't a daily fantasy player but a disciplined businessman committed to developing new products. Five months later, LaSalle's firm made a major investment in FanDuel as part of the company's financing round that raised $70 million.
"We thought the regulatory issues were going to have to be flushed out at some point," he says. "But no one anticipated the fervor of what happened and the way [the authorities] directed their energies" against the industry....MUCH MORE