January 17th, 2015
Courtesy of The Financial Times, an interesting article on the growing popularity of this legal online betting niche:
Killian Jones watched the lucrative online gaming market emerge as a UK equities analyst in the late 2000s, then decided to try it himself, ploughing his life savings into a start-up offering daily fantasy sports games, a fast growing genre of skill-based online wagering.
After launching his site, PlayOn.co, in Britain and attracting customers from more than 100 countries, Mr Jones is now setting his sights on the US, where the rocky rollout of online gambling has failed to meet even low expectations over the past year because of regulatory opposition and poor consumer demand.
But by pursuing daily fantasy sports, he is tapping into a niche that is both legal and highly popular with consumers. In these contests, players select fantasy “teams” of real-life athletes that compete in short-term contests and tournaments for cash prizes as high as $10m.Instant gratification, the peer-to-peer nature of the games and the tie to real world sports make the model compelling, says Mr Jones. “It’s an inherently social and viral game. That makes it much more interesting than the traditional betting product.”
Most importantly, the games offer a legal alternative to traditional, prohibited forms of sports betting in the US. They have exploded in popularity as live sports such as American football attract record audiences and other forms of online peer-to-peer wagering, such as internet poker, have been chased out of the country by the Justice Department.
FanDuel, the largest daily fantasy sports operator, estimates it will report $60m in net revenues for 2014, a jump from just $14.3m in the prior year. It expanded its player base year over year by a factor of seven, a result of aggressive marketing efforts to attract customers in the broader fantasy sports arena, which now comprises more than 40m players in North America.
$160bn — $400bn
Estimated amount illegally wagered on sports in the US each year
“2014 has been a defining year for FanDuel,” which now has over 1m active users, said Nigel Eccles, FanDuel’s chief executive officer.
DraftKings, the second-largest provider, does not disclose revenues, but Eilers Research, a consultancy, expects it to reap $30.7m in 2014 — compared with just $4.9m in 2013 — and to grow its user base 12 times over.
Because the games pose no tangible threat of match-fixing, the major US sports leagues — which have vehemently opposed sports betting for this reason — have given daily fantasy sports their stamp of approval.
It’s an inherently social and viral game. That makes it much more interesting than the traditional betting product- Killian JonesLast month, the National Basketball Association announced a partnership with FanDuel in exchange for an equity stake, while DraftKings has struck agreements with Major League Baseball and the National Hockey League. Both sites have agreements with individual National Football League teams.
However, the genre operates in a regulatory grey area, and could be at risk should efforts by casino mogul Sheldon Adelson and others seeking a federal online gambling ban prove successful.
“No one said there is zero risk, but the conclusion seems to be that the upside is more likely and more profitable to (the sports leagues) than the downside,” said Marc Edelman, a sports law attorney.
While the industry’s revenues are still relatively small, bigger names in the gambling business are beginning to take notice. In September, MGM Resorts CEO Jim Murran said his company was exploring a fantasy sports investment. Caesars and European bookmakers are also closely watching the genre’s growth.
“It’s an area that interests us in terms of a clear appetite for sports betting,” said a spokesperson for William Hill.
Federal prohibitions mean US sports betting is still largely an underground activity, with estimates ranging from $160bn to $400bn wagered per year through illegal bookies and offshore websites.
In 2013, Americans wagered $3.6bn on sports in Nevada — the only state where straight bets are permitted — but analysts predict that by 2016, the total amount bet on daily fantasy sports games in the US will surpass that amount.
The business model of daily fantasy sports is similar to that of online poker. Players pay an entry fee to join a contest, then the operator takes a percentage of the total wagered — typically eight to 10 per cent — and pays out the remainder as cash prizes.
But, as with poker, expanding the customer base is imperative to continued growth, and both FanDuel and DraftKings are engaged in a costly arms race to attract new players and fend off new competitors such as Mr Jones. These efforts have included heavy television advertising and partnerships with sports leagues, which benefit from the heightened fan engagement.
“While the long-term opportunity is compelling, user acquisition costs have been skyrocketing and the two major players in the market are both entirely dependent upon venture capital financing,” said Adam Krejcik of Eilers Research. “It’s unclear when either company will be able to generate a profit.”
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