Just ask the Seattle Seahawks, who lost Super Bowl XLIX in the closing seconds when it looked like they’d score an easy touchdown: For every crushing defeat, there’s the consolation of a comeback season. And if you’re a potential investor in the daily fantasy sports websites FanDuel and DraftKings, it’s pretty much the same.
Can recent stinging setbacks be offset by a “wait ’til next year” promise?
Both were on the fast track to initial public offerings next year, but now DraftKings and FanDuel are under fire after revelations surfaced that they allowed employees to play at each other’s sites and win large amounts of money, using information its customers didn’t have.
New York Attorney General Eric T. Schneiderman launched an inquiry and at least one class-action lawsuit has been filed. Boston-based DraftKings and FanDuel, headquartered in New York, are now in damage control, and have banned their employees from playing in daily fantasy games.
True, some investors still can’t wait to get in the game, despite the controversy. Daily fantasy sports sites have grown at explosive rates over the past few years. But the scandal is producing two major outcomes that can’t be ignored.
First, more attention is being focused on the lack of regulation in these sites, which reward fans financially for winning play. And second, some multi-million dollar entities have turned a bit skittish: Major League Baseball, which owns a piece of DraftKings, is distancing itself from the site as the scandal unfolds. ESPN, the cable network owned by the Walt Disney Co. (ticker: DIS), cut sponsored daily fantasy sports elements from its news shows.
That may not affect the long-term prospects or desirability of any IPO, but it does raise questions as to how much both sites must tighten up their operations in the face of increased scrutiny.
“I do believe that both companies have some public trust work to do, more so now than ever,” says Derrick Morton, CEO of FlowPlay, a Seattle-based developer of virtual worlds, social casinos and fantasy sports-based casual games. “There have been rumblings about the gaps between the casual sports fan looking to have some daily fantasy sports fun versus the professional players who have advanced computer algorithms that aid them in their selections of players.” (When you think about it, that sounds a lot like what happens in daily trading on Wall Street.)
“How the public will react to the story … will be interesting to watch,” says Ed Edmonds, associate dean for library and information technology and a law professor at Notre Dame Law School. “This could have a big impact on the future of FanDuel and DraftKings. But if they were to go public in the current environment, I think they would do quite well.”
Others counter that investors might shy away from the sector once the insider-information brouhaha foists more attention on how hard it is to win.
“Daily fantasy is in a bind even without the rigging,” says Laurence DeGaris, author of “Sports Marketing: A Practical Approach” and professor of marketing at the University of Indianapolis. “There’s an argument to be made that it’s a game of skill because most of the winnings go to a very small percentage of players. But if that’s the case, then it’ll be hard to attract new suckers — er, customers.”
As for big payoffs for the everyday investor, that’s another story, one that’s apparently not a fantasy. If it’s a question of “show me the money” (a phrase coined, after all, by a fictional football player), all you have do is look at the starting lineup.
DraftKings has raised an incredible amount — $375 million — and aside from Major League Baseball, lists Twenty-First Century Fox (FOX), Kraft Heinz Foods Co. (HNZ) and the National Hockey League as investors. FanDuel isn’t far behind at $360 million, and its roster includes Google Capital and Time Warner Investments, subsidiaries of Google (GOOG, GOOGL) and Time Warner (TWX).
Another FanDuel backer is the aptly named Bullpen Capital, a venture capital firm in Palo Alto, California, which has invested more that $18 million — and remains bullish. “There are 56 million people in the U.S. and Canada playing fantasy sports every year,” says Paul Martino, Bullpen Capital’s managing director. “Only a few million of them play on daily fantasy sites. So we are just at the beginning. There’s still a huge market that’s untapped.”
The possible profit pot has gotten so big, in fact, that Yahoo! (YHOO) entered the fray in July with its entry into daily fantasy sports. Unlike its competitors, it’s not a startup, meaning that it has plenty of clout and cash to throw behinds its efforts.
Future investors may also find comfort in the fact that daily fantasy sports sites aren’t breaking any gaming laws, though debate clearly exists on the accuracy of how they’re classified. The games are classified as games of skill, not games of chance.
“This is not a question of whether this is gambling by definition,” says Rodney Paul, a professor of sport management at Syracuse University. “To me that’s obvious: It is. Money is put at risk, the ‘house’ gets its cut and players play at a negative expected value in the long run. Since the leagues and major investors have partnered with FanDuel and DraftKings, I think it makes it much less likely it will be deemed illegal. But that does not mean that it’s not gambling, as people can and do lose money.”
Rishi Nangia, a business and legal advisor in the fantasy sports industry, sees it more as a new wrinkle. “There is no argument that the gambling laws clearly lay out an exception for fantasy sports,” he says. “Much like in any industry, innovation is inevitable. Once the law was determined and made clear, the brightest minds in the fantasy sports industry did what they do best: They innovated with a full understanding of the law.”
So how exactly did they innovate? Just ask Nangia, who’s a fan of the activity himself.
“I’ve been a longtime fantasy sports participant,” he says, “and there’s a common issue in season-long fantasy sports, one that rears its head in every league: disinterest and apathy. Daily fantasy sports is a perfect solution, particularly in today’s society filled with the need for instant gratification. It keeps participants interested and playing, and helps them avoid the season-long fantasy blues.”
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How the Fantasy Football Scandal Will Affect IPOs for DraftKings and FanDuel originally appeared on usnews.com
