The FanDuel site on an iPad in Washington, D.C., on Sunday. (Zia Morales/Bloomberg News)

The blossoming daily-fantasy-sports industry was supposed to be enjoying its victory lap. A multimillion-dollar carpet bombing of prime-time-TV ads, as well as mega-deals with some of media's and football's most prominent names, had attracted thousands of new bettors to its turbo-charged style of cash-prize online games.

Instead, the industry's Pepsi-and-Coke power duo, DraftKings and FanDuel, are swatting back allegations that an employee profited off insider data and grueling through a fight for their lives. A scandal-fueled crisis of confidence among fans, swelling resistance from lawmakers, threats of court action and fresh doubts from even some of its top allies have given the fantasy sites their biggest reality check yet.

Sparked by a short post on a daily-fantasy message board, the controversy now threatens to undermine an industry that exploded over the last year to become one of the nation's most unavoidable forces in advertising, even as critics questioned whether the unregulated game was online gambling in disguise. The billion-dollar businesses now face a critical question: Will any of these embarrassments stop people from playing?

If the industry "can't recreate the grassroots consumer friendliness that is the signature characteristic of traditional, season-long fantasy sports, investors will be betting a $500 million advertising bankroll on [a] long shot," wrote Kevin P. Braig, a partner with law firm Shumaker, Loop & Kendrick, in a note to clients Wednesday. "One does not have to be the sharpest gambler at the table to see that is a risky bet."

[Move over, Budweiser: Football has a new advertising king]

The sites' fast-cash contests are designed around a simple concept: Bettors pay an entry fee between 25 cents and $5,000, build an imaginary team of real-life players and then compete with others over how well their chosen athletes performed in a day on the field.

The games, which are legal in all but five states, have survived with help from a federal law passed in 2006 — three years before FanDuel was founded and the industry was born — that cracked down on online gambling but carved out an exception for fantasy sports, then known mostly for their slower, season-based gameplay popular in workplace leagues.

Daily fantasy sports sites like FanDuel and DraftKings are growing in popularity, but their legality is being called into question. Here's why they're technically legal—for now. (Jayne W. Orenstein/The Washington Post)

Industry boosters defend the games as tests of skill, not luck. DraftKings chief executive Jason Robins, who has often equated the game to chess, told The Washington Post last month that daily fantasy's legality is "really, honestly not a debate." But now, a data scandal has inflamed exactly that kind of debate and renewed lawmakers' calls that the industry face its first real oversight.

"This is not the Wild West," U.S. Rep. Hakeem Jeffries (D-N.Y.) said this week. "It is time to determine whether permitting a multi-billion dollar industry to police itself serves the best interests of the American people."

[Daily fantasy sports Web sites find riches in Internet gambling law loophole]

A DraftKings content manager named Ethan Haskell last week accidentally published internal data tied to the site's biggest contest, Millionaire Maker, earlier than usual, before bettors' lineups were entered and National Football League games had kicked off.

The leak showed how often players had been chosen for bettors' lineups — highly valuable information, for a game based on scouting out undervalued talent — and raised alarms when Haskell won $350,000 off a $25-entry contest at competing site FanDuel that same week.

DraftKings denied the win was related to Haskell's early data access, saying he didn't get the numbers until after locking in his lineup, and both companies said Wednesday they'd permanently ban their employees from playing for money in contests on any site.

DraftKings said Wednesday it had previously hired an outside investigator to review its practices, and FanDuel said it will create an advisory board and launch an internal review led by a former federal judge, adding, "It’s our job to ensure ... our fans can be confident in the sanctity and integrity of every game."

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But the firestorm that erupted over the past week has proved much of the damage had already been done. And for the games' growing fan base, many big uncertainties remain: Who has access to this prime information? How many employees had already struck it big? And if a select crew of elites held a jackpot of data, what were the odds of winning for everyone else?

New York Attorney General Eric T. Schneiderman has called for an inquiry, demanding both companies hand over the names of employees with access to sensitive data as well as the results of their internal investigations. So, too, did the Senate's top Democrat, Nevada native Harry M. Reid, who on Tuesday decried the leak's "absolutely scandalous conduct" and said, "Online gaming is a real scary thing and we’d better look at all of it."

U.S. Rep. Frank Pallone Jr. (D-N.J.) has called for a congressional hearing that could lay the groundwork for the industry’s first true legal challenge, and lawmakers in states like California, where leaders are pushing to regulate the industry, have also called for hearings within their borders. On Thursday, a Kentucky man launched a class-action lawsuit against the two top sites accusing them of fraud, negligence and other "deceptive acts."

 

Both companies became valued as billion-dollar "unicorns" this summer, following massive torrents of investment from cable conglomerates (Comcast, Fox Sports, NBC), national sports leagues (of baseball, soccer and hockey) and football-team-owning billionaires (the New England Patriots' Robert Kraft, the Dallas Cowboys' Jerry Jones).

The companies have yet to pull a profit but are spending so much on commercials that, in recent weeks, they've become some of America's top advertisers. DraftKings and FanDuel pulled in about $87 million in revenue last year after handing out about $870 million in winnings. This year, both expect to triple that prize haul, by handing out at least $3 billion.

[Answering some questions about the daily fantasy sports gaming industry]

But the controversy comes just as those companies' massive bets appear to be paying off. Data from SuperLobby, an independent site tracking the industry's guaranteed-prize games, found that DraftKings and FanDuel both just posted their first profitable Sunday of the season, giving out $39.8 million in winnings but taking in $43.6 million in entry fees.

The scandal has already hit the companies where they're farming for most of their new business: the airwaves. DraftKings sought to tamp down controversy by pulling its ads off ESPN — a huge move, considering the firm had promised to spend half a billion dollars on ads there and on Fox Sports over the next few years. ESPN also said it would scale back or stop running company-sponsored graphics and segments on air.

Even some of the sites' top sponsors are balking at their connections. Major League Baseball, a key DraftKings partner, released a statement saying its employees were prohibited from playing cash-prize fantasy games and said it was surprised the fantasy site ran on different rules.

The scandal has also not helped the industry avoid worries that novice players will be gobbled up by veteran "sharks." In a survey of players during the first half of the baseball season this year, the top 1 percent of players paid 40 percent of the entry fees but won 91 percent of the profits, according to research by poker author Ed Miller and Dan Singer, a senior partner with consulting giant McKinsey & Co.’s global sports and gaming practice.

Some fantasy-sports analysts worried the growing controversy could drive away the industry's biggest growth market of casual sports fans, and others have worried the sites have invested too much on advertising bombardments before they were established as a trustworthy brand. Braig, the Shumaker, Loop & Kendrick attorney, said the "industry appears to quixotically believe that amped-up advertising and lobbying of state lawmakers can prevent business catastrophe."

But SuperLobby chief executive David Copeland, a daily-fantasy player himself, said this scandal could be just what the industry needs: a moment to grow up. "I think people should welcome regulation. ... That’s what players want to see: more process, more protection," Copeland said. "The sites don’t want anyone to think there's any reason not to play."