BOSTON — Jason Robins has not been to the movies in three years, which is the kind of thing that happens when you’re helping change the way fans consume, interact with and — most profitably — risk money on sports.
Robins is the chief executive of DraftKings Inc., the daily fantasy sports company he started with two friends in 2011. Three years ago, he was running the company out of co-founder Paul Liberman’s apartment. Today, the office takes up almost the entire fifth floor of a swank office building on Summer Street in the heart of Boston’s financial district. The break room features two beer taps.
Last year, Robins said, DraftKings had 200,000 registered users. Now, it has 2 million. All of those people can put up money — real money — to compete against other users in fantasy sports competitions that last as short as a few hours. The game has elements of sports betting, and the interface recalls online poker. Yet it is perfectly legal in 45 states, a number likely to grow. By next year, Robins believes 5 million to 10 million people will be on the site. “Take by storm is definitely a good description,” Robins said.
In the six years since British entrepreneur Nigel Eccles founded FanDuel and invented the industry, daily fantasy sports has become embedded in the sports landscape and promises to continue to skyrocket. Embraced by sports leagues, funded by Wall Street, protected by federal law and played by more than 3 million people, daily fantasy sports Web sites such as FanDuel and DraftKings have become the most legitimate way for most sports fans to risk money on sports.
Fantasy sports, which 41 million people played last year according to trade estimates, are games in which participants accumulate points based on the statistical accomplishments of the athletes they have selected to their teams through a draft. As orginally conceived, these games were contested between friends and took place over the course of a sport’s regular season.
FanDuel and DraftKings altered both the traditional structure and the business model: Daily fantasy sports contests restart constantly and typically are played against strangers. Contests don’t begin with a draft. Contestants are given a “salary cap” with which to choose real players, whose “price” is set commensurate with their ability. It might cost $10,000 in “salary cap” money for Aaron Rodgers and $6,000 for, say, Robert Griffin III.
“We were like, ‘What other industry do we know that has 30 million who play it and you’ve got that much passion, but it’s just not that big an industry?’ ” Eccles said. “Not that much money goes through it. We just thought that was quite strange. We thought it was strange it was an industry that hadn’t had much innovation in 10 years.”
On a typical NFL Sunday, FanDuel’s most popular game awards a $500,000 first prize to the winner of a massive pool with a $25 entry fee. Rather than simply hosting leagues for users, daily fantasy sports serve as an exchange. Players enter contests and win prizes for the best entries, and the Web site keeps a cut.
“It’s hard to overestimate the sweeping manner in which it changed our industry,” said Paul Charchian, president of the Fantasy Sports Trade Association. “Those two have raised more money than the history of our entire industry combined.”
In its four-year history, the company says, DraftKings has raised $74.8 million in venture capital. FanDuel has raised $88 million. In the fourth quarter of 2014, aided by increased marketing and interest corresponding to football season, FanDuel brought in $36.8 million in revenue. Compared to one year before, its number of paid active users had multiplied more than five times, to over 1 million.
The real sports leagues have taken note. In 2013, with no fanfare, Major League Baseball purchased a financial stake in DraftKings. Last summer, the NBA announced a partnership with FanDuel that, according to a person familiar with the terms, gave the league an ownership stake greater than 2.5 percent of the company.
Which means when you plunk down your money on a FanDuel fantasy contest, a small portion trickles back to the real league.
“Depending on how broad your definition of gambling is,” Florida State assistant professor of sport law Ryan Rodenberg said, “the NBA runs a sports book.”
The daily fantasy sports boom began somewhere over the Atlantic Ocean in March 2009. On a trip from Britain to Texas, flying to the South by Southwest festival, Eccles pored through a copy of the Unlawful Internet Gaming Enforcement Act (UIGEA).
The law, which Congress passed in July 2006, prohibits gambling businesses from accepting bets or wagers over the Internet, effectively shutting down online poker and sports betting in the United States.
It might have had a similar effect on fantasy sports if not for the section carved out specifically to make them legal. The law permits “participation in any fantasy or simulation sports game or educational game or contest in which (if the game or contest involves a team or teams) no fantasy or simulation team is based on the current membership of an actual team that is a member of an amateur or professional sports organization.”
The section on fantasy sports included three conditions. All prizes must be established before the contest and not determined by the number of participants. The outcome of the contest must reflect “the relative knowledge and skill of the participants” and be determined by statistical results. The contest cannot be based on the score, point spread or any performance of a single real team or an individual athlete in a single real sporting event.
In other words, running a fantasy sports league for money had been protected by the same law that outlawed online poker and sports betting.
“The carve-out, as I recall, was considered a kind of footnote,” Jim Leach, the now-retired Republican congressman from Iowa who co-authored the bill, said in an e-mail. “It was never much discussed during consideration of UIGEA because it was considered like horse racing, already part of the American betting scene.”
Having capitalized for years on the popularity of fantasy sports, sports leagues helped ensure they wouldn’t perish. MLB specifically lobbied for the fantasy carve-out. In a letter dated Feb. 1, 2006, the top lawyers from the NCAA, NFL, NBA, NHL and MLB asked members of Congress to co-sponsor UIGEA, which included the fantasy carve-out.
The lawmakers certainly had traditional, season-long fantasy sports in mind when they wrote the exemption into the UIGEA. Daily fantasy would not exist for another three years. Leach, one of the co-authors who is now a professor at the University of Iowa, said he still has never heard of daily fantasy sports.
“There is zero evidence anyone contemplated fantasy of the daily variety when they passed this loophole,” Rodenberg said.
That’s because no one had come up with the idea. In March 2009, Eccles decided his first start-up, a prediction market Web site called HubDud, had plateaued. He grew interested in sports, believing start-ups had largely neglected the field. He wanted to use his background in prediction but realized meshing the two on a basic level would simply mean opening a sports book. He is Scottish, never followed American sports and had only a vague concept of fantasy sports. But as he sifted through UIGEA, an idea struck him.
“I said, ‘Wait a second. It doesn’t say here fantasy sports has to last a season. Fantasy sports could last a day,’ ” Eccles said. “If we took fantasy sports and made it faster, would that work?”
The law, in many ways, gave FanDuel’s games their contours. Even though the law was not created with daily fantasy in mind, experts say it would be difficult to challenge. Attorney David Klein of Klein Moynihan Turco in New York has consulted several venture capital firms interested in investing in daily fantasy sports. Having studied UIGEA and the games, he said, “my advice is that it’s entirely legal.”
Advocates defend fantasy sports as a game of skill. The same could be said of online poker or sports betting, too, but daily fantasy proponents draw distinctions from both. Unlike poker, in which players start each hand with different cards, daily fantasy gives every player identical resources to start. When you bet on a sports game, you’re betting against the house. When you play fantasy sports, you compete against other players, with the site serving as an exchange that takes a fee.
“If you look at what the law says today, it is very clearly within that,” Robins said. “So the law would have to change. If you look at when UIGEA was first passed, there wasn’t really anything like that previously, so there needed to be some sort of clarification as to what’s legal and what’s not.”
FanDuel and DraftKings do not accept payment from accounts based in Montana, Washington, Louisiana, Iowa and Arizona , the five states that outlaw playing fantasy sports for money. Already this year, Washington and Iowa have seen bills proposed to legalize them. The Fantasy Sports Trade Association has been active in lobbying for the bills and educated lawmakers.
The sheer amount of commerce daily fantasy sports produces suggests it will only spread further. The effect reaches to all corners of the sports industry. Charchian, the FTSA president, estimated that ESPN makes roughly $50 million per year in advertising from FanDuel and DraftKings.
The companies’ rise has been fueled by venture capital funding, which led to a marketing blitz, which led to customers who have remained users in overwhelming frequency.
In February 2012, DraftKings got off the ground by raising $1.4 million in a seed round of funding. “At the time,” Robins said, “that seemed like a ton of money.” The largest investment came from Atlas Venture after Ryan Moore, a partner in the technology group at Atlas, met with Robins.
“In 2011, you started seeing this age of platforms — whether it be Twitter, Facebook — and started to see meta content on screens could be used in a million different ways,” Moore said. “And I thought sports was a killer category. There’s this whole multitasking generation. I thought, ‘This is going to be a really interesting way for the leagues to stay younger.’ ”
Fortune has reported that FanDuel and DraftKings are seeking a new round of venture capital funding at a $1 billion valuation. Experts view the number without suspicion.
“For better or for worse, it does” make sense, Moore said. “This is like Economics 101. Valuation is a function of demand. I know where we’re sitting at DraftKings, and there’s a lot of demand from investors. I’m not surprised they can get a $1 billion valuation.”
Robins is thinking even bigger.
“I think $1 billion is still low,” Robins said. “I think we can turn this into $10 billion-plus. It’s a nice spot to be at for this stage of growth.”
In April 2013, Robins scored a meeting through a mutual contact with Bob Bowman and Kenny Gersh from MLB Advanced Media, the league’s innovative technology and media wing. Robins rehearsed his pitch in his head, figuring he would need to educate the baseball executives on how DraftKings worked and why it would engage fans.
“I sat down, and in the first five minutes of the meeting, [they were] like, ‘Oh, yeah. [We] know what you guys do. Are you interested in doing a deal with us?’ ” Robins said. “I was blown away. It was awesome. I thought I was going to have this lengthy education process, and they were ready to go.”
And so Major League Baseball became the first organization to join the daily fantasy business. The league purchased a small stake in the company, although it did so without making the deal public.
Last year, FanDuel struck a partnership with the Orlando Magic, the first individual team to jump into the industry. “The NBA looked at it and said, ‘Wow,’ ” Eccles said. Soon, Eccles heard from so many teams — including the Washington Redskins — that he needed to hire a consultant full-time to negotiate all the deals.
The largest came in the fall, when the NBA partnered with FanDuel and bought a stake.
“We’ve had fantasy games as part of our overall sweep of products that we’ve offered fans for the greater part of the last 15 years,” NBA president of global operations and merchandising Salvatore LaRocca said. “There had been an evolution from season-long to one day. The market was largely moving in that direction.”
NBA lawyers reviewed the laws pertaining to daily fantasy sports, and “We got comfortable pretty quickly,” LaRocca said.
Sports leagues receive a new revenue stream with their deals, but they view FanDuel and DraftKings primarily as a way to drive growth and fan engagement.
From leagues’ perspectives, daily fantasy sports break geographical boundaries: A Boston Red Sox fan will be more likely to watch the San Francisco Giants if he picked Buster Posey for his DraftKings team. Fantasy leagues ensure sustained rooting interests, because stats accumulated in the fourth quarter of a blowout could make or break as much as those in a competitive game.
FanDuel could not run a game for the Super Bowl, because it’s not legal — under UIGEA, contests must cover more than one real-life game. But any random Wednesday night provides players a smorgasbord of games from which to choose.
“Our product is built for those smaller games,” Eccles said. “We’re driving consumption where it’s weakest for them.”
The relationships between daily fantasy and leagues will only deepen. MLB and DraftKings are finalizing a deal to broaden their relationship and further integrate DraftKings’ services into MLB’s online presentation, multiple people familiar with the situation said. The deal will likely come before opening day. While details are not available, one person said MLB is “going to go all-in on it in a big way.”
Despite the dizzying growth of the industry Eccles created, daily fantasy sports remain in relative infancy. Both Eccles and Robins say they have the same frequent experience. They will meet someone, and upon learning where they work, the person will respond, “Oh, I’ve heard about that. So, how does that work?”
Eccles said 15 percent of FanDuel’s new players never played season-long fantasy sports; they came from a pool of sports fans he estimates at 200 million, not the 41 million fantasy players.
“I look at that 200 million, and I ask, ‘What percentage of that 200 million could we get?’ ” Eccles said. “I don’t know. I just think it’s a very big number.”
Robins views DraftKings as not only a gaming company, but a media venture. He envisioned one day a personal version of the RedZone Channel that players could access, with the screen zipping from game to game, showing their fantasy players in action. It wouldn’t be a fantasy sports product, and it wouldn’t be pure sports content. It would be both.
“It’s sort of like the two worlds are meshing, the media and the game side, if that makes sense,” Robins said. “Everyone thinks of games as second-screen experiences. I want to view ultimately where we’re going as moving toward one first-screen experience, where it’s all the same: The content and the game [are] on the same platform, and the interaction, the social side, too, is all there.”
David Fallis contributed to this report.