Gaming the Games: Online Daily Fantasy Sports Betting Faces Tech Dominance Reality Check

The power of information - and the sophisticated algorithms available to manage it - make the otherwise wildly popular sports betting industry a risky online proposition. Akin to investing in securities, those with the most powerful technology are likely to dominate.  JL

Kate O'Keefe reports in the Wall Street Journal:

Daily fantasy companies face the possibility that increasingly sophisticated players using complicated statistical formulas will wipe out novices. In the first half of the 2015 Major League Baseball season, just 1.3% of daily fantasy-sports players won 91% of the profits.
The National Football League season that kicks off Thursday will provide a reality check for an investor darling that has yet to make a profit: the daily fantasy-sports industry.
The fantasy-sports operators allow customers to draft virtual teams of professional athletes and compete against each other based on the teams’ real-world performances that day or week. The companies put customers’ contest entry fees toward cash prize pools and keep around 10% in commissions for themselves.
FanDuel Inc. and DraftKings Inc., which together control some 95% of the North American daily fantasy market, both entered the billion-dollar-startup club in July after big fundraising rounds, hitting respective valuations of $1.3 billion and $1.2 billion. But neither has made a profit because of heavy ad spending to draw in customers.
FanDuel, credited with starting the industry in 2009, generated $57 million in revenue in 2014 and awarded $564 million in cash prizes. The company has said it would dole out $2 billion in prizes this year, implying it hopes to more than triple its revenue to about $200 million in 2015.
DraftKings, founded in 2011, made $30 million in revenue last year and gave away $300 million in prizes. It has pledged to give away at least $1 billion in prizes this year.
Despite their current niche customer appeal—nearly all users are young white men—growth has been strong for daily fantasy-sports operators, which are expected to have 3.9 million paying customers in North America by the end of the year, according to Adam Krejcik, managing director of digital and interactive gaming at Eilers Research LLC.

But the coming NFL season, when fantasy-sports activity peaks, is “make or break” for the industry, whose aggressive growth targets and huge valuations leave them with little margin for error, said Mr. Krejcik. “With all this money and marketing, if they can’t show accelerated growth this year maybe this industry will never become mainstream,” he said. “At some point you’re accountable to your investors…you can’t just keep losing hundreds of millions of dollars.”
Regulatory risk is another threat the sector is facing, as more U.S. states consider whether to exempt the industry from gambling laws or impose regulations on it. Operators say their product isn’t gambling and that it is legal in nearly all states due to a fantasy sports carve-out in a 2006 federal law meant to crack down on online gambling.
But some casino and sportsbook operators are agitating for daily fantasy sports to be regulated like they are—as gambling companies—arguing that their businesses have evolved beyond what the carve-out had envisioned. Nevada gambling regulators are currently conducting a legal analysis of the daily fantasy-sports industry—the result of which analysts believe could affect other states’ thinking on the matter.
DraftKings Chief Executive Jason Robins said daily fantasy sports requires skill, unlike regular sports betting. “We have a lot more crossover with chess players,” he said.
In daily fantasy sports, customers choose from countless contests offered across various sports including football, baseball and basketball. They get a virtual budget to draft rosters and may take all sorts of variables into account such as whether a player might be undervalued, who he will be playing against that day and whether he will have a home-field advantage. Entry fees and prize structures vary widely, with some contests costing less than $1 to enter and others costing more than $1,000. Winners could walk away with a couple dollars or a couple of million dollars. Nigel Eccles, the chief executive of FanDuel, said investors always ask him what share of North America’s 57 million-strong season-long fantasy sports market his company can convert to his condensed version of the game. “The real question is, What percentage of the 200 million sports fans can we convert to daily fantasy sports?” he said.
Mr. Eccles said his company is evolving beyond just running fantasy sports contests and transforming into a “next-generation sports platform.” FanDuel’s August purchase of numberFire, a sports analytics company that provides content to outfits such as Walt Disney Co. DIS 0.16 % ’s ESPN and Time Inc. TIME 1.69 % ’s Sports Illustrated among others, is part of that plan, he said.
Media giants have been some of the biggest cheerleaders of daily fantasy sports so far. Fox Networks in July contributed $150 million to a $300 million venture-funding round for DraftKings. “It opens up a whole new area of content and conversation around sports that drives engagement,” said Fox Sports President Eric Shanks.
In a related deal, DraftKings committed to spending $250 million in ads with the network over the next three years, said a person familiar with the terms. 21st Century Fox FOX 0.37 % and News Corp, NWSA -0.30 % owner of The Wall Street Journal, were until mid-2013 part of the same company. DraftKings also has a $250 million advertising deal with ESPN.

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Investment firms have also jumped at the chance to invest. John Salter, a partner at The Raine Group, which invests in DraftKings, said the industry has provided a crucial platform for millennials to engage in sports. “It’s a social network for sports,” said Mr. Salter, who is also on DraftKings’ board.
Still, as the industry grows, daily fantasy companies face another risk: the possibility that increasingly sophisticated players using complicated statistical formulas will wipe out novices, say industry watchers like Ed Miller, a Massachusetts Institute of Technology-trained engineer and games strategist, and Daniel Singer, leader of McKinsey & Co.’s global sports and gaming practice.
In the first half of the 2015 Major League Baseball season, just 1.3% of daily fantasy-sports players won 91% of the profits, according to Mr. Singer.
“It’s not what it pretends to be,” Mr. Miller said in an interview. “It pretends to be, ‘Hey pick your favorite players, spend a few bucks and root for them.’ But if you pick your favorite players you will lose a lot of money.”
Neither DraftKings nor FanDuel disputed Mr. Singer’s data but both said it doesn’t reflect their broader customer base across multiple sports leagues. FanDuel said more than one million users have won money on its site. Both companies also said they have taken steps to protect novice players such as creating beginner leagues and enabling users to block certain players.
“It’s also an entertainment product,” said FanDuel’s Mr. Eccles. “Just because you lose it doesn’t mean you want to stop playing