Suddenly, DraftKings and FanDuel are no sure bets
Facing heightened scrutiny of their business practices, FanDuel and DraftKings are now busy playing defense. Both sites have prohibited their employees from participating in any daily fantasy game for money, and they've launched internal investigations aimed at assuring the public about the integrity of their wildly popular games.
The fantasy sports companies have come under withering fire that threatens their growth amid revelations that a DraftKings employee won $350,000 playing on FanDuel. Media reports raised questions about whether the worker -- identified by the New York Times as Ethan Haskell -- used non-public data on the roster selections of other players to gain an unfair advantage. An investigation by DraftKings found that Haskell accessed the FanDuel player utilization data after it was made public. In a separate probe, FanDuel found no evidence that its contest "was in any way compromised, or that non-public information was used for unfair advantage."
Neither Draft Kings nor FanDuel would answer questions about how often easily accessible player utilization data is on FanDuel.
State officials who regulate other forms of gaming, such as casinos and racetracks, are now raising concerns about FanDuel and DraftKings. And New York Attorney General Eric Schneiderman has demanded information from the companies about their internal operations, including how they prevent fraud. His counterpart in Massachusetts, Maura Healy, also is pressing the companies for information. Lawsuits are expected.
Regulations for games like daily fantasy sports depend on whether state law considers them to be games of skill or games of chance. Standards vary widely by state.
"There are also some very real questions about whether people should be able to enter these games in states that deem them to be impermissible," said Mark Edelman, an associate professor of law at New York City's Baruch College. He added that in many states the games' legal status is unclear.
Both FanDuel and DraftKings appeared willing to take the risk that their contests were legal or that they wouldn't be prosecuted by federal and state governments. Indeed, it took several years of inactivity from federal and state governments before others were willing to jump in.
Unlike traditional fantasy sports competitions, daily fantasy sports games don't require a season-long commitment, and they're surging in popularity -- although they remain unprofitable. Helping their growth has been a $200 million advertising blitz by both companies. They've also caught the attention of some of the biggest media companies and professional sports leagues.
Comcast's (CMCSA) NBCUniversal is an investor in FanDuel, as is Time Warner (TWX). 21st Century Fox's (FOX) Fox Sports, Madison Square Garden Networks (MSG), the National Hockey League and Major League Baseball have invested in DraftKings, which has pulled its ads from Walt Disney's (DIS) ESPN after the all-sports networks scaled back on the fantasy site's on-air sponsorships.
Before the current controversy erupted, Eilers Research estimated that the daily fantasy sports market would hit $1.18 billion by 2020, indicating a compound annual growth rate of 55 percent. As of the end of last year when both companies reported numbers, FanDuel led DraftKings in both entry fees ($620 million to $300 million) and paying users (1 million to 300,000).
Alan Woinksi, the CEO of Gaming USA, which publishes an industry newsletter, told CBS MoneyWatch that even with their popularity to date, the daily fantasy sports companies may not hit the jackpot.
"A lot of people don't realize that they legalized fantasy sports years ago in Atlantic City, and not one casino even bothered with that because there is no money to be made on it," he said, adding that the casino industry considers sports betting as a loss-leader.
CBS has an investment in FanDuel of less than 1% of that company's value.
Editor's note: This story was updated on 10/9 to add comments from companies denying that the DraftKings employee used nonpublic information.