Why investors are pouring millions into fantasy sports

The battle lines are drawn.
The battle lines are drawn.
Image: AP Photo/Charlie Riedel
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What do the media giant Disney, the cable colossus Comcast, the storied private equity firm KKR, and the National Basketball Association have in common? Not much really, in the scheme of things, besides a willingness to invest in the absolutely booming industry of American fantasy sports.

Fantasy sports has been around for years and traditionally involved groups of friends or colleagues competing against each other as the owners or general managers of imaginary teams, comprised of real players from a given sport.

For example, take football, the most common fantasy sport (though baseball and basketball are also popular). You may choose the New England Patriots Tom Brady to be your quarterback, and the New York Giants’ Odell Beckham Jr. as your wide receiver, and so forth. Your performance in your fantasy league will depend on how those players fare in actual games over the course of the season, and how the players your friends have chosen perform. Typically, a relatively small amount of money is pooled at the start of the season and then distributed to the person with the winning team. (A more detailed explanation of all this is available here).

Anyway, it’s now fair to describe fantasy sports a mainstream activity in the US. According to the Fantasy Sports Trade Association, some 41.5 million Americans participated in fantasy sports leagues last year, spending a cumulative $11 billion on league dues, research, and web hosting fees.

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Recently, a faster format has emerged, enabling people to pay small entry fees on a given weekend or per-game basis to play in public leagues against people they don’t know, for millions of dollars in prize money. For some people, this has even become a full-time job. For investors, it is proving an interesting opportunity.

According to multiple reports, Disney is investing in Draft Kings, one of the biggest players in this nascent weeklong market. Disney and DraftKings did not immediately respond to a request for comment from Quartz. ESPN, the sports network Disney majority-owns, is reportedly involved in the investment (and has a dominant position in traditional fantasy sports), and it declined to comment.

If true, this sets up an interesting battle, because Comcast, KKR and the NBA have all taken equity stakes in the rival operator Fan Duel. Weeklong fantasy sports is clearly a scale business, and it could be a winner-takes-all market. If so, some of these big bets won’t pan out.

As Fan Duel CEO Nigel Eccles explained to Quartz last year: The business model is to take a roughly 9% cut on each entry fee, then to pay out the rest of the money in prizes to participants. Since the payouts for its public leagues are predetermined (Fan Duel’s biggest league costs $25 to enter and paid out about $2.5 million each week during the last NFL season), if a league doesn’t get enough signups on a given week, it loses money. Draft Kings operates in a broadly similar way.

The race for scale explains why both companies been advertising aggressively during US sports telecasts, which according to the Wall Street Journal (paywall) is part of the reason Disney invested in Draft Kings (the deal reportedly secures $500 million in advertising commitments for ESPN).

Another potential risk is regulation. Under Federal laws passed in 2006 (which all but banned internet gambling and killed the once-booming online poker industry in the US), games of “skill” played for prize money are allowed to exist online, while games of “chance” are not.

Fantasy sports is classified as a game of skill and most people in the industry don’t think that will change.  Still, as it grows more popular, the industry is going to face more scrutiny. Five states—Arizona, Iowa, Louisiana, Montana and Washington—have passed their own legislation forbidding residents to play in daily fantasy leagues. And addiction to fantasy football is becoming a serious concern.

So there are plenty of risks facing the fantasy sports industry. But from the perspective of the aforementioned high-profile investors, the risks are probably outweighed by the potential rewards of backing the winner that runs away with the market.