What Scandal? DraftKings, FanDuel Had Their Best Weekend Ever

Record Numbers Enter Tournaments This Weekend, According to Research Firm

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Allegations of cheating within the two biggest fantasy sports companies, DraftKings and FanDuel, haven't scared off their customers. A record number of people entered tournaments for Sunday's NFL's games, according to an analysis from SuperLobby, an industry research firm based in the UK. Together, the top two sites received 7.1 million entries to their guaranteed prize pool tournaments, generating a whopping $43.6 million in entry fees.

This weekend offered the first real chance to quantify the impact of a brewing controversy on the bottom line of daily fantasy sports. The sites give players the chance to draft a team of real-life players; how well those players do on the field on a particular day determines the outcomes of the fantasy contests. Many tournaments offer cash prizes that stretch into the millions of dollars.

SuperLobby tracks how many people play the multiplayer tournaments known as guaranteed prize pools, information that the sites make public to people as they enter these tournaments when they sign up. DraftKings and FanDuel aggressively advertise the guaranteed prize pool games, and Copeland estimates they account for some 70% of the overall prize pool. A spokeswoman for FanDuel disputed this, but provided no additional information. DraftKings didn't respond to requests for comment.

The New York Times reported Monday that a DraftKings employee had been winning hundreds of thousands of dollars on FanDuel. While there was no direct evidence the employee had used proprietary information for personal profit, it raised the possibility of an unfair advantage for employees of the sites. People who work at daily fantasy companies are barred from playing on the sites that employ them, but it has been common for them to enter contests on competing sites. Both FanDuel and DraftKings went on the defensive last week, trying reassure customers and counter the reports of government investigations and a class-action lawsuit.

The reports rattled many daily fantasy players. Some of the biggest players privately drew parallels to what is known in online gambling circles as Black Friday, the 2011 crackdown on online poker companies that left many people unable to access the money in their accounts.

So far, the biggest money is sticking around. Saahil Sud, the top-ranked daily fantasy player in the world, said the controversy wasn't a "code red" for him. "I don't think that anyone feels directly cheated, but there's a concern that someone could do it," he said. He also noted that he had a financial interest in keeping things running smoothly. If top players pulled their money off the sites and caused a crisis of confidence, they'd be putting their own livelihoods at risk.

Smaller customers may feel differently. Bryan McWethy, a 25-year-old from Michigan who plays in small-money games, said the specter of cheating prompted him to close his account. He thinks less sophisticated players like himself have already been feeling overmatched. "They shouldn't have to feel that they are going against the house when they deposit money on these sites," he said. "They should feel like they have a realistic chance to win."

The skeptics didn't carry the day. FanDuel and DraftKings each had their most profitable week of the season, according to SuperLobby. Because the prize pools are required by law to be set in advance, the profitability of any particular game depends on how many people play. When tournaments aren't filled completely, the sites lose money; if they're particularly crowded they become more lucrative for the host sites. FanDuel earned an gross profit of almost 16% this week, its best of the season, according to Copeland's analysis. DraftKings's gross profit of 10.4% was its second-best week of the year.

Executives for both companies, which are closely held and valued at more than $1 billion each, have said they are not yet turning an overall profit. Their contest grosses don't take into account one of the biggest expenses for the sites: advertising. Daily fantasy ads have been inescapable since just before the NFL season began. DraftKings has been steadily pulling back on advertising since the NFL season started, but didn't accelerate that process over the last week, according to data from ispot.tv. FanDuel's advertising stayed steady: the company was the second-highest spender on U.S. TV ads over the last week, according to ispot.tv.

The lack of an immediate impact on the sites' businesses hardly means they're out of the woods. Investigations and hearings could lead to additional revelations. For now, daily fantasy sites operate with practically no oversight in the states where they operate (several states ban playing fantasy sports for money.) Now new state or federal regulation seems like a distinct possibility. Daniel Wallach, a sports and gaming attorney with the firm Becker & Poliakoff, says he also expects to see about a dozen more class action lawsuits. "You will see a groundswell of litigation activity. More tomorrow, more Tuesday. This is going to be a daily occurrence throughout the week," he said. "We're at the beginning of a fascinating roller coaster ride."

-- Bloomberg News

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