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Illustration by Max Fleishman

Can daily fantasy sports sites DraftKings andFanDuel survive the 2016 season?

If you were only judging by the advertisements that appeared on TV last year, you’d think that fantasy football was entering a golden age. DraftKings and FanDuel, the two leaders in the space, were locked in a commercial arms race, spending hundreds of millions in a mad dash to corner the burgeoning market.

DraftKings and FanDuel were supposed to change the face of fantasy football. With the ability to change your lineup daily and then cash in immediately, daily fantasy sports offered quick changes and immediate gratification, something season-long fantasy leagues, by their nature, can't offer.

That didn't happen. 

Instead, daily fantasy sports (DFS) got sacked for major losses last season. DraftKings and FanDuel were both declared illegal in Alabama, Texas, Nevada, and about a dozen other states. Neither site is profitable, and at one point last year, both sites were late paying their debts to advertisers and to players who won money.

Adding insult to injury, last October it was revealed a DraftKings content manager earned a massive payday playing on FanDuel last October and had accidentally leaked the kind of insider data that would have helped him win. That got the attention of Congress and the FBI. Both sites also gave up the action on college sports, lopping off what likely was a significant part of their operation.

There were victories as well. A handful of states declared DFS legal—including, most importantly, the state of New York—and despite all the blowback the industry received from lawmakers and federal investigators, both sites (and smaller players like Yahoo, FantasyDraft, and FantasyAces) are still taking bets.

But one year after FanDuel and DraftKings blitzed the market, the industry appears to be struggling.  

The saga of daily fantasy sports is a familiar narrative in the tech industry—and in sports, for that matter—where massive investments can lead to win-now strategies that royally backfire.

The downfall for FanDuel and DraftKings was a combination of audacity, bad publicity, differing legal opinions, and an oversaturation of ads.

FanDuel and DraftKings raised $1.3 billion and $1.2 billion, respectively, before the 2015 NFL season began, and the industry went into hyper growth mode with enough advertising and sponsorship deals to make a consumer feel blanketed at every turn.

At the time, FanDuel CEO Nigel Eccles said the advertising blitz was working. "I don't regret that advertising helped us to get there," Eccles said in a press conference last November, via AdWeek. "I don't think we should be apologetic about letting people know that we have this great product."

Even for those working in the industry, witnessing the growth was a remarkable feeling. Yes, there were problems—people grumbled about the amount of DFS ads that invaded their TV sets and podcasts—but DraftKings and FanDuel presented great growth.

"Watching it unfold while simultaneously working on resolution was an intellectually interesting, emotionally charged roller coaster ride," Femi Wasserman, DraftKing’s vice president of corporate communications, told the Daily Dot in an email. "After working so hard to build this company—and industry really—we are all very invested, both in the company and in each other."

It was an open secret in the industry that employees at the two sites often played contests on each other’s sites. According to ESPN, DraftKings employees won about $6 million playing on Fanduel. As Deadspin noted, FanDuel cautioned its employees not to be "among the top five players by volume on any one site" because "top players frequently become targets for accusations by other users."

In October, a DraftKings content manager named Ethan Haskell finished second in a FanDuel contest played by nearly 230,000 people and won $350,000 last October. He had also leaked what was considered inside information—data on how users set their lineups on the DraftKings site, which would likely hold true on FanDuel. DraftKings said Haskell hadn't used the inside information, and the two sites soon decreed that their employees couldn't play with their competitors, but the damage had been done.

"Watching it unfold while simultaneously working on resolution was an intellectually interesting, emotionally charged roller coaster ride."

It's worth noting that daily fantasy sports exist in a gray area of the law. An exception in the Unlawful Internet Gaming Enforcement Act decreed that fantasy sports aren’t considered gambling but rather games of skill. But the very nature of fantasy sports was completely different in 2006, when the bill was written, and the rush of publicity around DFS prompted states to reconsider the classification.

New York Attorney General Eric Schneiderman soon began investigating and sent cease-and-desist letters to both websites. The FBI took notice as well. Soon after, a number of states began declaring DFS illegal.

Meanwhile, jackpots were reduced as less players competed, and, according to ESPN, both sites had to spend millions of dollars in legal fees.

The disheartening news has extended into the 2016 NFL season. Guaranteed prize pools have basically been cut in half from last year. As Legal Sports Report points out, DraftKings’s biggest NFL jackpot is $5 million and FanDuel’s is $2 million; last year, the biggest payouts were $10 million and $5 million, respectively.

According to Forbes, during the first week of the 2016 NFL season, both sites lost money on their biggest jackpot games of the week.

But we still have 15 weeks of football left this season. Where do the sites go from here?

For one, consumers will see less advertising.

After the football season ended, Eccles admitted FanDuel had been overexposed and that the ad spend for 2016 would be “down significantly” from 2015. DraftKings has the same game plan.

“The regularity [of the ads] has changed for several reasons,” Wasserman said. “First, we always knew that this year's ad pace would be lighter than the last. That was our strategy even before the fall's events. Last year's objective was brand awareness; this year, [it's] about engagement. And certainly, we did get the message from customers and media about the intensity of our rotation as well. So, the pace reflects our original strategy, updated to incorporate the consumer feedback. The tone reflects market research that we've done on why people play DraftKings. They play because it's fun and makes watching sports more fun. Hence, engagement.”

“Everybody thought [DFS] would be like the new iPhone, like it’d be the next big thing. But what you have instead is an iPad.”

There have been talks of a merger. FanDuel has not commented on the rumors, but earlier this month, Jason Robins, the CEO of DraftKings, confirmed to Bloomberg that the two sides have been in talks for the past 18 months. He said more players combined on one site would be ideal, and it would allow the two sites to combine legal and lobbying expenses. But a source said that a merger was unlikely because the two CEOs have different philosophies, the companies maintain different cultures, and too many top DFS players use both sites concurrently. (FanDuel did not respond to questions from the Daily Dot.)

There is a viable path forward without a merger. “Investors are bullish,” Wasserman said, but DraftKings just announced it raised another $150 million.

“[FanDuel] can be reasonably profitable taking 20 percent of the market,” a FanDuel company source not authorized to speak on the record told the Daily Dot. “That’d be a really good thing, because there’s a lot money in there.”

Mostly, the industry is trying to mature and convince the fans that setting a daily lineup is more rewarding (at least in the short term) than a season-long commitment. Some states have legalized DFS—with new laws calling for DraftKings and FanDuel to pay fees to be licensed in that state—and they’re playing ball with states that are wary while trying to avoid the controversies that led to so much scrutiny.

“The future is undoubtedly bright,” Wasserman said. “We had a course correction, played out in the public eye. But growth numbers are strong and investors still believe in this industry. And most importantly, consumers really want to play. As long as we keep delivering innovative and quality products… there is no limit to the upside.”

Both sites continue to lose money—they are still young startups, after all—but as Fortune recently reported, DraftKings and FanDuel say “their active user and gross revenue figures were significantly higher for the first half of 2016 than for the first half of 2015.” DraftKings also said its gross revenue is up 98.2 percent while the percentage of unique paying users has risen 136 percent.

Those are promising figures for the industry, lending support to the idea that daily fantasy sports will stay, even though the goal posts appear to have changed.

“It’s way different than what people thought,” the FanDuel source said. “Everybody thought [DFS] would be like the new iPhone, like it’d be the next big thing. But what you have instead is an iPad. It’s cool. It’s nice. It’s profitable [potentially]. But it’s not the next big thing.”

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