DraftKings and FanDuel Go From Buying Ads to Selling Them
Michael Pine joined FanDuel last July to help the daily fantasy sports company build an advertising business. Pine, who had previously worked for World Wrestling Entertainment and Iron Man, quickly inked a few deals including a big one with Bud Light, which wanted to sponsor a handful of tournaments during the upcoming NFL season. But everything was put on hold when a nationwide controversy broke out about whether daily fantasy sports should be classified as illegal gambling. “We had to pump the brakes,” said Pine.
Now FanDuel is revamping its efforts for the beginning of the National Football League season, the time of year when interest in daily fantasy sports peaks. It first tested the waters with Pine's original partner. Bud Light and FanDuel collaborated on a 30-day fantasy tournament during the NBA playoffs, and attracted over 1.5 million entries. Pine said Bud Light paid almost $1 million for the campaign, which he hopes to use as a template for future customized marketing partnerships. Representatives for Anheuser-Busch InBev NV, which owns Bud Light, declined to discuss their relationship with FanDuel.
FanDuel plans to finalize a handful of other partnerships in the next few weeks. DraftKings, its biggest competitor, is also using September to roll out new deals. This week alone, it started campaigns with TGI Friday's Inc. and Paramount Pictures. Corey Gottlieb, DraftKings’ vice president of new media, says it has about a dozen clients signed to deals, with three to four times that many in the pipeline.
The activity could make a notable shift in the business model of daily fantasy games. Up to this point, the companies have made their money by offering contests with cash prizes, and taking a cut of the entry fees, known in gambling circles as taking a rake. At this time last year, the daily fantasy sports industry was bombarding the television-viewing public with an endless parade of advertisements, promising life-changing money to people who won their contests.
Neither company was able to prove that this was a way to build a stable business. Both lost gobs of money last year, with Draftkings spending $174 in marketing for each new user it acquired in 2015, and FanDuel spending $123, according to an analysis by Eilers & Krejcik Gaming, a research firm. Meanwhile, they thrust themselves into the public eye in a way that made government attention practically inevitable. State legislatures began re-examining whether this was an activity that should continue to be legal. A handful of state attorneys general decided it was already illegal and went after the companies, most significantly in New York, the industry’s biggest market.
Even as they fought an existential legal and regulatory fight, both DraftKings and FanDuel began to reposition themselves. They hushed talk of enormous prize pools, describing fantasy sports instead as a fun thing to do with your friends. The companies now prefer to talk about cash prizes as a form of social lubrication. They've pulled back significantly on advertising, and say they’re getting serious about moving from growth stages to profitability.
Opening up new revenue lines based on advertising is a logical outgrowth of this pivot, says Adam Krejcik, a principal at Eilers & Krejcik. “At some point they need to change this whole model from a venture backed, cash-burning business to a sustainable, free cash-flowing model,” he said. “Advertising dollars are basically what make the world go round.” Like many people who follow the daily fantasy business, he still thinks the two companies will eventually have to merge to avoid spending resources competing against each other. But DraftKings just raised $150 million in capital, indicating that no deal is imminent.
The companies are hesitant to simply sell display advertising on their sites, because they're worried about alienating fans. Instead, they’re steering brands toward co-produced videos and sponsored tournaments. “We are very much veering away from the mold of traditional display, and any traditional interruptive advertising that would be harmful to our users,” said Gottlieb. “Everything we’re doing is around customized integration.”
A recent FanDuel partnership with Machine Zone, the video game company, allowed people to enter games with cash prizes by downloading one of Machine Zone’s mobile apps rather than ponying up a few dollars. DraftKings’s partnership with TGI Fridays, announced Wednesday, gives discounted food at the restaurant to anyone who enters a DraftKings tournament.
This is an idea that is very much in its experimental phase. Each partnership is a custom deal, which raises questions about how far they can scale the idea. Neither DraftKings nor FanDuel would say what proportion of their overall business they saw advertising becoming, other than to say it would be significant. Nor would they discuss the size of the deals they’re signing. Gottlieb says DraftKings is intentionally keeping prices low to help goose the market.
The partnerships are important to DraftKings and FanDuel in another way: they indicate that the companies have come through a tough year without having been broken. The number of states where daily fantasy sports don't operate because of legal questions has doubled since last year, and there are still open legal issues in important markets. But New York lawmakers cleared the path this summer for the companies to resume operations in the state. The legislative calendar in places like Illinois and Texas make it unlikely that there will be any big legislative setbacks during the NFL season. “The legal and legislative momentum is undeniably positive at this point,” said Chris Grove, a partner at Narus Advisors.
Most importantly for Pine, brands looking to sell products to young men haven’t been turned off to the industry after a year of legal controversy. He says that the regulatory landscape has generally been the first or second question from a potential partner. But as time passes and that environment brightens, it seems to be less of an issue for the people he’s pitching. “Some are not bringing it up, period, and some are not bringing it up until midway through a conversation or pitch,” he said. “I love that.”