You are not imagining it: daily fantasy sports companies spend incredible amounts of money on advertising.
According to Nomura analyst Anthony DiClemente, DraftKings and FanDuel likely spent a combined $US150 million on TV and internet advertising in the third quarter, which ended September 30 and included the beginning of the football season.
This is a massive sum of money. All told, this increase in spending from DraftKings and FanDuel could add 0.5% to TV advertising growth in the third quarter of the year.
For some perspective, total spending on TV advertising in the third quarter was over $US15 billion. And so while daily fantasy sports are small advertisers on an absolute basis, they did move the industry needle.
But as outlets ranging from The Wall Street Journal to threads on reddit have noted, these ads are little annoying. And according to Legal Sports Report, in late summer just ahead of the start of the NFL season, DraftKings was averaging a commercial every 90 seconds.
So basically, if you’ve been near a television on a weekend in the last couple months you’ve seen a commercial for FanDuel or DraftKings (and potentially been annoyed by it).
The recent negative PR for the companies, however, will now put to the test just how effective that advertising has been.
On Monday, news broke that data from DraftKings was inadvertently leaked before the start of NFL games two weekends ago. That same weekend, an employee from DraftKings won $US350,000 playing daily fantasy sports on FanDuel.
The companies have said this data leak was not related to that employee’s winnings. They did, however, revise policies that allowed employees to play daily fantasy at other sites.
Daily fantasy sports, for the uninitiated, give every player a budget which they use to select players they think will accumulate the most points in a given week — rushing yards, passing yard, touchdowns, etc. — with everybody picking all new teams each week.
Traditional fantasy sports see players stay on one team all year (or most of it: the details aren’t that important), which can get boring. Daily fantasy also pays out big prizes for very little money (which is important). And if you’re wondering, it’s not gambling because of a legal technicality. (They have been judged games of skill, not luck. For now.)
As Tech Insider’s Drake Baer wrote a few weeks ago, the way daily fantasy games work is by using the “shark and fish” theory. This basically means the games need a lot of people to play — even for a little bit of money — in order to pay out big prizes which, in theory, entice people to keep playing.
The way the companies spend money on advertising certainly makes clear that this is a one-way bet on increasing user growth. And so now if you’re unsure about the integrity of the game you’re getting on DraftKings and FanDuel, are you likely to keep playing?
Your view on which financial crime this most vaguely resembles doesn’t really matter (and again, the companies said there is no evidence this information was used to anyone’s advantage).
What does matter is that people have noticed and taken an interest in even this limited scandal because, a) these companies have been in-your-face advertising like crazy and frayed the nerves of even folks who play and support the venture and, b) these companies depend on having and maintaining consumer confidence.
Again, these companies’ entire business model is dependent on an ever-growing pool of players to pay a little bit of money for a very small shot at a very big prize.
(And like, yes, every company’s business model is, at heart, a bet that the market for their product will get larger, but these companies very literally need more money to keep coming in order to keep delivering on the payouts promised, which are the company’s whole appeal.)
Now, this hiccup for the industry isn’t likely to derail the whole thing. As DiClemente points out, both companies have raised more than $US350 million in venture funding, with the “vast majority” raised since July.
DiClemente also notes that DraftKings has a 3-year, $US250 million spending commitment with ESPN and that there are several big venture capital and private equity names invested in these companies in addition to sports leagues themselves.
Investors in DraftKings include 21st Century Fox, Kraft Group (founded by Robert Kraft, owner of the NFL’s New England Patriots), and Melo7 Tech Partners (the venture capital firm founded by New York Knicks star Carmelo Anthony). FanDuel investors include KKR, Google, and Time Warner Investments.
And so future advertising spending from these companies’ partners seems likely to continue given that many daily fantasy investors are the investment arms of companies that will reap the benefits of DraftKings and FanDuel continuing to spend ad dollars.
But the whole thing ultimately depends on the typically fickle whims of consumers.
Business Insider Emails & Alerts
Site highlights each day to your inbox.