The Best American Sports Writing 2017

by Glenn Stout

  It has been, by any measure, a spectacular fall.

  The industry’s implosion began with a series of tactical mistakes made by a pair of bitterly hostile start-up companies that all but dared federal and state authorities to shut down the sites over concerns the games constituted illegal gambling. Outside the Lines interviewed more than 50 company executives, current and former players, legislators, lobbyists, lawyers, investigators, and industry consultants and found that the companies’ troubles were triggered, in part, by a toxic combination of young executives’ hubris and ignorance, reckless risk-taking, and raw political naïveté. Infused with a false sense of security from FanDuel’s and DraftKings’ surging valuations and soaring revenues, the companies’ cofounders and CEOs—Nigel Eccles, 41, of FanDuel and Jason Robins, 35, of DraftKings—waged a self-destructive, kill-or-be-killed race toward industry supremacy and a life-changing payday that they now acknowledge was crazy for all of the cash it torched, the wrong messages it sent, and the legal and media tsunami it unleashed.

  For years, the two companies’ leaders had been warned by investors, lobbyists, consultants, and even some players about a coming day of reckoning. Yet they relentlessly promoted their games as a means to get rich quick when they knew only a tiny percentage of their customers were winning more often than losing. They failed to aggressively move against big-bankrolled players who dominated newer players, sometimes with predatory behavior or technological advantages. And they allowed their own employees to play—and win millions—on their rivals’ sites, despite their having access to odds-improving proprietary data.

  “This industry blew up so quickly—no one adequately planned or prepared for it,” says Gabriel Harber, 29, a former high-volume player at DraftKings and FanDuel. “[The executives] didn’t make the substantial investment on self-regulation and the regulatory side that was obviously needed . . . Every PR person and lawyer should be fired. How could you let your client engage in this kind of crazy advertising if every legal loophole wasn’t closed? How stupid can you be?”

  The daily fantasy industry has an unwitting—and unlikely—founding father: George W. Bush.

  On October 13, 2006, President Bush signed the Unlawful Internet Gambling Enforcement Act. UIGEA was intended to reverse the momentum of America’s Internet gambling boom by prohibiting banks from processing bettors’ credit card deposits with illegal betting operations. With the blessing of the major sports leagues, a carve-out in the law was made for the wildly popular season-long fantasy leagues that an estimated 57 million Americans now play. But the drafters of UIGEA were silent about daily fantasy contests because no such thing existed. By 2007, however, a handful of lightly played daily fantasy websites had opened in the United States, but overseas, things were moving much faster.

  A group of sharp entrepreneurs from the United Kingdom, some of whom had worked as online poker executives, started considering the possibilities. An entrepreneur named Nigel Eccles had concluded, correctly, that season-long fantasy leagues were far too slow for action-junkie millennials, who thrived on instant gratification and who’d soon routinely watch sports on TV while glued to a second screen, usually their smartphone.

  So in July 2009, Eccles and his colleagues launched FanDuel in Edinburgh, Scotland. It was a spin-off of Hubdub, their failed prediction site on which users bet virtual money. Unlike Hubdub, FanDuel would accept real-money wagers.

  A soft-spoken, lanky Brit, Eccles had printed out a copy of UIGEA and studied its fine print. From day one, he concluded that the law would provide “safe harbor” for daily fantasy games. In early meetings with potential investors, Eccles was a passionate evangelist for daily fantasy sports as a game of skill, similar, he liked to say, to a golf tournament, a 5K race, a chess championship, or a spelling bee. His initial pitches steered clear of gambling parlance: “bets” were not wagers but “entry fees,” and competitors were not vying for “jackpots” but preset “cash prizes.” “We can show with FanDuel that the high-skill players will win predominantly,” Eccles would tell investors, the media, anyone who’d listen.

  The chase for financing was slow going at first; the initial investors were Ian Ritchie, a Scottish software millionaire, and Kevin Dorren, a Brit who founded a meals-on-wheels diet service. Eccles nearly gave up when investors’ cash dried up. But he and his cofounders pressed on, and by the end of 2011, FanDuel had combined smart product design and savvy marketing to establish itself as the industry leader. The company’s later financial backers, like Mike LaSalle of Shamrock Capital Investors in Los Angeles, were hooked by Eccles’s vision for explosive growth, with a target of 20 million to 30 million active users within several years.

  During their first meeting in Manhattan in April 2014, LaSalle says, he was particularly impressed that Eccles wasn’t a daily fantasy player but a disciplined businessman committed to developing new products. Five months later, LaSalle’s firm made a major investment in FanDuel as part of the company’s financing round that raised $70 million.

  “We thought the regulatory issues were going to have to be flushed out at some point,” he says. “But no one anticipated the fervor of what happened and the way [the authorities] directed their energies” against the industry.

  As FanDuel grew, the three young men who would launch its principal competitor were still working near Boston for Vistaprint, the printing and business cards company. The trio were Jason Robins, a Duke graduate with degrees in economics and computer science who minored in math; Matt Kalish, a Columbia grad and fantasy baseball addict; and Paul Liberman, an electrical engineering and computer science graduate of Worcester Polytechnic Institute in Massachusetts. On a Tuesday in January 2011, Kalish pitched an idea to Robins: an online sports venture that would jam all the excitement of a season-long fantasy league into a single day—even a few hours. Robins was in. They recruited Liberman. They would become discouraged after discovering that FanDuel and other companies already had a strong foothold. But Robins told his pals the crowded field proved there was a marketplace for daily fantasy. They’d just have to find a way to beat FanDuel.

  By that weekend, the trio were holed up developing their idea inside the spare bedroom of Liberman’s town house in Watertown, Massachusetts, and, on occasion, over draft beers at Boston Beer Works.

  Robins is a quick-thinking, fast-talking entrepreneur, a natural-born salesman who is articulate, supremely confident, and a little brash. Some investors call him “the closer.” In the beginning, however, he didn’t close anything. He pitched DraftKings to nearly 50 potential investors, none of whom bit. But after meeting Robins in November 2011, an investor named Ryan Moore says it didn’t take long to hand him a $1 million check. “I’d say within an hour, maybe 90 minutes,” recalls Moore of Atlas Venture.

  Three months later, Robins, Kalish, and Liberman were still at Vistaprint while moonlighting on DraftKings inside Liberman’s spare bedroom. That’s when Moore challenged them with a difficult question: if they don’t believe in the company enough to quit their day jobs, why would any other investor—or any customer—believe they are serious? It was the push Robins, Kalish, and Liberman needed.

  They quit, and on April 27, 2012, the trio hosted their first daily fantasy baseball contest at DraftKings. A few dozen family members and friends paid $20 per lineup and competed for a pot worth nearly $400. The three cofounders’ cut was $40.

  From the beginning, DraftKings built a reputation for being hyperaggressive, racing to build a user-friendly mobile product and the first to recognize the importance of signing credibility-boosting major league sponsorships. The company also would eventually offer fantasy contests on sporting events that FanDuel wouldn’t touch, like PGA golf tournaments, mixed martial arts, esports, and NASCAR. FanDuel had avoided those sports over its interpretation of federal law: that fantasy games must involve multiple contests, such as an evening’s worth of NBA games rather than a single NASCAR race.

  But the wider smorgasbord of games proved popular. Draf
t­Kings always “shot for the moon—pushed the envelope in every way to make up ground on FanDuel,” says a consultant for both companies.

  FanDuel had a three-year head start, but DraftKings broke from the scrum of dozens of start-ups to establish itself as the Boston-based rival that FanDuel, in New York, would need to reckon with.

  The early, relatively low-stakes games being offered were intended to cater to friends playing for fun rather than money. Two months after going live, DraftKings offered its first guaranteed jackpot contest, for $5,000. But on the lightly trafficked site, many contests wouldn’t fill up with enough players to cover the large guaranteed payouts. This meant DraftKings had to defray the difference, a figure that ran into tens of thousands of dollars that executives would come to view as a marketing expense. Gamblers loved the “overlay” because the guaranteed jackpots, with fewer players, improved their odds, and they viewed the cash difference as free money. For the sites, it turned out to be cash well spent: word of the overlay opportunity in DraftKings’ bigger-money contests ricocheted among frequent daily fantasy players, attracting waves of new customers and helping DraftKings emerge from the pack and close the gap with FanDuel.

  Before long, both companies’ executives discovered that the easiest way to lure customers was to offer the long-odds promise of lucrative jackpots. On December 8, 2013, in the FanDuel Fantasy Football Championship, a Sioux City, Iowa, sales manager named Travis Spieth turned $10 into daily fantasy’s first one-day millionaire prize. A year later, in the same contest, a Pasadena, California, personal trainer named Scott Hanson was minted as the first daily fantasy multimillionaire by winning the $2 million grand prize.

  By 2014, DraftKings had become the second-largest daily fantasy site, buoyed by its purchase that summer of the third-largest site, DraftStreet. The industry was consolidating in multiple ways. FanDuel and DraftKings had developed similar platforms and offered many of the same products. They also shared a cross-section of players.

  And investors, businesses, media companies, and America’s major sports leagues noticed the two companies’ mind-boggling growth. Even more important, they loved how daily fantasy turbocharged TV ratings and fans’ engagement with all sports, even for something as mundane as a midseason Monday night slate of NHL games. Entry fees in the United States had jumped from $20 million in 2011 to $1 billion in 2014. In a confidential pitch memo to investors, DraftKings projected an astonishing $15 billion to $20 billion in industrywide entry fees in 2017.

  Most investors, including the pro sports leagues, weren’t blind to the danger that the gravy train could be derailed by legal challenges. Among the early skeptics were Major League Baseball executives, who conducted a two-year study of the legality of daily fantasy sports. But an outside law firm hired by MLB concluded that DraftKings “overwhelmingly” offered games of skill, not chance.

  After that assurance, MLB became the first league to partner with the industry, accepting a small equity stake in DraftKings before eventually naming DraftKings its official daily fantasy game. MLS, the NHL, NASCAR, and the UFC followed. FanDuel, meanwhile, became the exclusive partner of the NBA, in exchange for an equity stake.

  At the same time, DraftKings and FanDuel did their own diligence on whether their games would survive a legal challenge. To investigate the issue, DraftKings hired a Las Vegas lawyer named Anthony Cabot, who had cowritten an article touting the legalization of online poker for the UNLV Gaming Research and Review Journal. Cabot concluded that the company’s “pay-to-play fantasy sports service” was legal in 45 states as long as each contest’s outcome was “within the control of the users.”

  “The key to the distinction between fantasy sports and sports wagering is that fantasy sports require the consistent and recognizable involvement of the contestants to achieve success,” Cabot told DraftKings executives in the letter obtained by Outside the Lines. FanDuel was given a green light by a law firm that conducted a similar exhaustive study, documents show. Executives say these assurances led the sites to flatly state on their websites that daily fantasy was legal in most states and to pass those assurances on to investors and would-be partners.

  The skill set needed to win at daily fantasy most closely resembles the skills needed to win at the racetrack. Like the horseplayer handicapping a Pick Six by scouring the Daily Racing Form’s miniaturized type, a daily fantasy player chooses a combination of pro players who he or she believes will perform the best based on their past performances and an array of other factors. When the thoroughbreds bolt from the gate, the horseplayer becomes a deeply invested though passive observer, in the same way the daily fantasy player can only watch and root for players to run up the points after the kickoffs of Sunday’s early NFL games.

  That parallel wasn’t lost on some industry insiders and even a few leaders of the Fantasy Sports Trade Association, the 18-year-old volunteer trade group representing about 250 member fantasy sports companies. At the FSTA’s winter conference, held at the Mirage in Las Vegas in January 2013, FSTA president Paul Charchian warned the daily fantasy executives assembled not to emphasize the monetary aspect of their contests or they’d risk a legal or regulatory pushback. In particular, he urged the executives to keep all gambling lingo from their websites and to refrain from emphasizing winning and winning big in marketing campaigns.

  “Don’t f— this up,” Charchian told the industry leaders, including the CEOs and top executives of DraftKings and FanDuel.

  Charchian and other FSTA leaders also worried that as the industry grew, it would seize the attention of casino and thoroughbred racing executives, who would lobby elected officials to try to stop daily fantasy from cutting in on their action. In April 2014, Eccles himself wrote a better-business charter of consumer protection, warning companies to “avoid the use of gambling terms in the promotion and marketing of their games.” The FSTA adopted the guidelines but did not enforce them.

  Trade association officials and other insiders also urged FanDuel and DraftKings to adopt a best-defense-is-offense strategy. Yet prior to 2015, FanDuel and DraftKings executives had balked at numerous proposals to invest in an expensive state-by-state campaign seeking regulatory and legal clarity on the gambling issue. They also considered but rejected numerous attempts to form a self-regulatory, industrywide board that would field customers’ complaints and aggressively police the companies’ integrity, fairness, and transparency.

  “The industry moved too slowly,” says Rick Wolf, a founding board member of the FSTA, whose annual lobbying budget in 2014 was $75,000, barely enough to mount a battle in a single state. “We began looking at regulation two years ago, but the attempt kept getting punted. No one wanted to take it on.”

  One reason that some industry leaders resisted: their marketing had been successfully targeting poker players and sports bettors to become their customers. DraftKings embedded gambling phrases into its website to help gamblers find it using Google searches like “fantasy golf betting” and “weekly fantasy basketball betting,” documents show. That occurred despite its leaders’ assurances that it offered legal skill games and, in the fine print of its ads, that DraftKings is “not a gambling website.”

  Confidential investor pitches obtained by Outside the Lines were rife with comparisons to online sports wagering and casino gambling. “Sports Wagering Vertical is a large addressable market,” DraftKings told potential investors, suggesting that its contests would appeal to American customers illegally wagering billions of dollars at offshore sportsbooks and online poker sites.

  FanDuel was also blunt about its products’ appeal to gamblers in materials provided to investors, documents show. FanDuel executives told one investor their target market was male sports fans who “cannot gamble online legally” and that their customers have “a higher preponderance to gambling.” FanDuel also compared its performance with that of Bwin.Party, a sports bookie that is one of the world’s largest online gambling companies. In a pitch to investors, FanDuel noted that nearly
20 percent of its users, in a survey, said they bet or gamble and that their friends would describe them as “a bit of an addict.”

  “We always knew there was no law on the books,” a longtime lobbyist says, “and if you make it about gambling and winning big checks, you can blow it all.”

  Like any poker website or online bookmaker, DFS companies need two vastly different types of players to keep depositing money. Small-stakes players were needed to join—and continue playing—but the high-volume players, some of whom entered thousands of lineups in hundreds of contests a night, had become the sites’ most reliable cash machines. The companies, whose total revenue last year was $280 million, make their money in the same way horse tracks and poker rooms do—by taking a 6 percent to 15 percent cut, or “rake,” of players’ wagers. The higher the betting volume, the more the sites get to keep.

  By some estimates, 60 percent of the daily fantasy industry’s revenue comes from the roughly 15,000 high-volume players wagering at least $10,000 a year. Nearly 50 players, most of whom are savvy, analytics-driven professionals, each wager at least $1 million a year. And some go even higher: two sharks played hundreds of high-stakes heads-up NBA contests during the homestretch of the NBA’s 2014–15 season. After 20 consecutive nights, one of the players had lost nearly $2 million.