Next hurdle for daily fantasy sports sites? Profits

After surviving a threat by New York Attorney General Eric Schneiderman that could have put them out of business, daily fantasy sports operators face their biggest challenge yet: Earning a profit.

Both New York-based FanDuel and its larger rival DraftKings currently lose money, although neither has disclosed precisely how much. The Wall Street Journal reported last week that FanDuel's revenue nearly doubled in 2015 to about $100 million. A company spokeswoman disputed the figure, saying in an email it was based on a "U.K. filing that only gave half the year's revenue." She declined to elaborate further.

In an interview with CBS MoneyWatch, CEO Nigel Eccles said FanDuel -- like other tech start-ups -- is under pressure from investors to become profitable. "We are not profitable today but we are moving towards profitability, and we are sufficiently funded to get to profitability," Eccles said, adding that the company doesn't have a target date for when it expects to be in the black.

Even so, FanDuel, which employs about 400, is continuing to hire at an aggressive pace, particularly in engineering as the company "continues to invest heavily in the product", Eccles said.

He downplayed media reports about a potential merger between FanDuel and DraftKings, noting that the companies wouldn't save money on legal costs and multiple state lobbying efforts since they're already sharing such costs with each other and the Fantasy Sports Trade Association. Regulators also could reject such a deal on antitrust grounds.

One area where FanDuel and DraftKings have both cut back is on advertising. The companies last year bombarded consumers with a television ad blitz valued by iSpot TV at more than $300 million. So far this year, FanDuel has spent about $1.2 million on TV commercials, compared with $12.7 million during the same period last year. Meanwhile, DraftKings' ad spending slumped to $3.09 million from $32.2 million.

According to Eccles, FanDuel no longer needs to make the public aware of its core product since more than 80 percent of sports fans have now heard of it. "It's not about generating awareness anymore," he said. "We got that in spades. It's more about how we position and market the product" on different digital platforms.

Last year's ad campaign went too "mass market" and wound up reaching many consumers who weren't sports fans and had no interest in FanDuel, according to Eccles. "People who see the ads [now] are more likely to be players," he said of current efforts.

The fantasy sports industry's business practices came into sharp focus in October 2015 when the New York Times reported that DraftKings employee Ethan Haskell had won $350,000 on FanDuel. A later investigation by DraftKings found that Haskell hadn't done anything wrong. Nonetheless, both companies prohibit their employees from playing daily fantasy sports for money. State officials then began to take a closer look at the companies' activities.

"What happened last October is that we suddenly all realized that the biggest threat to our companies was from outside the market and that if we didn't all work together, we were all going to go down," Eccles said.

With its recent victory in New York, the industry appears poised for growth. About 60 million people play fantasy sports though only around 5 million or so play the daily variant.

Note: parent CBS Inc. has an investment in FanDuel of less than 1 percent of that company's value.

  • Jonathan Berr On Twitter»

    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.