Four things we learned about DraftKings from N.Y. AG’s lawsuit

REUTERS

When New York Attorney General Eric Schneiderman began investigating the daily fantasy sports industry in October, he used his subpoena powers to force DraftKings Inc. of Boston and its business partners to turn over confidential documents.

When Schneiderman later filed lawsuits against DraftKings and competitor FanDuel Inc. on Tuesday, those documents became public. Here are four things we learned from those filings that we didn’t know before:

1. The G-word

DraftKings is at pains to avoid calling its daily fantasy sports contests for cash “gambling.” Doing so would undermine the company’s argument that the contests are skill-based, a fact it says exempts it from state gambling laws.

But Schneiderman cited several instances in which he alleges the company itself referred to its games as a form of gambling:

■  In a presentation to investors, DraftKings listed “poker” and “sports betting” as “addressable markets” that daily fantasy could draw customers from. The company also included a slide with charts showing the projected growth of the global online poker and online betting markets, and figures on how much cash was wagered in Nevada’s sports books.

■  Multiple gambling-related keywords are embedded in the code for DraftKings’ website, according to Schneiderman, intended to steer online searches about gambling toward DraftKings instead. They include “fantasy golf betting,” “weekly fantasy basketball betting,” and other similar phrases.

Schneiderman also said DraftKings’ records indicate the company fielded multiple calls from customers who said they were addicted to daily fantasy contests and asked to be cut off.

DraftKings’ lawyers have since said in court that the use of gambling terminology has no bearing on the legal status of the company’s contests.

2. Massive ad spend

Anyone who watched TV in September couldn’t miss the heavy advertising from DraftKings and FanDuel at the start of the National Football League season. Now, thanks to Schneiderman, we can see just how much the companies spent to broadcast those enthusiastic testimonials from the likes of “Zack from Fairfield, California.”

According to documents the attorney general subpoenaed, DraftKings spent just $1 million on commercials with NBC Universal/Comcast in all of 2014. But that figure jumped to $21 million in the first 10 months of this year, an increase of more than 2,000 percent.

FanDuel also ramped up its ad spend with NBC Universal/Comcast, from $2.2 million last year to $12 million so far this year.

3. Bullish projections (and big revenues)

It shouldn’t come as a surprise that DraftKings is confident in the future of the daily fantasy sports industry. But according to the investor presentation Schneiderman subpoenaed, the company is really, really confident in its future.

DraftKings projects the total US and Canadian market for daily fantasy sports is worth $3 billion to $4 billion this year. Next year, it thinks the market will jump to between $7 billion and $10 billion. By 2017? $15 billion to $20 billion, DraftKings said, or roughly a quadrupling of the US-Canada market this year.

The documents also contain information on DraftKings’ state-by-state revenues from 2014, which, as a private firm, the company has not disclosed publicly before.

California was the company’s most lucrative market, with accounts in the state paying $34.3 million in entry fees last year and earning the company $3.4 million in revenue. New York was second, with $25.7 million in entry fees and $2.6 million in revenue, followed by Florida and Illinois. Massachusetts, DraftKings’ home state, was the company’s ninth-most lucrative US market, with $1.3 million in revenue.

The numbers are likely much, much higher this year, given the aforementioned ad blitz and public statements from the company touting its recent growth. For example, DraftKings chief executive Jason Robins recently said the company acquired nine times as many new users in September 2015 as it did in September 2014.

4. Entries from banned states?

Even before the recent controversy around whether daily fantasy sports are legal, the companies stayed out of five states where the prohibitions seemed clearer: Arizona, Iowa, Louisiana, Montana, and Washington.

But Schneiderman said he obtained records showing that DraftKings took in revenue from those jurisdictions anyway: more than $484,000 in 2014, with the largest chunk — more than $153,000 — coming from the state of Washington.

In November, authorities in four of those states said they are looking into Schneiderman’s allegation. Washington launched a formal investigation, while Arizona Attorney General Mark Brnovich sent letters to DraftKings and its top competitor, FanDuel, asking for records of any transactions with players from his state. Brnovich also asked what steps the companies were taking to block accounts from Arizona.

In recent court filings in New York, DraftKings said that most of the nearly $485,000 in disputed fees from 2014 proved to be from players who actually lived in other states where daily fantasy sports is permissible.

DraftKings didn’t say why the players’ accounts were initially associated with banned states, but its court filings suggested that players may have moved, had residencies in multiple states, or even mistakenly filled out their online registration forms.