Business

DraftKings finds footing in heavily regulated fantasy sports market

Len Don Diego, marketing manager for content at the DraftKings daily fantasy sports company, which has drastically changed the way its business operates in the face of last year’s high level of scrutiny.

Stephan Savoia/Associated Pres

Len Don Diego, marketing manager for content at the DraftKings daily fantasy sports company, which has drastically changed the way its business operates in the face of last year’s high level of scrutiny.

Last fall, flush with $500 million in venture capital, DraftKings Inc. burst onto the national scene with an inescapable ad campaign tied to the National Football League’s kickoff.

What a difference a year makes. Chastened by battles with officials in multiple states that threatened to tank the daily fantasy sports industry, DraftKings has spent months developing new procedures and controls that will help the company comply with a long list of new government regulations.

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Fantasy sports customers have already seen the effects, including a sign-up process that relies on more sophisticated tracking of players’ location and the kind of identity verification you might expect from a credit card company. And while the TV ads will be back, they’ll be less flashy and not so frequent.

It’s a remarkable shift that means Boston-based DraftKings isn’t likely to repeat the explosive growth that garnered so much attention from regulators in the first place. But the new landscape, observers said, also means that daily fantasy sports companies, which still don’t make money, might have a shot at becoming sustainable businesses.

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“Let’s face it: They got themselves way too big, too quick,” said the Rev. Richard McGowan, a Boston College professor who studies gambling. “It’s ironic that the best thing that ever happened to them was regulation.”

Daily fantasy sports operators, led by DraftKings and New York’s FanDuel Inc., offer large cash prizes for thousands of online contests revolving around mythical rosters of real-life athletes. Fantasy competitors amass points based on each athlete’s statistical performance in actual games.

The industry spent several years as a niche online pastime for young sports obsessives. But in 2015, in a frenzied competition to sign up new customers, DraftKings and FanDuel pushed to become household names with commercials that seemed to run between every whistle in every football game.

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DraftKings alone spent some $156 million on TV commercials last year, running more spots than any other advertiser in the country from late August to mid-September, according to the advertising tracker iSpot.tv. And it paid off: DraftKings and FanDuel collected nearly $3 billion in entry fees last year, according to estimates from industry analyst Eilers & Krejcik Gaming LLC.

But regulators also took notice, questioning whether the games were actually illegal gambling. The most severe challenge was in New York, where state Attorney General Eric Schneiderman sued to shut both companies down.

In Massachusetts, where regulators said state law didn’t squarely ban the games, Attorney General Maura Healey instead imposed regulations to protect consumers. Those rules banned players under age 21, games based on college contests, and the use of sophisticated third-party software that allowed professional players to manage hundreds of entries at once.

Fantasy sports companies also had to set aside games that only beginners could play, and require “highly experienced” players to be prominently labeled so amateurs would know who they’re up against.

The regulations were endorsed by Massachusetts lawmakers, who passed a bill in July legalizing daily fantasy companies that follow Healey’s rules. “Our office continues to look into this industry and will enforce our regulations against any operator that doesn’t come into compliance,” Healey spokeswoman Jillian Fennimore said.

Parts of Healey’s regulations also made their way into rules approved by other states — the ban on college sports and designation of highly experienced players, for example, were incorporated into New York’s law legalizing daily fantasy sports, which Governor Andrew Cuomo signed into law earlier in August.

DraftKings was already preparing for tougher regulations because of its expansion to the United Kingdom, where many forms of online betting are legalized and subject to government oversight. But the surge of new rules in the United States forced DraftKings to build new tools to ensure the company and its customers are in compliance.

“We took this extremely seriously,” DraftKings cofounder Paul Liberman said. “More than 40 percent of my technology and product team spent the early parts of this year developing the right tools and the right platforms to make sure that we’re equipped for the future.”

DraftKings has also paid outside vendors for more robust ways of keeping its nose clean.

For example, DraftKings hired IDology Inc., which aggregates credit records and other information to verify a person’s age and identity. The process is similar to what you might encounter when applying for a credit card or loan, Liberman said, such as being asked for prior addresses or models of car that a person owned.

Those systems help DraftKings deal with the new reality of a checkerboard of regulations: players who sign up in New York, for example, see a different version of DraftKings than those in Massachusetts or Virginia.

DraftKings determines player locations by using GPS coordinates and data from Wi-Fi access points and other Internet signatures. That information is then paired with an identity check to determine if the player can continue, Liberman said.

“We say, all right, this is a person. This person is currently located in Massachusetts. They map to a real person with a real birthday. And we’re able to give a whole set of different rules for what a person can do. Can they enter games, period?” Liberman said. “There’s probably a dozen or so rules that go into play.”

The company also has a team of fraud analysts monitoring incoming players and investigating accounts that are flagged for suspicious or unusual behavior, such as players setting up multiple accounts to skirt limits on contest entries.

DraftKings, a privately held company, wouldn’t disclose its spending on the regulatory overhaul and whether it needs to raise new investment. But the company’s chief financial officer, Tim Dent, said the new compliance costs weren’t a threat to DraftKings’ growth.

“We knew that we had to build this stuff, so really all of these oncoming regulations just accelerated our development,” Dent said. “The ongoing costs, I think, are certainly manageable.”

DraftKings’s advertising is not expected to reach the level of 2015 — the company would only call this year’s TV spending “a smaller investment.” It’s also shifted the tone of those commercials, which last year focused on the millions of dollars players could win in major competitions.

Christopher Cakebread, a Boston University advertising professor, said DraftKings appears to be cultivating a more mature, sophisticated personality. He noted that the company recently hired Don Lane, a veteran of Boston ad agency Arnold Worldwide, as a senior marketing vice president.

“Technology marketing is full of hubris, arrogance, and ego, and companies following each other along like expensive sheep. I don’t expect that to be the case any longer for DraftKings,” Cakebread said. “It would be a good ending if DraftKings became a good corporate citizen due to an internal brand revision, instead of being forced into submission by state regulators. Good marketers don’t brag and boast, as it’s called in the industry. They perform consistently.”

Curt Woodward can be reached at curt.woodward@globe.com. Follow him on Twitter @curtwoodward.
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