Daily fantasy sports business gets a dose of reality

Lucas Jackson/REUTERS

Daily fantasy sports has lost a bit of the fantasy.

After recording several years of torrid growth that helped pull in hundreds of millions of dollars in investor cash, business has cooled off for market leaders DraftKings Inc. of Boston and FanDuel Inc.

Players spent an estimated $3.26 billion on daily fantasy sports in 2016, up about 4 percent from a year earlier, according to an annual market study released Friday by research firm Eilers & Krejcik Gaming.

That’s a monumental change from 2015, when Eilers & Krejcik estimates entry fees paid to daily fantasy companies grew 222 percent. But the drop-off was no surprise: DraftKings and FanDuel, which account for more than 90 percent of the market, diverted millions of dollars into legal and lobbying campaigns last year after state regulators questioned whether the companies’ cash-prize games amounted to illegal gambling.

“It’s not bad, in light of the regulatory headwinds and the reduction in sales and marketing,” said Adam Krejcik, the report’s lead author.

“There are so many variables that it’s tough to say. But basically, we’re saying that you’re not going to see 200 percent growth year over year.”

Eight states passed laws to regulate or legalize daily fantasy sports contests in 2016, including New York, where state Attorney General Eric Schneiderman sued to ban DraftKings and FanDuel. Massachusetts lawmakers also passed a bill formalizing a long list of consumer protection regulations developed by Attorney General Maura Healey.

The run of regulatory victories gives daily fantasy sports a stronger legal foundation for the years ahead, but Eilers & Krejcik said annual growth through 2020 will probably range between 5 and 15 percent.

The roughly $3 billion in player fees reached in 2015 is now likely “a nice, sustainable floor for the business,” Krejcik said.

DraftKings and New York’s FanDuel are seeking federal approval for a merger, which would help the companies reduce marketing, lobbying, and other corporate costs as they try to stoke revenue growth.

“While still nascent, we are pleased to see additional affirmation that the fantasy sports industry continues to grow and evolve,” DraftKings said in a statement. FanDuel declined to comment on the report.

In daily fantasy sports, contestants assemble mythical rosters of real-life athletes and amass points based on those players’ game statistics. Contestants pay to enter games that offer cash prizes, which can top $1 million in the biggest contests.

The companies take a percentage of those entry fees as their net revenue, generally in the neighborhood of 10 percent. The rest is recycled as prize money.

Neither company is profitable, but Eilers & Krejcik estimated a merged company could operate near break-even after trimming costs. DraftKings likely lost $61 million on $169 million in net revenue last year, while FanDuel probably lost $44 million on $166 million in net sales, the report said.

Increased sales will likely depend on expanding the user base of daily fantasy sports, which remains a relatively niche pastime even among fantasy sports enthusiasts. DraftKings and FanDuel claim about 5.5 million active users combined, a fraction of the estimated 57.4 million players of all fantasy sports games in North America.

Both companies have added products, such as private games that can be played between friends, intended to expand their reach into that larger group of more casual players. But those efforts are still in their infancy.

“To grow that core user base is getting harder and harder,” Krejcik said.