FanDuel – Mobilizing Its Networked Business via Viral Distribution

In a recent study, it’s been estimated that fantasy football could cost businesses $13.4 billion in lost productivity. Note, that estimate only accounts for fantasy football and does not include losses from other fantasy sports, such as fantasy basketball, fantasy baseball, and even fantasy golf. And soon, that number will rise even further as more individuals become engaged with fantasy sports (Exhibit 1).

Exhibit 1. The number of fantasy football users is projected to grow at a 10% CAGR between 2014 and 2024.

 

One of the big reasons for this growth has been driven by innovative platforms (e.g., FanDuel) that allow users to engage with and possibly earn money from professional sports games on a daily basis. This has not always been the case.

Historically (though still to this day), users would draft fantasy teams for an entire season. If these users are anything like me, they typically spend a few days conducting mock drafts, thinking through different strategies, ranking players, etc. to create the perfect team, with hopes of winning the league championship and making a solid payout.

Unfortunately, that hard work in some cases could be instantaneously meaningless. Given that football is such a violent sport, in a split second things can change. A couple years ago, I had what many of my league members considered one of the best fantasy drafts. I was certain that I would at least make the playoffs. That changed immediately when two of my best players got injured. Now, instead of watching a number of random and sometimes boring NFL games (e.g., Jaguars vs. Browns – sorry (for multiple reasons) to those fans who read this), I just watched my Houston Texans play. The excitement of watching my fantasy team compete, praying in some cases for my players to play in rare overtime games to pad their stats, was gone… until applications like FanDuel (and DraftKings) came into the picture.

FanDuel creates value for fantasy players by allowing users to play and gamble against their friends and even random individuals on a daily basis. As opposed to drafting a set of players you are stuck with for the entire season, a user picks players based on a salary cap system. For example, you might have a $25,000 budget and need to fill in a team of 1 QB, 2 WRs, 2 RBs, 1 TE, 1 K, and 1 DEF with that money. The better players cost more (e.g., Aaron Rodgers may cost $10,000, and the remaining $15,000 is distributed between the rest of your team). In this case, even if I were to lose on a given day – whether through injury or bad play by my team – I’m still engaged in the football season because I could have an entirely different team the following day. Plus, I’d have a chance of winning money every day – versus waiting 16 weeks to do so. And in exchange for managing this whole platform, FanDuel takes in around a 10-13% rake (percentage of entry fees) in each competition or league.

In addition to creating value for players like myself, FanDuel has been able to create value for major sports leagues, such as the NBA and the NFL. As mentioned earlier, fantasy sports have led to users watching more games (this goes back to my Jaguars versus Browns example), in hopes that their players perform well, which leads to more advertising revenue for the leagues.

Now, it’s clear that FanDuel has been creating a lot of value for users and leagues, however when thinking about the platform, I would argue that it’s not actually that complicated to develop such an application. With technology these days, I could probably hire a few coders pretty easily replicate this business in weeks. So what’s stopping me? Network effects and a mobilization strategy fueled by over $360 MM in VC and angel funding.

FanDuel experiences direct network effects, which entices more users to join its platform. As more users join, players are able to play in competitions with larger pot sizes (since the pot is created by the users), bet on different games, play in large or small buy-in leagues, etc. As more of my friends joined, I found myself wanting to play as well, since I could now join their league, compete with them on a daily basis and have a chance at winning some money. These direct network effects have helped lead to the over 1 MM active users (as of Q4, 2014) on FanDuel (Exhibit 2), however the company has not just passively growth through direct network effects. On the contrary, it has spent millions on advertising (over $20 MM for 7,500 TV airings since August 1, 2015), while also engaging in a mobilization strategy has been focused on harnessing virality and sparking interest via referral payments and subsidies.

Exhibit 2. FanDuel active user growth between 2013-2014.

Referrals

FanDuel has been very creative with its referral process. Contrary to the common, “If you refer a friend, we’ll give you both $10,” approach many companies use, FanDuel has created a new structure that allows users to “[Make] A Living From FanDuel Referrals.” As illustrated via the dashboard in Exhibit 3, users can earn a share of their friends’ monthly net revenues (MNR, calculated as approximately 10% of their total entry fees) each month. For example, for every dollar up to $1,000 of MNR, the referrer earns 20% of the referee’s MNR. So if my collective group of referred friends put in $1,000 worth of entry fees this upcoming month, I’d capture ~$200 in referral bonuses for that month. Further, this bonus increases up to 35%, assuming an MNR of $5,000. It’s a pretty great deal for the referer, and the potential to gain a large sum of money each month further incentivizes the referer to promote FanDuel to friends who will be active users. This in turn helps the company continue to grow its user base and grow its competition pools, which help fuel the direct network effects.

Exhibit 3. FanDuel Referral Program

Subsidies

In addition to the referral program, FanDuel is subsidizing early adopters. These days, if flip to ESPN, it seems that the odds are high you’ll run into a FanDuel commercial, and in these advertisements, FanDuel is providing deposit bonus codes that will give users a 100% bonus match on any deposit amount up to $200. With that said, the company has been smart in its subsidy strategy, as it prevents bonus fraud and helps maximize its number of active users. For each real money game played, the “pending bonus” (e.g., the $200 match) is converted to real cash at a rate of 4% per entry fee. For example, if a user plays a game for $100, $4 of the bonus offered become unlocked. So theoretically, to fully receive the $200 bonus, $5,000 worth of betting must have occurred. When doing the match, it’s clear that the subsidy is not as attractive as it immediately sounds, but FanDuel seems to believe that if you try their product and experience the excitement it brings (and see the huge pools of money available), you just might stick in for the long-term, while receiving a decent bonus as well.

In a highly competitive market (namely driven by DraftKings and possibly ESPN and Yahoo! in the future), capturing users and direct network effects will be very important, and for individuals wanting to enter this space, it’ll be very hard to compete against the huge funding and network FanDuel (and DraftKings) has created. With that said, it’ll be interesting is to see how FanDuel and its competitors focus on locking in the users they’ve spent recruiting, given the low multi-homing and switching costs.

Sources:

·         http://blogs.wsj.com/cmo/2015/09/16/are-draftkings-and-fanduel-bombarding-fans-with-too-many-ads/

·         https://www.fanduel.com/making-a-living-from-referrals

·         http://www.fool.com/investing/general/2014/02/21/how-peyton-and-eli-mannings-rap-song-foretold-the.aspx

 By: Aryan Sameri