DraftKings Business Model | How Does DraftKings Make Money?

DraftKings, Inc. offers competitive daily and weekly fantasy sports games in the United States and Canada with cash rewards. 

You can play daily fantasy football, baseball, basketball, hockey, golf, college football, and basketball.

DraftKings is an online sports betting and fantasy sports platform located in the States. The company was founded in 2012 by Jason Robins, Matt Kalish, and Paul Liberman. 

DraftKings Business Model is unique and diverse that generates revenue for them. DraftKings makes the majority of its money by hosting sporting events.

There are certain states in the United States where customers can wager on sports through the DraftKings Sportsbook app. 

DraftKings also provides more than 400 casino games via a different app. The business also generates revenue from advertising.

What is DraftKings?

DraftKings is a daily fantasy sports website that also offers sports betting and gambling products. Customers can access the products by visiting the company’s website or downloading the mobile app.

DraftKings earns money from commissions charged on tournaments, betting products, advertising, and B2B services.

The company was founded in 2012 and has since become one of the world’s largest online gaming and betting platforms. The IPO of DraftKings was launched in April 2020. 

How Does DraftKings Work?

DraftKings is a daily fantasy sports platform and a sports betting platform. A user can bet on various sports and leagues, including the NBA, NFL, MLB, NHL, and soccer leagues such as the Premier League.

Participants in conventional fantasy sports choose a team of players who earn points for their performance.

DraftKings Business Model

Basketball fantasy leagues award points for scoring points, assisting players, grabbing rebounds, and blocking shots.

A league winner is determined at the end of the season based on the participants’ cumulative points.

DraftKings takes this principle one step further by reducing the timeline. Users can form teams around a single gameday.

There is an announcement of the winner at the end of the day. Once the teams have been reorganized, they can compete for rewards the following day.

Players can also participate in tournaments and head-to-head competitions (playing against a single opponent).

A variety of cash prizes are then awarded, depending on the number of competitors and the entry fee paid.

You can also wager on the outcome of games via DraftKings Sportsbook, which is available in several states. There is a state-dependent relationship between availability and accessibility.

DraftKings offers an online casino with table games like blackjack and roulette through its separate standalone app, iGaming.

You can access the platform through DraftKings’ website or mobile app (available for Android and iOS). The company’s extensive offerings are accessed by over one million people every month.

How Does DraftKings Make Money?

DraftKings’ revenue strategy is unique and diverse. DraftKings earns money by charging a commission on tournaments, sports betting, gambling products, advertising on its platform, and fees from its B2B offering.

In the section below, we’ll delve deeper into each of these revenue streams.

Daily Fantasy Sports

DraftKings derives the majority of its revenue from the daily fantasy sports games it organizes and runs.

Players must pay a buy-in to participate in the competition. They may get a financial prize if they finish in a certain position, depending on the tournament’s rules.

DraftKings earns money by deducting approximately 10% of the money consumers pay to enter a tournament.

DraftKings Business Model

The value of DraftKings’ retention is approximately $100,000 if players contribute $1 million to a tournament.

Therefore, the total prize pool for participants would be more than $900,000 ($1 million minus a 10% cut).

iGaming

DraftKings has also built a second app that enables users to play online casino games like blackjack or roulette. The software includes almost 400 playable games.

A gambler who bets against the company (in this case, DraftKings) and loses makes money when the company earns money.

DraftKings has a statistical edge over the player in each of the games offered. DraftKings will eventually win more bets than it loses as those statistics accumulate.

You make money with DraftKings by winning prizes at odds that are less than the odds needed to break even.

You have a 50% chance of winning if you toss a coin. DraftKings would then modify the game’s odds of winning slightly.

The odds offered by DraftKings remain within the legal limits as a legal gambling operator, however.

Sportsbook

A U.S. Supreme Court ruling in May 2018 invalidated a 1992 act that permitted sports betting in certain states under the Professional and Amateur Sports Protection Act (“PASPA”).

DraftKings presently offers sports betting through their Sportsbook application, which is available in many states, including Colorado and Virginia.

DraftKings earns money when its customers lose wagers, as do any other traditional bookmaker. DraftKings also uses vigorish (also called juice, margin, or overround), one of their strategies.

Vigorish is essentially a fee payable for placing the wager. Typically, this is demonstrated by the odds offered by a bookmaker. DraftKings can (nearly certainly) turn a greater profit by offering less favorable odds.

Additionally, DraftKings maintains the right to limit the number of executable bets and the amount of money that a user can wager to mitigate risk.

Advertising

DraftKings began offering advertising opportunities to brands in 2016 to use the platform for promotional purposes.

The company has partnered with Hooters, Sprint, Jägermeister, and Buffalo Wild Wings to promote its brands.

These advertising partners would then collaborate with DraftKings to arrange branded tournaments based on most of those agreements.

Jägermeister hosted a soccer tournament called The Real Shot during the 2018 World Cup, in which the team captain selected the team.

DraftKings does not disclose the specific terms of the agreement, but it is reasonable to assume that the company is compensated on both a flat fee and an incentive basis.

DraftKings may receive a $1 million fee from the beverage company Jägermeister in exchange for hosting the event. The rewards would subsequently be increased once the target of 50,000 participants was reached.

There are a few benefits for the brand. To begin, they gain access to a highly focused audience. 

Fantasy league players are almost always male, in their twenties or thirties. The majority of them have some form of affinity for the companies mentioned above (looking at you, Hooters).

Second, engagement is simply quantifiable. DraftKings can supply a range of data to its advertising partners, such as how frequently an advertisement was seen (= impression) or how long participants played in total.

B2B Offering

DraftKings went public in April 2020 through a combination with Diamond Eagle and SBTech. The combined company uses SBTech to power most of its betting and gambling products.

DraftKings estimates that the merger would result in yearly cost savings of more than $100 million. 

More crucially, it effectively transformed one of its largest cost centers into a profit center (a technique Amazon has mastered with AWS and Fulfillment).

DraftKings earns money from its B2B product through a so-called managed service charge. This means that DraftKings retains a portion of the income generated by the platform with whom it partners.

The actual percentage split is determined by the parties’ contractual agreement. In reality, it’s between 10% and 20%.

By 2027, the worldwide online gambling market is expected to reach $127.3 billion. 

DraftKings’ B2B offering alone could generate $1.27 billion ($127.3 billion x 10% market share x 10% managed service charge) to $2.55 billion ($127.3 billion x 10% market share x 20% managed service fee).

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What is the Funding and Valuation of DraftKings?

Crunchbase reports that DraftKings has raised $719.4 million in venture capital investments through 11 rounds.

Some notable investors in DraftKings include Redpoint Ventures, FirstMark Capital, Atlas Ventures, GGV Capital, Manhattan Venture Partners, and Michael Jordan.

When DraftKings went public in April 2020, it was valued at $6.5 billion. Today, the value of the company is over $24 billion.

What is the Revenue of DraftKings?

DraftKings reported revenue of $643 million in 2020, an increase of 49% over $431 million in 2019. Even after accounting for the corporation’s EBITA, it will still lose $396 million in 2020.

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Success Story of DraftKings!

DraftKings was created in 2012 in Boston, Massachusetts, by Jason Robins (CEO), Matt Kalish, and Paul Liberman.

Robins attended Miami Killian Senior High School in the mid-1990s. 

There was some talk about a guy who attended Miami Palmetto High School nearby and sold books online.

That gentleman was none other than Jeff Bezos, who spent a portion of his adolescent years in Florida. 

Robins was enamored with what the internet-enabled individuals to do and briefly considered dropping out of high school.

His father intervened fast and persuaded him to obtain a college degree before moving out. Robins attended Duke University, where he majored in Computer Science.

He joined Capital One as a marketing and analytics analyst after completing his degree. 

He worked at the company for five years before moving on to Vistaprint, where he met his cofounders Kalish and Liberman.

They all had a passion for sports and, more specifically, fantasy leagues. In an interview with Boston Magazine, Robins said that he was a member of up to 200 leagues concurrently.

Kalish proposed the idea of condensing an entire fantasy league season into shorter periods, such as a week or even a game day, in late 2011. 

Robins was immediately taken with the concept, and the team got to work after enlisting Liberman.

Initially, the creators worked on DraftKings during their spare time (while keeping their day job). Apart from working 100 hours each week, the team encountered two additional difficulties.

They needed money to hire programmers and pay cash charges at first. 

Second, and most significantly, funders were unwilling to provide the money until they saw the crew commit to the project full-time.

They organized a few minor Major League Baseball competitions with $100 prize money to demonstrate the notion. 

A few dozen people entered those contests, demonstrating to them (and possible) investors that this could work.

Eventually, the DraftKings team convinced investors and raised $1.4 million from Atlas Ventures, a venture capital firm based in Cambridge. 

When the check arrived in their bank accounts, all three founders were still employed but departed shortly after that.

DraftKings relaunched its website in July 2012. This time, contestants can compete for a chance to earn up to one million dollars.

The concept of a fast-paced fantasy league took off like wildfire. Within less than a year of launch, DraftKings had over 100,000 users who collectively played over 500,000 matches.

This once-in-a-generation growth potential was then leveraged by raising two more rounds of funding in 2013, which brought the total raised to $7 million and $24 million.

It was already able to acquire two of its largest competitors a year later, in 2014. DraftKings bought both DraftStreet and StarStreet within a few months. 

Both services were shut down immediately, allowing DraftKings to acquire their user base.

DraftKings’ platform collected roughly $1 billion in registration fees from players last year. The result was that two years after DraftKings was founded, the company was already generating $30 million in revenue.

Gaining momentum and exponential revenue growth became critical for the company due to the fierce competition it faced, particularly from rival service FanDuel.

Numerous collaborations negotiated by DraftKings, such as Major League Baseball in 2013, were exclusive. 

This meant that only DraftKings could provide fantasy leagues for that league, eliminating an income stream for its competitor (it has to be noted that not all of its partnerships are exclusive, though).

One of these significant transactions was announced in June 2015. 

DraftKings and ESPN announced an exclusive relationship that will see DraftKings become ESPN’s exclusive daily fantasy sports platform.

A month later, Yahoo (which operates the popular Yahoo Sports platform) announced its entry into daily fantasy sports, but it was too late. 

By that point, DraftKings and FanDuel controlled more than 90% of the American fantasy sports market.

DraftKings has experienced meteoric growth (after a $250 million Disney investment failed) but will soon encounter its first major setback.

The New York Times reported that DraftKings staff had access to aggregate data to analyze the most popular players on their platform. 

So, they could determine which players were preferred by the most users and beat them to the punch.

Employees were not allowed to participate in DraftKings’ tournaments but could participate in FanDuel contests (and vice versa). 

Ethan Haskell, who worked as a Content Manager at the time, won $350,000 during an NFL game day tournament using the insider info.

DraftKings employees earned more than $6 million playing on FanDuel’s site, according to subsequent reports. 

DraftKings announced it would conduct internal investigations, but Haskell and no other employee faced disciplinary action.

While the news of insider trading was unsettling, the worst was yet to come. 

The department of Attorney General of New York (headed by Eric Schneiderman) essentially took legal action within a month of the employee controversy by declaring that fantasy games constitute illegal gambling and areas such as illegal and punishable.

Following that, a months-long court dispute ensued over DraftKings’ capacity to continue operating. Other states, such as Illinois, have enacted similar prohibitions.

Meanwhile, DraftKings contended that its fantasy league games were skill-based rather than luck-based. 

Congress passed the Unlawful Internet Gambling Enforcement Act in 2006, which prohibited games of chance such as blackjack or roulette but allowed fantasy leagues, which were deemed to need the skill to win.

DraftKings’ assertions were bolstered, for example, by research from Sports Business Daily, which discovered that 1.3 percent of all DraftKings’ participants pocketed nearly 90% of all payouts.

After a brief hiatus, New York Governor Andrew Cuomo signed a bill legalizing daily fantasy sports in August 2016. 

Both DraftKings and FanDuel ultimately reached an agreement with Schneiderman’s office. 

Both corporations admitted to deceptive advertising and agreed to pay $6 million in fines.

Interestingly, another compelling storyline emerged as a result of the firm’s legal struggles. 

In June 2016, rumors surfaced that both corporations were cash-strapped (resulting from litigation bills and missed revenue) and contemplating a merger.

Additionally, both companies spent hundreds of millions of dollars pursuing exclusive advertising arrangements. 

Their combined marketing expenditures would be reduced, while improved bargaining power would be gained as the undisputed leaders of the market. 

FanDuel and DraftKings announced their intention to merge in November 2016, with Robins taking on the CEO role.

Regrettably, the Federal Trade Commission (FTC) filed a complaint seeking to halt the transaction. 

The complaint stated that the combined companies would control over 90% of the daily fantasy sports market in the United States, thereby creating a monopoly.

Once again, it was time for mergers and acquisitions, and expansion. 

For example, DraftKings expanded into Australia in April 2018 (its UK business started in March 2016 after being delayed due to staff problems).

When the Supreme Court announced in May 2018 that it would allow states to legalize sports betting, the tide finally turned (that is, to bet on the outcome of a game). 

Within a year, six states (including New Jersey and Pennsylvania) legalized sports gambling, providing the corporation with new revenue sources.

After months of exponential growth, DraftKings announced its intention to go public via a SPAC with Diamond Eagle Acquisition Corporation in late December 2019. 

Despite coronavirus lockdown efforts, DraftKings filed for an initial public offering in April 2020.

And the company was extremely inventive. It allowed users to wager on events ranging from Belarus soccer to esports such as NASCAR’s iRacing to the outcomes of Tiger King episodes. 

DraftKings’ expansion coincided with the reintroduction of once-popular sports leagues such as the NBA or NFL.

The stock’s success was boosted further by many (exclusive) collaboration agreements, including a contract renewal with ESPN and agreements with the New York Giants, the UFC, and Turner Sports (which, for instance, owns Bleacher Report).

Today, the company employs over 2,500 employees and runs eight offices worldwide, including Boston, Dublin, Las Vegas, and Tel Aviv.

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Key Takeaways from DraftKings Business Model

DraftKings was founded in 2012 by Jason Robins, Matt Kalish, and Paul Liberman as a website for sports betting and fantasy sports.

Kalish’s idea of compressing the typical fantasy sports season into a single week or match proved to be invaluable.

DraftKings competitions require users to pay an entry fee. It also offers a betting and gambling application for earning revenue from lost bets and vigorish.

The company also provides tailored advertising during contests in conjunction with businesses it partners with.

SBTech, a company offering online sports technology, may now be sold to other businesses with a cut of their profits.

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