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In 2015, Fantasy Sports Troubles Started With Disney's Cold Feet. Next Year, Expect More Regulation.

A look back at the broken investment deal that spelled doom for daily fantasy.

Jason Miller / Getty Images

Daily fantasy sports companies DraftKings and FanDuel have had a roller coaster year.

The sites, which offer fantasy sports games with cash prizes in most U.S. states, have each raised more than $350 million in funding, which they promptly spent on TV advertising. They both inked partnerships with top American sports teams and leagues. And now they’re both fighting for their respective business lives in New York State.

The industry’s unraveling started when regulators discovered company employees were playing (and winning) in the public competitions, and some were concerned that employees had access to company info that would give them a competitive advantage. Officials started taking a closer look at both their business models, and now they’re both in court.

But that unraveling was actually hinted at some six months earlier.

Here’s What Happened

Back in June, ESPN was set to invest $250 million in DraftKings in exchange for both equity and $500 million in advertising spend. The deal was close to done when higher-ups at Disney, which owns ESPN, got cold feet. The reason? Disney didn’t want to associate its near-century-old, family-friendly brand with a business that some categorized as sports gambling. Fox Sports replaced ESPN as the lead on the funding round.

How’d It Work Out?

The decision looks pretty darn prudent. DraftKings and rival FanDuel are embroiled in a tough legislative battle with New York State over the legality of the site’s fantasy contests. New York Attorney General Eric Schneiderman claims the companies violate the state’s gambling laws. The companies argue their product is skill-based and is not actually gambling. Regardless of what the final ruling is, Disney’s concerns have certainly played out.

ESPN got a pretty good deal anyway. Disney didn’t get an equity stake, but DraftKings still committed to spend $250 million on advertising with ESPN properties over the next three years. Perhaps you’ve seen some of the commercials.

What’s Coming in 2016?

There will be more legal battles in more states. Both DraftKings and FanDuel presented in front of a legislative board in California earlier this month to explain how their businesses operate. The hope is California will work with both companies instead of trying to shut them down (a la New York).

I’ve argued before that daily fantasy isn’t going to disappear — there are too many important investors and partners in the game to let that happen — but it looks as though the future growth of daily fantasy is going to hinge on government acceptance. And that probably means handing over some of the profits in the form of taxes or licenses.

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