The Business Of Fantasy Sports: CDM Sports Saves An Industry
In January 2005, I was the Chairman of the FSTA and EVP at Allstar Stats, home of Rotoworld.com and Sandbox.com.
The Fantasy Sports Industry Faced Its Most Difficult Threat
Allstar Stats was a league management service for mostly Rotisserie leagues. The leagues were loyal to Allstar Stats paying as much as $55 a team ($700+ for a league). Our team understood that 24-hour availability and service is part of the culture. We gave our cell phone numbers to our customers. They called to get service or just ask for fantasy advice. We didn’t mind. We loved our customers. Rich Pike and Mike Oliveto made that culture. They ran the company as icons in the fantasy sports industry who humbly take little credit for their impact.
Rotoworld.com was the largest pure-play fantasy sports site on the Internet. Over 5 million people visited each month with 59% of them coming more than once per day. They gobbled up 120M page views a month. Rotoworld.com brought in about $200,000 monthly from those ad impressions in 2005. The Poker and Sportsbook ads drove a ton of revenue to the company.
We sold premium products, draft guides, and in-season tools. Ad revenue was still about 90% of revenues. Rick Cordella, now President of NBC Sports, led this division to incredible growth in a short time. His Red Sox were world champions for the first time in 86 years, so he put them on the cover of the 2005 Rotoworld Fantasy Baseball Guide.
Sandbox.com was a games site that lost its technology when the Internet bubble burst. Sandbox was 25 games in nine sports for $9.99 a month. One of the founders, Larry Cotter, made a deal with us. Allstar would rebuild the games, and Sandbox would do the marketing. I wrote much of the code and acted as Chairman to drive the business. It was a lot of fun!
Allstar Stats also operated a business-to-business division that powered the fantasy sports sections for FOX Sports and USA Today and ran games for Head2Head, NHL, and some others. This started when I arrived in 2002, as it was me helping my friends and them helping me. All the leaders of these companies at the time are still close friends: Ed Bunnell, Howard Kamen, Stacie Stern, and Rich Libero.
In the summer of 2004, during the Red Sox run, we purchased a company called Instant Fantasy Sports and began to use the code to build a daily fantasy sports platform called SnapDraft. We spent hours ideating on how to play poker and daily fantasy baseball at the same time. The former was legal, and the latter was not. Two years later, The Unlawful Internet Gambling Enforcement Act would flip that. Hilarious.
In January 2005, MLB Advanced Media (MLBAM) signed a five-year deal with the MLB Players Association for the online rights to most of the players. MLBAM believed that this included fantasy baseball.
On a day in late January 2005, we received a cease-and-desist letter from MLBAM. It indicated that using the players’ names in fantasy baseball games broke the players’ “right to publicity.” The letter also told us to stop all our businesses that used the players’ names or pay MLBAM a revenue share where they keep most of the profits. I believe it was 90%.
We had received cease-and-desist letters before. Our lawyer would generally reply, asking for proof of our violations. If they did not respond, we generally adjusted or sent back more letters until the attacks stopped. This was different.
In 2002, Allstar partnered with MLBAM on a failed fantasy baseball project. The registration process was the major problem. The numbers didn’t meet MLBAM’s expectations, so they stopped paying us in May. You see, we were in acquisition talks with multiple groups. Was MLBAM trying to punish us so we couldn’t sell?
Nope. It was bigger than just Allstar. As Chairman of the FSTA, I reached out to other member companies who also received these same letters. This made it clear. This was an attempt to lessen the number of licensees and control the industry. Players’ associations did that in the trading cards and video game industries.
The Fight Was On
We continued to do our business with communications, asking for more proof with each letter. The letters stopped for us. The brave company in my last article, CBC Distribution and Marketing Inc. (CDM), decided to sue MLBAM for the right to continue operating its fantasy baseball games. CDM hired Rudy Telscher to lead the case.
The accounting below is from my vantage point and does not detail the case itself. If you want to dig deeper into the details, here is Rudy Telscher's case study.
The fantasy sports industry was shaken to the core.
Members looked for guidance, and we told them that now that the fight was on between CDM and MLBAM, the best we could do was “business as usual” and look for opportunities to help. Many in the industry gave to a defense fund, but it was nominal compared to the $1m+ that CDM shelled out to defend the industry from MLBAM but also from the other players’ rights holders. For the industry, we were worried about the NFLPA. Fantasy football grew to more than 15M players by 2005 and was growing at 10-15% every year.
In 2002, the NFLPA tried to lessen the number of licensees to control the revenues and get a larger share of profits. They were overt about it, even coming to speak at an FSTA conference and using the dais to command that all operators would get cease-and-desist letters. Clay Walker, the leader at NFLPA, was made aware of this. He stepped in before the fight got divisive. The big companies were paying licenses to protect their HUGE rights deals for the broadcast. This could not be risked for their fantasy sports divisions.
Greg Ambrosius was the President of the FSTA and led the charge and decision-making with heavy advice from me. He spoke to Charlie Weigert, part-owner of CDM and one of the founders of the FSTA, almost daily.
CDM argued that running games with the players' names and statistics did not violate their right of publicity.
My close friend of almost 40 years and former federal prosecutor, Glenn Colton, had played in fantasy leagues with me and against Greg since 2002. Greg and I looked to him for legal advice, as did many members of the trade association. The CBC case was ruled on in June 2006, but appeal was pending in the 8th Circuit. Glenn recommended an Amicus (friend of the court) Brief as the best move.
Greg and I were raising money from members for a legal fund. It was not going well. The FSTA was fractured with some members forced to exit or resign board seats including Greg and myself. The remaining FSTA members could not afford to pay for a job like this. Glenn worked it out with his team to cut the costs to make it work. He knew the industry needed a friend and he wanted to save the industry too.
The brief argued two CRITICAL points:
- That the right of publicity is not implicated by simply having a player name in a drop-down menu of players you can choose (i.e., there is no risk anyone would think that just by virtue of being 1 of 50 shortstops to choose from that Derek Jeter was endorsing that fantasy site;
- Even if there was some violation of the right of publicity, which the brief disputed, the first amendment issues and freedoms would trump the right of publicity. This is the issue on which the fantasy industry won in both the district court and in the 8th Circuit.
The preliminary statement from the 8th Circuit amicus brief laid it out well:
"Fantasy sports have transformed from a fringe hobby into a billion-dollar industry. This case represents MLB’s brazen attempt to swoop in and wrest control of this booming business by shoehorning a proverbial “square peg” of facts into their “round hole” right of publicity legal theory. As demonstrated below, the two just do not fit. The facts, law, and fundamental fairness demand that MLB’s attempt to reap the rewards created by others’ hard work, vision and fortitude be rejected.
In a well-reasoned opinion that appropriately explored the genesis and purpose of the right of publicity, the District Court reached the only result that stays true to that history and purpose, holding that using player names and statistics within fantasy sports websites does not violate players’ right of publicity. The District Court also properly concluded that fantasy sports are entitled to full First Amendment protection, and that the First Amendment interests at stake outweigh MLB’s alleged right of publicity interests. These holdings should be affirmed.
Absent affirmance, fantasy providers who built the industry through investment, innovation and pure sweat equity would likely lose their livelihoods, and fantasy sports participants would be forced to choose from fewer, more expensive options. This Court should not countenance such an inequitable and undesirable result."
A three-judge panel of the Court of Appeals in the 8th Circuit upheld the ruling in Oct 2007. After that ruling, the US Supreme Court denied the petition to hear the case.
THE INDUSTRY WAS SAVED BY CDM SPORTS & GLENN COLTON!
On August 18, 2006, Allstar Stats, including Sandbox, Rotoworld, the B2B division, and the daily fantasy sports platform SnapDraft, was sold to NBC Sports.
In October 2006, The Unlawful Internet Gambling Enforcement Act (UIGEA) passed, carving out a space for fantasy sports, which opened the door to daily fantasy sports.
Next week, I will break down UIGEA from my vantage point as a full-time employee for NBC Sports, a rights holder, and the effects inside NBC Sports and the FSTA.