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DraftKings, FanDuel make millions, and give them away, as fantasy revs up

As much fun as fans have playing fantasy football, two Internet upstarts are making loads of money from the diversion—while giving it away at the same time.

FanDuel and DraftKings, two of the web's premier daily fantasy sports companies, are ringing in the second week of the National Football League's season by offering huge bounties to contestants. They will likely continue to do so up until Super Bowl 50 takes place in Santa Clara on the first Sunday of February.

Investors have sunk a combined $575 millioninto both DraftKings and New York-based FanDuel, helping to feed the promotional battle between the two.

Read MoreDraftKings CEO looks to future of fantasy sports

DraftKings is offering $25 million in guaranteed prize money for opening week, including a $2 million top prize and a $1 million second prize as part of its "$10 Million Guaranteed Millionaire Maker," contest. Simultaneously, FanDuel has guaranteed $12 million in prizes opening week, including a $1 million top prize for a "Sunday Million" contest that it will offer every week of the NFL season.

The daily fantasy market has exploded from a hobby to what some estimates say is a multi-billion dollar market. The mother's milk of FanDuel and DraftKings' efforts are entry fees, which help fund the massive payouts that can be won by contestants.

Earlier this year, privately-held DraftKings reported it earned more than $300 million worth of entry fees last year.

Self-funding business

Peter Jennings, a former stock trader from Fort Collins, Colorado, took home a $1 million prize after a five-day fantasy baseball event.
Courtesy DraftKings
Peter Jennings, a former stock trader from Fort Collins, Colorado, took home a $1 million prize after a five-day fantasy baseball event.

"Player prizes [are] really driven by entry fees," FanDuel's CEO and Co-founder Nigel Eccles told CNBC's "Squawk on the Street" last week. "The money that comes in, we take about a 10-percent cut and we pay out everything else in prizes, so it's really self-funding."

Aiding the two companies' ability to generate revenue are aggressive marketing and advertising techniques. Dangling the prospect of becoming an instant millionaire is another sure fire way to grab attention.

Advertisements for the two competitors have appeared throughout the web, including on popular music streaming sites like Pandora, and on radio and network television. Meanwhile, both companies have ratcheted up their presence on the airwaves during NFL games: Thursday's network broadcast of the Kansas City Chiefs and Denver Broncos saw ads for both DraftKings and FanDuel.

'Sky's the limit'

So how exactly can these sites afford to give away that kind of money? Lots of eager fans willing to pay entry fees certainly help.

"We have over (one million) paying active users who love our product," a FanDuel spokesperson told CNBC in a statement. Currently, the site operator dominates the fantasy market with more than 70 percent market share.

"That said, that's a very small percentage of the 228 million sports fans across America so new entrants into the space are inevitable," the spokesperson added. "So our goal with our advertising, promotions and prize money is to engage these sports fans and acquire new customers."

In addition to these more-traditional methods of promotion, both sites have also partnered with individual franchises in major U.S. professional sports leagues. Last week, DraftKings announced sponsorship agreements with 12 new NFL franchises, and earlier this year partnered with sports networks ESPN and FOX Sports.

"The sky is the limit for our partner teams and their fans this NFL season, as we host the largest contest in daily fantasy sports (DFS) history, join forces with ESPN to seamlessly bridge daily and season-long fantasy football, collaborate with FOX Sports on unique TV integrations and open in-stadium lounges at three outstanding facilities," DraftKings CEO Jason Robins said.


Some have floated the idea that the next logical step for the two operators is to expand outside North America.

DraftKings has obtained a license to operate across the pond and plans to open a London office before the end of the year. Chief International Officer Jeffrey Haas, a PokerStars veteran, will head the expansion effort as DraftKings also looks to reach Europe, Asia Pacific and Latin America in 2016.

"Daily Fantasy Sports is a growing category outside North America, and we have a tremendous opportunity to engage sports fans around the world," Haas said in a statement.

Disclosure: NBC Sports, a sister company of CNBC, has a financial stake in FanDuel.

--The Associated Press contributed to this report.