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The uncertain future of fantasy sports

State of fantasy sports

The daily fantasy sports industry is changing faster than anyone can keep up with.

Just two years ago, daily fantasy sports sites FanDuel and DraftKings were virtually unheard of. After a huge marketing blitz, they exploded into billion-dollar companies. All that attention not only caused their valuations to skyrocket, but it caught the eye of regulators and lawmakers hoping to protect consumers and share in the profits.

Today, the industry looks very different. It is changing daily, and operators are rushing to keep up, or risk dying. The Fantasy Sports Trade Association estimates 10 percent of the industry has disappeared in the past months. There are reports that two of the daily fantasy sports industry's biggest players, FanDuel and DraftKings, could be merging.

Both FanDuel and DraftKings declined to comment on the reports.

DraftKings Chief Marketing Officer Janet Holian said the company does entertain potential merger talks from time to time with FanDuel, but it's part of an ongoing conversation.

Holian called the latest reports "rumors and speculation."

Among all these disruptions, industry professionals gathered this week at the Fantasy Sports Trade Association's summer conference in New York.

Andrew Harrer | Bloomberg | Getty Images

Two main things are abuzz at the conference. First, is there really going to be a merger between DraftKings and FanDuel? And second, will New York state politicians legalize daily fantasy sports before their session ends on Thursday.

"It's a turbulent time for the industry," Paul Charchian, the association's president, told the 300-plus members in attendance.

After mammoth growth in 2015, fantasy participation stabilized in 2016.

While fantasy sports participation in North America has reached more than 57.4 million players according to an Ipsos poll — the legal and regulatory battles have put financial strain on the companies, forcing them to re-allocate their staffs and resources.

"The lawyers are definitely making a lot of money," said Peter Schoenke, the association's chairman. "There's a lot of legal chaos right now."

Insiders at the conference suggested the renewed merger talks between daily fantasy's two biggest players might be a backup plan in case New York state lawmakers rule against the companies.

Consolidation could help both companies financially and potentially ease their legal and regulatory fight with the states.

Specifically in New York state, Schoenke has been personally very active. "We have hired lobbyists, PR, and I have been trying to coordinate with our members to get us all on the same page so we can all push for the same things. We need legal clarity."

"I would say my biggest competition right now is lawmakers," said Stacie Stern, general manager of Head2Head Sports, an Arizona-based fantasy sports site. She said the fight against daily fantasy sports has hurt her part of the industry: season-long fantasy sports. "It's created a bit of a headache in terms of educating lawmakers about what fantasy sports games are and why they aren't gambling."

While a lot of the news goes to the giant players like DraftKings and FanDuel, ESPN, Yahoo, and CBS, a lot of the operators are small businesses, like Head2Head.

"So far, Colorado has been the best state," Stern said about her travels across the country to get regulators to open up. "Lawmakers were very reasonable, took a measured approach to consumer protection but also letting the small businesses keep running and not hindering."

Moving money to Facebook

Most interesting is the shift to Facebook, away from Google, when it came to putting ad dollars to work. "Our growth has been impacted from companies like Google who categorize it as gaming, and therefore it has shut off our advertising," said Stern. "Without being able to advertise where our users are, it has stunted our growth. Google has a great amount of power. Facebook really dove in and educated itself, but Google is behind in that area. We spend a lot more money on Facebook and the radio. We have gone back to old school ways of advertising. There are probably about 20 small game operators now, so we are all moving to Facebook and Twitter. "

Changes are also taking place in the payment space in daily fantasy sports. In February, payment processor Vantiv made the decision to stop processing payments by daily fantasy operators.

"Many payment processors are skittish about doing business in the fantasy sports space," said Charchian. He says legalization will solve this problem but until then, the industry needs to be less reliant on their biggest provider, PayPal, to process payments.

"I see that as more of a danger. If they were to have some kind of reversal or decision that impacts us, it could hurt our whole industry. We are working hard at broadening the scope of payment providers in the fantasy sports space." Charchian recommended site operators use multiple merchant banks and payment processors. That redundancy would protect sites to stay in business.

For now, much uncertainty lies ahead. The clarification of what New York state will do is just the first step in getting the industry back on track.

Disclosure: CNBC parent Comcast and NBC Sports are investors in FanDuel.