DraftKings CEO: What went wrong and how we’re fixing it

In short: a DraftKings employee, Ethan Haskell, who may have had access to data showing which NFL players had been selected by what percentage of DraftKings users, played in a FanDuel NFL contest and placed second, winning $350,000. The media erupted in accusations of “insider trading,” ESPN has temporarily pulled DraftKings-sponsored segments from its network, and the New York Attorney General launched an inquiry into both DraftKings and FanDuel.

DraftKings and FanDuel have each raised more than $350 million in funding, each have valuations of more than $1 billion, and are exploding in user growth. DraftKings spent $20 million on TV advertising just during Week One of the current NFL season. This scandal is a serious setback for these red-hot companies.

On Thursday morning, DraftKings CEO Jason Robins agreed to speak to Fortune exclusively by phone. Robins was candid about the company’s mistakes, its future plans, its differentiation efforts from FanDuel, and his response to some of the reporting on the situation.

What follows is a full, uncut transcript.

Fortune: How would you describe the past week?

Jason Robins: Oh, I’ve had better weeks. It’s just so unfortunate.

The company has been on an amazing run where it’s been all growth, incredible partnerships, and everything has been positive, until this. This is a big challenge we’re facing and something I wish hadn’t happened in this way. Ethan [Haskell] had his name dragged in the mud before there was even a full investigation done. And as it turned out, he did not do anything unethical, he made a mistake—but that was an error in his job, not an error in his ethical judgment. It’s been so unfortunate with people attacking him on social media, reporters showing up at his parents’ house.

But right or wrong on that part of it, this has sparked an important discussion, one that’s important to the entire industry, not just to DraftKings, but because DraftKings and FanDuel are the two leading companies in the industry, we are the focus. It’s gotten the two of us to band together more so than ever before—we were already working on some things of this nature, we had jointly engaged Greenberg Traurig already, and that’s still ongoing. So we can collaborate together, the two of us, and I think others will follow our lead. So we’re really collaborating on these issues.

What are you doing about this specific situation?

The steps we’re taking are twofold: We’ve addressed the immediate issue, which is banning all employees from playing anywhere in the industry in public games. That’s a big step. I think that honestly solves this issue, and while there are certainly additional safeguards to enforce that, I think if we can successfully enforce that, and we will, then that solves this issue.

And then second, we have engaged Greenberg Traurig to do a full audit of all the sensitive data available on DraftKings in the last several years—who accessed it, how, when they accessed it.

So what I’m saying is, We’re not stopping at just looking into the Haskell thing, we’re looking into the entire history of who has looked at our data. We need to definitively show that the times that data were used was because people needed to see it for their job, and that it was not used for unethical purposes.

One other point I want to make about our investigation: We also are continuing to proceed with an overall audit of all of our compliance procedures, separate from this instance. We are committed to being the best, most world-class organization in the industry in terms of openness.

Many compared what happened to “insider trading.” That doesn’t seem like the right analogy at all—even if you have ownership data, no one can know exactly how well the football players will perform. What’s your take on the comparison?

It’s not at all the same thing. While we agree that having that data can help your performance, the skillfulness of the players on DraftKings and their ability to compete is much more about an ability to synthesize a lot of data, not just one data point like ownership. With insider trading, markets move on a single data point in the world of securities trading. In our world that’s just not the case. An individual data point is not enough. You need the ability to look at a lot of different things and make educated decisions on statistics and other things related to it, and while certainly we don’t want to minimize this, and while we acknowledge the problem of someone seeing the data, and certainly seeing that data would be helpful, it’s not insider trading because it’s not like he had a specific data point that guaranteed he would win.

What surprised me most about this situation was actually that DraftKings and FanDuel didn’t already have a rule that their employees couldn’t plan on the competitor’s site. Why was that?

Certainly we may have been late to the game on the employee ban—and hindsight 20/20, that’s something I admit we should have done before. But I think that when people see what we produce, they will be impressed by it. We have always had strong monitoring in place.

Part of what this situation demonstrated is just how similarly the two sites function—so similarly that seeing DraftKings data was useful enough to help someone succeed on FanDuel. Is that a problem in terms of differentiation, and does it add to the logic that these two companies should just merge, as we have written?

Obviously a lot of people have been asking me about a merger, and to be honest that’s not the top thing on our mind right now. We’re really more focused on trying to partner with FanDuel to introduce a series of best practices for us and the whole industry. I don’t know that I’d say that this event in particular makes it more likely.

What I would say is that while certainly some aspects may be the same, or not exactly the same but similar, there are a lot of differences in the products. In this particular case it’s not different, but we have a much stronger UI, much better feature set, we offer way more sports, and our games are bigger. Our largest game is 40% larger than FanDuel’s largest game, and for $20 instead of $25.

So while you’re right that at the core, we’re all still running a fantasy football product and we choose from the same NFL players, I think the experience on DraftKings greatly exceeds where our competition is at. It all really hinges on having better technology, and a better product follows from better technology, so we’ll continue to hang our hat on that.

It sounds like it’s more likely you’d try to buy them than merge with them?

Ehhh, as much as I know you want to dig into this topic, I don’t want to comment on it too much. Right now we’re trying to collaborate together.

Forget the access to data for a moment—Haskell’s success also took some skill. For example, he picked Andy Dalton, who has been playing really well for weeks and yet only 2% of people chose him. So, in a way, it reinforces your argument of “game of skill,” but does it also remind people that only “grinders” like him win the contests? And does that hurt your marketing?

So, first, yeah, I don’t know why Andy Dalton just has this stigma, for years now, that he’s not good. He’s always not taken by many players. And he always gets a lot of points.

I think as far as your point goes, yes, I think it strengthens our skill-based argument, it strengthens the legality of it, so that’s a good thing. But I think you’re also right that it might hurt the argument that everyone can compete.

There’s a way to solve for that. And the way to solve for that is you create more ways to win. In golf, the very best golfers in the world constitute a very tiny percentage of all the golfers in the world, but they’re going to win the major tournaments. That’s the reality of any sport. But that doesn’t mean that no one else wants to play golf. You enter other skill-set tournaments. So what we already do is put limits on the amount of games one player can play. We’ve already been on this path and this is something we will continue to do, which is to put things in place that will allow for individuals of all skill levels to have competitions where they have a chance to win.

Now, the one exception to that, of course, in the short run, will be the mega tournaments we run where there are hundreds of thousands of people in them. And in those, we’re just at a stage in the industry where you can’t make those easier. It’s the same as entering any big tournament. Individuals who want to play in a big chess tournament or anything skill-based, you’re free to do so, but there are likely to be very good players in the field. The reality is most people you are playing are not highly skilled, and those at the professional level are less than a tenth of a percent of people playing on DraftKings, and we make sure that those people do not make up the majority of the fields in every tournament. We used to allow unlimited entry, for example, just one year ago, and now we don’t.

If you fast-forward a year or two, we will have different teams and levels. Eventually we plan to have both beginner and expert level. The industry just isn’t there yet where we can have skill segregation. But it will get there. I think that’s the solution to this.

You’re handling the problem of daily-fantasy employees playing. But what about any other people that might have information that could help them know which players to choose—say, a friend of a Patriots employee who saw a practice, and saw that the Pats plan to give the ball to LeGarrette Blount every play on Sunday. What’s to stop them from playing, and picking Blount and winning?

So the answer there is that we do need to come up with—and this is the real goal of the Greenberg Traurig audit—we need to cover all bases that have to do with anyone having anything that could give them an advantage. So what we look at will be all-encompassing. I don’t know enough yet to comment on your specific scenario, but I think we have to address any example that could come up.

What I will say is that in football, more than any other sport, there is a lot of info out there. There are sports beat writers, for example, that attend every practice, and they know what teams are planning. Something like watching a practice, in my opinion, still feels like something public, anyone can go. But if you’re on the inside of a sports organization, I do think that crosses into an area where you shouldn’t be allowed to play our games.

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Has this scandal changed the image of DraftKings and of daily fantasy overall?

You know, I think that daily fantasy as a whole is probably the larger piece here, because remember, this didn’t just involve DraftKings, it was something that ironically has more to do with people questioning the fairness of the games on FanDuel. Certainly it was our employee, but I think this is more of an industry question. If one company doesn’t do enough to protect its data, and if that’s the fear out there, then it affects the gameplay on the other sites.

But I think people are level-headed and they understand that what really matters is what the industry does to ensure, going forward, that everything is done in the right way. We have some work to do. We need to earn back the trust of the customers. And we take that responsibility seriously. We are fully committed to doing whatever it takes to do that. We will go as far as we possibly can to be open, transparent, and we know we have more to do to get people to a point where they are confident we are doing things the right way. But I know that talking to my team and talking to the management of FanDuel, we are engaged in the right discussions right now. And we will move swiftly.

You keep saying this issue is really industry-wide, but we’re only talking about you guys and FanDuel. So, have you also talked about this situation with, say, Yahoo?

Of course we are engaging with the whole industry, but I think as everyone knows, the vast bulk of the industry is DraftKings and FanDuel. That does’t mean we don’t need to have an industry-wide discussion—and we are. We are in regular contact with the Fantasy Sports Trade Association, and I was trading emails yesterday with someone at Yahoo. But the reason I focus so much on DraftKings and FanDuel, beyond the fact that this event was directly related to us, is because we have over 90% of the market right now. I think whatever we do together will be something that in itself encompasses over 90% of the industry. We will set the tempo that I believe others will follow.

Where do you see the daily-fantasy industry in 2 years? And in 5?

I think it’s still in hyper growth right now. You can obviously see that from the numbers wev’e posted. We acquired nine times as many customers this September as we did last September. For a company of our age, you just don’t see that. The industry is growing like a weed. DraftKings is growing faster than everyone, but everyone is growing. And the good news is the majority of fantasy players in America, the bulk of the 57 million, 90% have still never even tried daily fantasy. So I think our future is bright.

But the space will only continue to grow if we do things the right way here. I think this is a watershed moment for the industry. It was inevitable in many ways that the discussion that was already being had at the industry level between us and FanDuel, now it’s been raised to the media and the public. Now everyone is watching us. They want to see what we’re going to do, and my belief is we will respond, and we will prove ourselves.