It’s official. FanDuel and DraftKings have reached a merger agreement. I can honestly say that there are some noteworthy positives and some troubling negatives to such a transaction. The DFS community has every right to be apprehensive. Why? Because, given that this agreement passes anti-trust regulations, one entity will control almost 100% of the DFS marketplace.
Conversely, this is not the sole reason for the colossal merger. The reality is that the DFS industry has come under fire by multiple state governments: New York, Illinois, and Texas chief among them. By combining efforts, FanDuel and DraftKings will significantly cut costs as it relates to legal fees. According to Forbes, FanDuel spent $8 million in legal fees in just Q4 of 2015. To be clear, they spent $8 million on legal fees in three months. For a company that only recorded $100 million in revenue for 2015, $8 million in one quarter alone is significant. The only question is, do the pros outweigh the cons?
If you’re like me, then you love playing Daily Fantasy Sports. Without a doubt they have made my Sunday’s infinitely more exciting, emotional, and sometimes agonizing. DFS companies like FanDuel and DraftKings have done the impossible, they make the average fan care about out of market, non-nationally televised games. They have no doubt played a pivotal role in the NFL’s ratings growth in the last five years, not including this year’s “slump”.
What these companies do is help these professional sports leagues attract the younger viewer that everyone seems to be fighting over. FanDuel CEO Nigel Eccles told USA TODAY Sports, “This is the way to bring the younger consumer into watching sports.” He went on to note that their player profile information indicates that the average DFS player is in their early 20’s.
In order for us to engage in DFS, these companies must operate legally in our respective home states. While FanDuel and DraftKings are profitable, they could not continue to afford to fight these legal battles alone. It’s the old adage, the enemy of my enemy is my friend. FanDuel and DraftKings understood that the greatest threat to their survival is not each other, rather, a different entity entirely.
This joint venture allows for these companies to cut down on legal costs, become more profitable, and as a result, survive as a business. What the merger allows for is a united effort to fight for the DFS industry as a whole, not just in the interest of these two companies. Newer DFS companies like Roster.com and FanPicks.com do not have the resources to fight for the industry, so, FanDuel and DraftKings will have to, whether they like it or not.
It’s quite clear, we have a potential monopoly in the DFS industry. If this agreement were to pass anti-trust laws, the combination of FanDuel and DraftKings would account for almost 100% of the DFS marketplace. The marketplace as a whole, according to the Wall Street Journal, is about 5 million people. Monopolies are never beneficial to the consumer, we lose our most important power, the power to choose.
What’s truly scary is that there is serious potential for this to become a legal, authorized monopoly. This joint venture does much more than cut costs for the respective companies. This agreement allows them to allocate more money to spend on lobbyists in problematic states. Empowering the right people to try and alter existing gambling laws to allow DFS entities operate free of legal fees is imperative to their survival. That sounds like a positive though right? If they can affect change then every DFS company benefits right? Not necessarily.
While in theory that logic is correct, the outcome is totally dependent on the language of the amended law. If somehow FanDuel and DraftKings could exclude other, smaller players from operating in a given state, then we as the consumer are going to suffer. This potential, keyword potential, exclusion would give the FanDuel and DraftKings complete control. Of course laws exist to prohibit this situation, but lawyers and lobbyists are paid to find loopholes and enact change for their clients.
It is unclear what long-term effects this transaction will have on the industry for a few reasons. One, this merger does not become official for another calendar year. Two, we don’t know if this merger will change the mechanics of DFS themselves. Meaning, we have no way of knowing if player pricing or the money withdrawal system will change as a result.Third, we don’t have to keep playing. If the merger produces results we are unhappy with, then we can still choose to stop playing, even if we don’t want to.
As this story develops, we can get a good sense of how the result will turn out based some key players and what side of the line they stand on. First, pay attention to the commissioners of each major professional sports team. Listen to what they say, but more importantly, where they receive and spend money. FanDuel and DraftKings already have partnerships with the major sports leagues. It’s in each leagues best interest to do so because DFS has a positive impact on each league’s viewership. NBA Commissioner Adam Silver is already on record endorsing DFS entities and even went as far as becoming an equity investor in FanDuel.
Second, look out for any media outlet that pays for the right to televise any of the major sports. Why? Because they benefit tremendously from all the advertising dollars FanDuel and DraftKings spend. It was reported by the Wall Street Journal that since FanDuel and DraftKings cut back on advertising, ESPN experienced a 13% decline in ad revenue. Outlets like CBS Sports, TNT, and ESPN will all want to continue to benefit from DFS advertising. In order to do that, these entities must survive.
Thankfully, we don’t have to worry about this impacting our ability to play DFS this week or this year. But, we could see drastic changes in the coming year to the DFS industry.
“From Our House to Yours”