Potential FanDuel And DraftKings Merger: A Hail Mary For The Companies?

esports betting impact FanDuel DraftKings merger
Facing legal challenges, coupled with a saturated market, FanDuel and DraftKings have had a difficult two quarters to start the 2016 fiscal year.

The two largest daily fantasy sports companies may now be looking to team up.

Talks started in early June over a potential merger of FanDuel and DraftKings. A deal would reduce the two companies’ legal costs as they both face the same issues. The companies’ biggest issue is making sure their current operations remain legal, as well as battling individual states that have already made FanDuel and DraftKings illegal.

The attorney generals of several states, including New York, Illinois, and Nevada, are questioning the legality of the games.

FanDuel, owner of AlphaDraft, and DraftKings, which also offers esports betting, agreed in March to halt their business in New York, banking on a legislative path to make the games legal after a months-long fight with the state’s attorney general, Eric Schneiderman. The state passed DFS legislation last month, however New York Governor Andrew Cuomo has yet to sign the bill into law.

A merger would also reduce operation costs, as they both currently offer similar products. Consolidating operations to one singular platform would reduce the cost of overhead and server demands.

A merger would also help both companies’ marketing budgets.

DraftKings and FanDuel have been in a public advertising war for the better part of a year now. Bernstein Research estimated that 59 percent of total U.S. TV ad revenue growth in the third quarter of last year was from spending on daily fantasy football ads.

Early struggles in the year put a damper on DFS

Back in February, FanDuel went through another phase of layoffs (its second so far this year). The most recent layoffs involved its Orlando office, which focuses largely on research and development. The company publicly stated that the design team focused on ancillary games and applications that the company will no longer be investing in moving forward.

A spokesperson for FanDuel stated:

“As we plan for the future, we are building out our customer service operations in Florida and will continue to hire for select roles throughout the company. We are helping the individuals in these roles find employment elsewhere and are grateful for the work they did at FanDuel.”

The company has declared that 19 employees will remain in the Orlando operation that employs FanDuel’s customer support agents and a talent team.

It hasn’t been all rosy for DraftKings either. Surrounded by rumors of possible insider trading, DraftKings pulled its advertising from ESPN. Meanwhile, ESPN also made a separate decision to scale back on DraftKings sponsorship graphics and language within its programming.

Both companies faced questions about possible insider trading when a DraftKings employee won $350,000 in a daily fantasy contest on FanDuel. With insider access to data showing which players are trending that weekend, the theory is that somebody could use that information to spot market inefficiencies and improve his or her chances of winning against the group.

However, it hasn’t been all bad news for FanDuel and DraftKings, as several states, including Virginia, Indiana, Tennessee, and Colorado, have enacted legislation that would protect customers while allowing daily fantasy sports to continue.

The popularity and quick growth of both of these companies indicates there is a demand for daily fantasy sports. While fantasy sports started in 1980, it quickly evolved into a season-long adventure.

As a new generation of fantasy sports fans have emerged, the more adaptable single-day fantasy games, instead of a whole season, are becoming more popular. These type of daily fantasy games are also adaptable for quick use for the smartphone generation.

No imminent deal is in place

While sources have stated no deal is certain, negotiations have remained confidential between the two companies. At what stage the merger talks have transpired is complete speculation.

Some legal experts argue that the odds of antitrust regulators approving such a deal are slim. A merger between the number one and two companies in a singular marketplace will lead to significant antitrust scrutiny from regulators, such as the Federal Trade Commission and the Department of Justice.

Rumors are that both companies have faced increasing pressure from their investors. At their peaks, DraftKings, whose headquarters is in Boston, and FanDuel, whose headquarters are in New York, were estimated to be worth $1 billion. Both are private companies.

The battles over legality have since depreciated the value of both companies. At the beginning of the 2015 NFL season, the companies also waged a marketing war with each other, attempting to outspend the other company in advertising. That bombardment of the media with commercials built up a huge following until critical articles, particularly this one in the New York Times, started raising questions about their business practices.

It appears the two companies are now at a crossroads that will determine their immediate future. A merger would significantly cut down the cost of operations and marketing, allowing a singular company to combat legislation.

The other path leads to a continuation of what the companies are currently doing, spending upwards of $250 million a year on just advertising. That path seems as though it would ultimately make one of the two companies irrelevant, while also inflicting irrevocable damages on the industry as a whole.

Rachel Perry

About

Rachel is an avid gamer whose insatiable desire for all things gaming related has been augmented by the inconceivable growth of eSports and how competitive gaming is viewed. When she’s not busy writing about her favorite games, Rachel can be found playing League of Legends, Hearthstone, Heroes of the Storm, or watching too much Twitch.tv.