The two largest daily fantasy sports operators have long been in competition, but increasing pressure over the legality of daily fantasy sports and an absurd marketing battle between the two companies makes consolidation a more efficient business strategy.
FanDuel launched in 2009 in Edinburgh, Scotland as a subsidiary of Hubdub before rising to the top of the industry on a splurge of innovation — namely the condensed version of the traditional season-long fantasy sports.
DraftKings was established in 2012 by three former VistaPrint executives, Jason Robins, Matthew Kalish, and Paul Liberman.
The company was linked with Major League Baseball from the outset, receiving an undisclosed investment from MLB in 2013 (the first professional sports organization in the United States to invest in daily fantasy sports).
Potential antitrust issues loom
Both FanDuel and DraftKings will continue to operate under their respective brand names at least until the second half of 2017 when the merger, still pending regulatory approval, is expected to close.
The other issue is a potential monopoly over the daily fantasy sports market. Currently, the companies control more than 80 percent of the daily fantasy marketplace, an issue the Federal Trade Commission may bring up.
One approach FanDuel and DraftKings may use to skirt antitrust issues will be identifying other DFS operatives as competition. This will include both legal and “gray” markets (operators that don’t strictly follow regulations and are potentially considered illegal in the US).
However, that could create a potential issue. Both companies have battled in court to establish DFS as a game of skill and not sports betting.
The more likely strategy for FanDuel and DraftKings is to focus their merger on season-long players, or customers who participate in the entire length of NFL, NBA, or other sports seasons. This market contains an estimated 40 million players in North America alone.
That’s more than eight times the number of customers who participate in daily fantasy leagues. FanDuel and DraftKings could, therefore, insinuate that ESPN and Yahoo fantasy sports leagues are valid competition, opening up a much larger market that isn’t exclusively tied to DFS.
Said FanDuel CEO and founder Nigel Eccles in a press statement:
“Being able to combine DraftKings and FanDuel presents a tremendous opportunity for us to further innovate and disrupt the sports industry.
While both companies have accomplished much already, this transaction will create a business that can offer a greater variety of offerings, appealing to new users, including the tens of millions of season-long fantasy players that haven’t yet tried our products.”
What regulators want to see
Before a potential merger can be accepted, regulators will want to see a plan for how this new company will control prices. This will include DFS rakes, or the percentage of entry fees paid by players to participate.
Another major issue is creating an equal opportunity for small-time players. Currently, the bigger competitions have been inundated with “professional” players handicapping the tournaments.
Regulations passed this week (more on that later) have started to crack down in this area. This includes banning third-party programs that allow players to generate multiple lineups using advanced algorithms.
This has been a longstanding issue with DraftKings, where the top one percent of users accounted for 32 percent of entry fees and collected 47 percent of winnings in the last two quarters of 2016.
Improvements have been made, such as creating beginners-only tournaments and free games for more casual players.
Publicly identifying experienced players and creating private, invite-only tournaments are two other steps the company is currently promoting.
New DFS regulations take effect this year
With the start of 2017, new regulations on daily fantasy sports took effect in certain states. One of those states was Maryland, where a 2012 law forcing tax obligations of state residents, became effective on Monday.
Rules in other states will include banning minors from participating in daily fantasy sports, barring anyone directly affiliated with fantasy sports companies (including direct relatives of employees), as well as banning professional athletes from participating in daily fantasy sports games.
The new regulations haven’t just targeted daily fantasy sports users. DFS operators will also have to adjust their current business models. College sports and amateur events can no longer be included in DFS.
Highly experienced players must be identified. And all third-party scripts used by experienced players have been banned.
Another huge regulation taking effect is the maximum amount of money players can spend per month. If a DFS player wants to deposit more than $1,000, he or she must proactively work with the operator to gain a special exemption, including financially proving the player can afford the potential losses.
Operators will also no longer be able to extend any credit to players, and all player funds must be held separate from operating funds. Starting this year, operators are also now required to prove they have an established reserve fund to pay prize winnings.
How a united company will operate
The name of the joint company has yet to be revealed, but it is expected that both the headquarters in Boston (current DraftKings headquarters) and New York (current FanDuel headquarters) will be maintained.
The unification is to be an amicable 50-50 division between the two companies.
Each company will retain three seats on the board, with one elected independent director. DraftKings’ Robins will be retained as CEO after the merger clears, and FanDuel CEO Eccles will become the chairman of the board.
The benefits of the DraftKings/FanDuel merger
The two companies argue that a potential merger will benefit future entrepreneurs looking to create a similar business model. A united company can efficiently tackle the numerous regulatory hurdles with which they’re currently presented.
Finding a more transparent resolution to those issues would certainly open the door for future competition. In fact, some smaller fantasy operators already view the merger as an opportunity.
For some investors, the merger is a necessity, as mounting legal fees and regulatory costs have begun to cripple the financial liquidity of both companies.
Big corporations will also be watching closely at how this merger pans out. Most of the top professional sports leagues have financial arrangements with daily fantasy sites, as do some of the biggest media companies.
FanDuel is backed by Comcast Corp., while DraftKings has investments from 21st Century Fox.