Is Daily Fantasy Sports Dying Or Flourishing? The Truth Is Somewhere In The Middle

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DFS future

A narrative I have seen repeated in some segments of the media about the daily fantasy sports industry of late is that it’s dying. Legal concerns and the mounting costs associated with doing business in the DFS space have certainly been trying, not to mention obligations already on the books for the top two sites.

DraftKings and FanDuel, on the other hand, will tell you that things are going well. They say their metrics are up year over year, there are more users, and they’re making money on their contests, etc. And there’s truth to all of that, as well, and you certainly wouldn’t expect either company to say anything different, publicly.

From where I sit, are things great? Definitely not. Is the DFS industry about to go away? Not that either.

In anything in life, the middle ground between two extremes often comes closer to the truth than either side of the pendulum.

The past year is probably not one that will be remembered fondly in the annals of DFS history. But it can also be seen as a year when the industry turned the corner with victories in state legislatures, as eight states passed laws legalizing and regulating the industry.

The bottom line: There’s reason to be both optimistic and pessimistic about the future of DFS.

The underlying numbers from DFS contests

While I can’t report on exact numbers from the contests offered at DraftKings and FanDuel, it’s clear the two sites have at least reached equilibrium in terms of entry fees and revenue.

In Week 1 of the NFL season, the two sites — DraftKings moreso — gave away millions of dollars in guaranteed contests, which they said was part of their marketing plan. To what extent that was really the case, we don’t know.

In the weeks since, however, the sites have been making money on their NFL contests, no longer overlaying guaranteed contests (i.e. guaranteeing more money than they take in via entry fees). Gross revenue just from NFL from week to week appears to eclipse seven figures (although some percentage of entries each week are free ones handed out by the sites).

And that does not account for contests in other sports. For instance, the NBA season just began, and both FanDuel and DraftKings offered $1 million guaranteed contests. Those figures would have unthinkable even a few short years ago. And NBA has clearly turned into a viable revenue driver for DFS.

So, in a vacuum, the baseline numbers are a positive sign for DFS.

Revenue isn’t the entire story

That revenue is coming in the door is certainly good.

This is not “profit,” however; it’s not like it’s free to run DraftKings and FanDuel. While marketing and ad spend has been cut way back this year, there are plenty of other costs in play:

The New York Times recently reported that “both companies have acknowledged that they are months behind in their payments to vendors.” More from the NYT:

DraftKings and FanDuel are so short of cash, according to the two people familiar with the negotiations, that they have asked Mr. Schneiderman’s office if they can pay the final settlement in installments, and they have conceded that they are having difficulty meeting their day-to-day obligations.

I have little direct insight into how dire the situation might be, but I can say the idea that a site is behind on its bills is not without merit. It’s hard to square this with the fact that DraftKings just closed a $150 million round this summer, of course. But it is clear that the valuations of the two companies, at this point, are well off the highs that they were at in the summer of 2015 following major investment rounds.

Where does growth come from?

The venture capital behind the billion-dollar-plus valuations of DraftKings and FanDuel was based on the idea that the DFS industry would continue to scale rapidly.

Events of the past year have curtailed projections on growth moving forward, after seeing major strides leading up to this year.

And while there might be some growth in 2016, this year looks more like a holding pattern than a major tick upwards.

Which leads to the question: Where does growth come from for DFS?

The two sites spent hundreds of millions of dollars last year on TV commercials and other marketing spend; however the number of users acquired and retained based on that spend would have to be viewed as underwhelming. The universe of “fantasy sports players” is in the tens of millions of people, but the number of truly active DFS users remains a very small fraction of that target audience.

Expansion to the UK for DraftKings and FanDuel has also been underwhelming so far and hasn’t been accompanied by the major marketing spend that is likely needed to make a meaningful push there.

The growth, at least for now, will have to come in some other way than huge ad spend. DraftKings and FanDuel, for their part, hope growth becomes more organic, and have both rolled out products in advance of NFL season bent on capturing more of the season-long market and feel, with Friends mode (FanDuel) and Leagues (DraftKings).

DraftKings also fancies itself a mover on the content side, rolling out the DK Live app for iOS for NFL season.

Outside of the big two, there are signs of meaningful iteration of the base DFS product, such as prediction-based “fantasy” games offered by the likes of WinView Games, Boom Fantasy and ringit! by iPro. (More on this soon at Legal Sports Report). Start-up Global Daily Fantasy Sports is looking to partner with existing online gambling and sports betting providers in regulated markets.

Where is the DFS industry headed? At the end of October of 2016, that’s hard to say. But to say it’s either 1. dead or 2. hitting new heights certainly isn’t accurate. Whether the glass is half full or half empty is up for interpretation.