Why Did So Many Daily Fantasy Sports Startups Fall By The Wayside? It Wasn’t Just Bad Timing And Bad Luck

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DFS operators

It’s no secret that the past two years have been difficult for the relatively young daily fantasy sports industry.

Legal and regulatory concerns meant growing pains and a pivot in strategies for its biggest companies — FanDuel and DraftKings. And it has meant the end of the road or a tough path for just about every other daily fantasy operator out there.

Why did all this happen? That’s a matter of opinion and perspective.

Where the DFS industry stands today

A piece from the Associated Press today made the difficult climate abundantly clear, citing data from the Fantasy Sports Trade Association that 81 of 118 member companies that once ran DFS contests are “no longer offering contests or their status is unknown.”

Where once there were a number of companies that eyed meaningful marketshare in DFS, FantasyDraft, Yahoo and Draft are some of the survivors. The list of sites that fell by the wayside, for one reason or another, is far longer.

Some went quietly into the night, some went bankrupt, some stole players’ money, or some combination of the preceding.

Here’s the industry spin on why it all went down, per the AP:

The legal chaos and uncertainty that befell the industry starting with the 2015 NFL season has driven away investors, making it impossible for many startups to continue to raise the financial capital to survive, said Peter Schoenke, the trade association chairman.

Well, that’s one way to look at it for DFS

Yes, the legal and regulatory climate had a chilling effect on investment in DFS. Complying with regulations — and paying taxes and fees that didn’t exist before — was a burden not many could handle without new money coming in.

But the industry paints itself here as a passive actor. The investment dried up because of all the events that started in the tail-end of 2015, we’re told.

Isn’t it a bit of the chicken and the egg problem? The industry itself is at least partially — or substantially — culpable for creating that series of events.

The DFS industry cropped up because of a legal loophole in federal law regarding fantasy sports. Everyone just started opening up DFS sites with contests that look like gambling — I won’t go down the game of skill vs. gambling rabbit hole here — armed with nothing more than some opinions of lawyers paid to say “this is legal.” Or they just played “follow the leader” of the big sites, piggybacking on their claims of legality.

A number of state attorneys general have since said what many believed all along — that DFS is gambling under some state’s laws. Only in the past year-plus is the industry (read DraftKings and FanDuel) attempting to get the legal clarity that never existed previously.

The potential for legal and regulatory concerns for DFS should have been apparent from miles away. So it should also be difficult to feel sorry for anyone who wasn’t ready for that eventuality.

Some sites were being run poorly

On top of all that, we know this: A number of DFS sites weren’t being run very well:

There were also plenty of good actors in the DFS sector that simply ran out of money and had to close up shop without incident. But some of the tales above point to the problems that the DFS industry was bringing on itself in an unregulated environment.

There’s also no great way to compete with DraftKings and FanDuel

Yes, the concerns above slowed investment in DFS to a crawl. But there’s also this stark reality: There may not be room for more than two big operators in DFS. Investing meaningful money in the DFS industry to attempt to dethrone the “big two” might be throwing money in a fire, legal and regulatory concerns or no.

And once (and if) the merger of FanDuel and DraftKings goes through, it’s not clear there will be more than one big operator left. Is there room for one or more of the companies listed above, that survived the purge of 2016, to rise up and become a meaningful competitor? Possibly.

Regardless, I reject the narrative that a huge swath of DFS industry operators went away through no fault of their own.