The proposed merger between daily fantasy sports sites DraftKings and FanDuel has reportedly hit some choppy water.
Recode reported on Wednesday night that the Federal Trade Commission might move to block the tie-up announced last year on anti-trust grounds.
And while that may not be welcome news for some, it does set up the possibility of a winner-take-all scenario between the big two of the DFS world.
What we know about the FTC, DraftKings and FanDuel
The Recode report was the first tangible evidence that the FTC might have a problem with the merger. The transaction would combine the two entities that control almost all of the DFS market:
Staff at the U.S. Federal Trade Commission have raised serious competition concerns with the proposed merger of FanDuel and DraftKings, according to three sources familiar with the matter, raising the specter that the government agency could soon block the deal.
Before that report, things had been largely quiet.
In May, DraftKings CEO Jason Robins said that the FTC review was “going well.” Earlier, we learned some of what the FTC was asking in relation to the investigation.
What’s the anti-trust issue?
The problem from an anti-trust standpoint is how one defines the market. If the FTC thinks it’s just the narrow world of DFS, DraftKings and FanDuel have a problem.
The two companies take up an estimated 90 to 95 percent of all handle and revenue in the industry. While there are competitors in the space — like FantasyDraft, Yahoo DFS, Draft and Boom Fantasy — their marketshare pales in comparison to FanDuel and DraftKings.
As an aside, there’s also the argument that the merger could be good for the rest of the industry, creating a dynamic where one of the aforementioned platforms could rise to a meaningful No. 2 in the space.
If not DFS, then what?
DraftKings and FanDuel are arguing that regulators should consider them a part of the larger fantasy sports industry, in terms of the FTC review. That industry involves far more users, and puts them in a category with ESPN and Yahoo’s much more broadly used season-long product, among others.
(The difference is that those fantasy platforms don’t charge entry fees, and don’t rake the contests for their revenue. There are a variety of relatively niche season-long operators that work under basically the same model as DFS, processing entry fees and taking a cut from each entry.)
Sports betting or gaming?
One could go even go a step further and say DraftKings and FanDuel are part of two other industries:
- The larger casino/gaming industry, of which they would be a very small part.
- The larger sports betting industry. Again it would be a more minor part of that industry. The Nevada sports betting industry alone handles more money than the DFS industry as a whole.
It’s more difficult to put the companies in either of those baskets, however. They both insist that they are not akin to gambling and are games of skill. And they have lobbied — successfully in many instances — to be labeled as such in states around the country.
Both companies (and Yahoo) have received gaming licenses to operate DFS contests in the UK.
The merger isn’t a magic bullet
Even before the FTC concerns popped up, we knew the merger wasn’t an instant cure-all for the two sites, neither of which is believed to profitable on their own, yet.
A story at Sports Business Journal (paywall) illustrated that point:
According to a merger document sent this year to FanDuel investors and obtained by SportsBusiness Journal, the company cited “numerous challenges” associated with the merger and integration of the two companies, and that “there can be no guarantee the combined group will become profitable in the future.”
While this may come as a shock to some, it relays the reality of DFS right now. (Of course, neither company is valued because of current or near-term profit.)
“The simple fact is that both companies have very burdensome commitments on the sponsorship side, this combined with the increased costs of operating in a regulated environment leaves no room for profitability given the current number of players who play DFS,” Marc Brody, a gaming industry analyst and veteran who once worked for DraftKings, told Legal Sports Report.
“If you look at the NBA’s decision to partner with PlayON in the EU, and you can clearly see that even an equity partner has lost faith in the duopoly’s ability to produce results,” Brody continued.
So, if the merger doesn’t go through…
It’s far from a certainty that the merger won’t go through. The Recode story outlines what would have to happen in order for the FTC to stop the merger; it’s not clear all those steps — or even the first one — will happen.
But we know this: DraftKings and FanDuel merged in the hopes that it would benefit both companies — or at least help them survive in what has become a more difficult legal and regulatory climate in the past two years.
But a blocked merger raises the possibility of what could have been the endgame, prior to the merger announcement: One of the two companies failing and the other company going on to dominate the DFS market by itself.
Who’s better (or worse) off?
Which company would benefit more from — or be hurt less by — the merger not going through is unclear:
- FanDuel, for much of DraftKings’ rise, was not reportedly not keen on a potential tie-up.
- From what LSR can glean from users, handle and revenue at the two sites, DraftKings is clearly the leader of the two at this point in time.
- The outstanding liabilities and cash positions of both sites are a variable we don’t have insight into, and would play a role in which site might survive over a longer horizon.
- Fundraising would likely be more difficult for either while both companies continue to exist.
There is significant overlap between the two sites, but they also each have a large base of users that are unique to their platform. The potential disappearance of one site would be a boon to the other.
This is all speculation, obviously. The merger might go through as planned, and we’ll see what a combined DraftKings and FanDuel can do to attempt to expand the industry as a combined entity.
But if the merger doesn’t happen, all bets are off, and it will be interesting to see what happens next for DFS.
Image credit: CaseyMartin / Shutterstock.com
