3 Reasons Why The Feds Should Approve The Merger Of DraftKings And FanDuel

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Federal trade Commission Sign

This week Recode reported murmurs of trouble in D.C. for the proposed DraftKings / FanDuel merger.

Approval was never expected to be a smooth process, something the companies signaled when announcing the merger by forecasting a year-long process for closing.

But, given Recode’s report, I believe regulators are vastly overthinking or fundamentally miscontextualizing the merger.

1. The two companies dominate a small, unproven segment of the fantasy sports market

Daily fantasy sports is an often-misunderstood branch of the broader market for fantasy sports contests.

In short, DFS is a tiny slice of fantasy sports activity. As small as it is, that slice has been artificially inflated via the pumping of hundreds of millions of VC money into marketing and the nurturing of a low/no-margin class of high volume players.

And if you understand DFS as a sports betting product and therefore as a component of sports wagering activity, then the slice becomes too small to see.

2. The merger is not chilling competition, M&A, or investment

The merger was announced in November 2016. I am aware of precisely zero companies who have subsequently exited DFS, canceled plans to enter the space, or scaled back their involvement as a result of the announcement.

Some companies have shut their doors in the interim, but those closures were driven primarily by financial mismanagement, an inability to operate in a regulated environment, or an inability to raise capital due to the legal ambiguity surrounding DFS – not the impending merger of DraftKings and FanDuel.

The recent acquisition of fantasy sports app DRAFT by international betting giant Paddy Power Betfair underlines the point nicely, as does the recent funding round for Boom Fantasy.

From the industry’s view, a combined FanDuel / DraftKings is preferable to the two companies continuing to operate separately. Why?

3. Legal ambiguity, not the merger, has kept competition on the sidelines

There’s a flawed narrative in play, one in which FanDuel and DraftKings so thoroughly dominated the DFS market that competitors simply threw up their hands and decided not to bother.

The truth is that many companies who would have been natural competitors for FanDuel and DraftKings, especially casinos and other gambling operators, stayed on the sidelines due to legal ambiguity surrounding the product.

That ambiguity is starting to subside.

In the last two years, thirteen states representing roughly 25 percent of the U.S. population have explicitly authorized real-money fantasy sports contests. That wave of change has created a larger addressable market that gambling operators can pursue largely free of legal concern. As a result, competition from that deep-pocketed sector is now beginning to emerge.

William Hill US has applied for fantasy contest licenses in various states. Vegas-based US Fantasy has steadily expanded into regulated markets. And Resorts Atlantic City is days away from launching a fantasy sports product that will live both online and on terminals at the company’s land-based property.

As the addressable market grows, so will the list of major casino operators considering the opportunity, including heavyweights Caesars, Penn National, and MGM, along with regional operators like Pinnacle and Isle of Capri.

Image: Paul Brady Photography / Shutterstock.com