ESPN Considering Making A Move Into The Daily Fantasy Sports Space
Legal Sports Report

Why ESPN Will Enter Daily Fantasy Sports Cautiously – If They Even Enter At All

ESPN Considering Daily Fantasy Sports
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Come kick off of the 2015 NFL season you could be submitting your daily fantasy lineups on FanDuel, DraftKings and … ESPN?

That’s what some are taking away from today’s report in Sports Business Daily that ESPN is “looking hard” at “how the company can get involved in the increasingly profitable daily fantasy business.”

And, per sources at ESPN, the network could have something live before the start of the next NFL season.

But I’d suggest that a number of factors will keep ESPN’s direct involvement with real-money DFS games limited – at least in the near term.

Risk to significant advertising income from FanDuel and DraftKings

Precise numbers aren’t readily available, but Eilers Research estimates point to a 2014 ad spend on ESPN by FanDuel and DraftKings that totalled over $20mm.

And it’s growing.

ESPN launching a competing site would threaten that revenue. Partnering with one or the other would threaten that revenue.

In an annual ad revenue pie estimated at $3.9bn, $20mm isn’t a make-or-break number.

But the fact that (i) the number is growing at a yet-to-be-capped clip and; (ii) it’s coming from just two customers makes it a revenue stream you don’t tinker with unless you have a strong reason indeed.

The market’s not big enough to matter right now

The obvious candidate for said strong reason: getting in on the high-flying revenue growth of the one-day fantasy sports industry.

The problem: that growth is far more impressive in relative terms than absolute ones. While the year-over-year percentage increases are eye-popping, the hard numbers are less so.

To wit: The entire daily fantasy sports industry will likely come in under $100mm in total revenue for 2014. And – despite SBJ’s characterization of DFS as “increasingly profitable” – none of that will be profit.

That’s less than New Jersey alone generated from regulated online gambling during the same period, and in suboptimal conditions.

The story of 2015 is likely to be a similar one: big growth, but ultimately modest numbers.

ESPN doesn’t need first-mover advantage to thrive

But, the argument goes, even if there’s no money in it today, ESPN should still jump in now in order to establish itself as a major DFS player. And then they’ll reap the rewards when the industry broaches billion-dollar territory (and profitability) in the years ahead.

That’s a reasonable argument if you’re DraftKings or FanDuel. In fact, it’s the primary justification for the tens of millions in backing they’ve booked.

Actually, it’s a pretty reasonable argument if you’re basically anyone but ESPN. But as the 800lb gorilla of the sports media space, the idea that ESPN needs to move now to grab land just doesn’t pass the smell test.

They are the land.

Bottom line: ESPN can flip the switch on a DFS product at any point and likely be guaranteed dominant market share within a small window. So there’s little reason to move now and pay a premium to do so.

Building the infrastructure will take time …

As Adam Krejcik of Eilers pointed out to me, ESPN “does not have the expertise and technology” to operate a real-money daily fantasy site.

With the number of DFS sites in operation, it may seem a relatively trivial thing to get one up and running. But rest assured that an ESPN-operated site would bear little resemblance under the hood to your typical one-day sports platform.

Security, payment processing, fraud and player data protection are just a few of the functions ESPN would have to develop from the ground up to a painfully high standard. Their attractiveness as a legal target alone demands this.

… and acquisition won’t cut it

So what about just buying DraftKings or FanDuel and acquiring that infrastructure in one fell swoop?

Sounds good, but two things:

  1. The cost is too high. I don’t know what valuation is currently slapped on either DraftKings or FanDuel, but I do know it’s high enough that Jason Ader expects one – or both – to go public in 2015.
  2. See above. With all due respect to DK and FD, they simply don’t have as much at risk as ESPN and that’s reflected in the product.

Disney’s aversion to anything resembling gambling

Last but not least, there’s the issue of how ESPN parent company Disney feels about corporate connections to gambling.

Disney has been an outspoken opponent of gambling expansion in Florida. And the company is slowly unwinding licensing deals with slot and lottery companies that involve Marvel and Star Wars characters (deals that predate Disney’s acquisition of both companies).

Fantasy sports may enjoy a UIGEA exemption, but the daily fantasy product is culturally close to (some would argue indistinguishable from) gambling.

So it’s not hard to imagine a scenario where Disney pauses ESPN’s foray into the space, especially given the relatively meager financial upside in the short run.

……

I have no doubt ESPN is “looking hard” at DFS. As Krecik told me, “they would be crazy not to.”

But I suspect that the closer they look, the more likely they are to conclude that staying on the sidelines is the right approach – at least for the next year.

Chris Grove
- Chris is the publisher of LegalSportsReport.com and OnlinePokerReport.com. Grove also serves as a consultant to various stakeholders in the regulated market for online gambling in the United States.

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