The “D” In DFS Could Soon Stand For “Disney”

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Disney and DraftKings

According to a report today at Fortune, Disney is in “early talks” regarding an investment in DraftKings.

Should this move from rumor to contract, it would arguably mark the highest-profile investment to date in a daily fantasy sports company.

Representatives from both companies declined comment.

Will it happen?

While Disney and DraftKings together in a headline is appealing stuff, the majority of those that I reached out to for comment stressed the speculative nature of the report.

DraftDay co-founder Andrew Wiggins noted that “the article reports that talks between DraftKings and Disney are only in the early phases, so expectations should be tempered until we hear something concrete.”

Adam Krejcik of Eilers Research echoed Wiggins, saying that the news represents “an interesting development,” but that “it’s important to remember a key phrase from the story being ‘early talks’.”

This isn’t the first time that Disney and DFS have been linked in mainstream reporting.

Back in January, SportsBusiness Journal asserted that ESPN was “eyeing” the DFS space, with an aim of involvement prior to the start of the 2015 NFL season.

One could argue that the same widely-identified hurdles to ESPN’s involvement remain by and large intact today:

Two DFS unicorns

According to Fortune, DraftKings’ current funding round places the valuation of the company north of $1 billion.

DraftKings is the second-largest operator in the DFS space by traffic and revenue. Market leader FanDuel is also reportedly considering a new funding round at a valuation also exceeding $1bn.

Krejcik commented that such a valuation for DraftKings would be “impressive considering it has lower market share.”

The two companies have collectively raised over $150mm in funding since 2013.

Betting the draw

Those are heady valuations for the market leaders in a rapidly-growing, but still relatively small, vertical.

“Every late state VC investor is chasing the next big unicorn,” Ader Investment Management CEO Jason Ader told ODF. But, Ader added “every company in the DFS sector is losing money.”

“The entire DFS industry generates total annual revenues equal to a few hours of total revenues in Macau.”

According to internal estimates from ODF, the entire daily fantasy sports industry generated under $100mm in total revenue during 2014.

The bull case from Eilers Research – the most credible and oft-cited source for DFS market projections – puts total industry revenue at around $2.5 billion by 2020.

But involvement by a company like Disney could super-charge the growth.

“It appears both FanDuel and DraftKings will likely have a very big war chest of cash (assuming fundraising rumors are true, and we suspect they are),” Krejcik told ODF via email, “which means the customer acquisition battle will continue and the all-out marketing blitz should be even bigger this upcoming NFL season.”

“This is generally in-line with our industry forecast/assumptions and should go a long way in terms of helping drive mainstream awareness.”

And Wiggins agreed that the involvement of a company like Disney would make it “likely that the current momentum of customer acquisition spending and growth would not only continue, but accelerate.”

Impact on FanDuel’s acquisition model

One obvious question that the report sparks is how – if at all – such an investment would impact the ability of competing daily fantasy sports sites to acquire customers via ads on ESPN, a subsidiary of Disney.

ESPN is thought to generate tens of millions a year in advertising revenue from DFS, the vast majority of which comes from DraftKings and FanDuel.

An investment by Disney into DraftKings wouldn’t necessarily result in a shifting of that landscape.

After all, the NBA is an equity partner in FanDuel and DraftKings still has robust marketing and promotional relationships with several NBA teams.

But it’s FanDuel that is the “Official One Day Fantasy Basketball Game” of the NBA.

Disney willing to split gambling hairs?

A final note worth making: Disney is notoriously averse to any 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. And the UIGEA exemption only applies to the UIGEA – it’s not a blanket exemption from all gambling law at the state and federal level.

That’s why major daily fantasy sports sites block players from up to a dozen states from participating in their games.

With Disney’s aggressive opposition to connections to clearly legal and regulated forms of gambling, entering the legally ambiguous DFS space may prove too dissonant from a PR perspective for the House of Mouse.

Image credit: Katherine Welles /