NFL Season Is Over; Now What For Daily Fantasy Sports?

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The football season officially came to an end on Sunday with Super Bowl 50, and it also brought to a close the most lucrative time of the year for the daily fantasy sports industry.

FanDuel, DraftKings and other operators had managed to eke a little more revenue out of by pairing the Pro Bowl and the Super Bowl for a DFS contest. But now the DFS industry must make it through the next seven months without football.

A lot will happen between now and the first kickoff next season. Here’s a look at the key storylines to watch:

Legal clarity for DFS?

The industry has had to spend a disproportionate amount of time — and money — on legal issues over the past five months:

The outcome of the cases in New York and Illinois will be a barometer and the first court precedent on the books about the legality of daily fantasy sports under current laws.

DFS will not reach an end point of legal clarity everywhere in 2016. In a best-case scenario, the industry will get legislation passed in anywhere from a handful to more than a dozen states. In a worst-case scenario, nothing gets passed as bills get held up or sidelines during the election cycle.

The momentum for DFS regulation has been palpable in the early weeks of 2016, with bills passing through chambers in California and Indiana and a variety of committee hearings in other states.

But, it’s one thing to get a bill introduced and through a few votes. It’s another to get legislation to the finish line and a governor’s signature.

How successful will the industry be at seeing bills through to passage? That might be the biggest storyline this year. Regulation passing in one state can be seen as a de facto regulation nearly everywhere; as long as a site is licensed in ‘x’ state, it’s undergoing some sort of external review.

What’s going on with federal investigations, and Congress?

How much does daily fantasy sports have to worry about at the federal level? That’s a potentially major piece of the puzzle for DFS that hasn’t been considered at length nearly anywhere. Consider:

The federal investigations — at least theoretically — have the ability to turn the industry on its head quickly, although that’s a matter of speculation. As some have pointed out, a violation of state law can trigger violations of federal law, to potentially devastating effect.

Does anything come out of Florida, New York or D.C. on this front in 2016? It’s a major question mark looming over the industry.

The money in daily fantasy sports

The days of major new investments in paid-entry fantasy sports are likely over, at least in the short term, given the legal morass touched upon above.

The top level of DFS

First, how are FanDuel and DraftKings doing financially? They burned through massive amounts of capital on advertising spend late last year. They’ve also been spending major money on legal and lobbying issues.

These are private companies, and we’re not privy to exactly what’s going on financially. Suffice it to say, about six months ago DraftKings and FanDuel figured they would be in a much different position than they find themselves today. Both had figured to scale substantially and hoped to focus on growing, rather than simply ensuring their offerings are legal. Some of that growth definitely happened, of course — especially when looked at from increases from 2014 figures — but not to the extent that was once hoped for.

Both have lots of financial commitments in terms of team sponsorships, advertising, and simply operating costs. The most interesting to watch is the ESPN-DraftKings relationship; the two signed a deal for exclusivity on DFS in June. How solid that relationship is came into question when DraftKings’ live final slated to be aired on ESPN was moved to Fox Sports (a DraftKings investor).

An IPO almost certainly seems out the window in the current environment. If either needs cash, could a down investment round be funded? That might also be optimistic. A convertible note could be a possibility for a short-term infusion.

No matter what happens, DraftKings and FanDuel are likely both still operating in the red overall, and without major changes, it would be difficult to see that changing before NFL season.

The second level of DFS

Do the non-DraftKings and non-FanDuel sites of the world have the resources to continue to operate until the next NFL season starts? It would seem unlikely that everyone will be able to keep open their virtual doors. It’s fair to assume that some sites will cease operating, while others will consolidate to survive.

Some operators are positioning themselves to work as B2B, white-label sites ready to work in a regulated environment moving forward — most notably DraftDay, Star Fantasy Leagues and iTEAM Network.

There has also been a move toward models that are not based on paid entryfree-play offerings or platforms that are advertising-based in their revenue, for instance. Will these gain traction as a form of DFS with fewer legal concerns?

Diversification at FanDuel, DraftKings

The non-football portion of the daily fantasy sports season at one point was almost an afterthought — most of the year was geared toward the NFL season.

Now, FanDuel and DraftKings have become diversified to the point where the rest of the year is not just a placeholder while waiting for the next football season to start. They have leveraged their relationships — most notably the NBA with FanDuel and Major League Baseball with DraftKings — to great effect.

In 2015, there was evidence that DFS for both the NBA and MLB had gained in popularity, and that more revenue was coming in for those sports as a percentage of all entry fees DFS than in previous years. The diversification was more clearly apparent at FanDuel, where a week’s worth of NBA contests sometimes approached a week of NFL, in terms of entry fees.

DraftKings, of course, has expanded in ways that FanDuel has not — offering sports that its competitor stays away from, like soccer, golf, NASCAR and mixed martial arts. At least some of those — golf and NASCAR in particular — appear to be offered in a gray area under the Unlawful Internet Gambling Enforcement Act, depending on which lawyers you talk to.

But that has created revenue streams that FanDuel cannot tap, and it allowed DraftKings to overtake its rival in 2015 for the No. 1 position in the market.

Will FanDuel expand into any new verticals this year? Last summer, when FanDuel was offering just baseball contests and DraftKings offered a suite of contests across various sports, it was obvious that decision paid off. FanDuel also purchased AlphaDraft, an eSports fantasy site, late last year, but it has not yet leveraged that platform in a meaningful way, beyond its pre-FanDuel ownership period.

New markets?

Given the lack of legal clarity in the U.S. in the short term, moving into new markets with clarity — via a gambling license — might be done out of necessity. DraftKings‘ oft-delayed UK launch came last week; FanDuel’s UK license is still pending.

The appetite and full market for DFS outside of North America remains to be seen, but it needs to be truly tested at some point. The problem might be that the companies, given monetary concerns, can’t make a proper marketing push; however, DraftKings has already partnered with a trio of Premier League teams.

DraftKings, at least, has expressed interest in new markets — other parts of Europe, as well as Asia and Australia. If any of those markets can be tapped in the short-term (without large amounts of capital behind the effort) remains to be seen, but DraftKings and FanDuel also need to expand and scale, not just hold steady in the U.S. So international expansion may have to happen out of necessity.