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While a merger may make sense on the surface from a practical standpoint — there are also a lot of reasons why it may not.
Venture capital drives the trains that are DraftKings and FanDuel. And right now those two trains still seem to be on different tracks.
According to the latest issue of eGR North America, DraftKings completed a $75 million Seres G round in January of this year. FanDuel, while it hasn’t raised a publicly known round of funding since last summer, could be considering another round as well.
If a merger were to happen — yes, now would be a good time to do so. But putting more investment money in separate companies would appear to mean that the investors are still backing the horse that they originally picked.
All of that doesn’t mean that VC couldn’t approve of a merger down the road, if it’s deemed necessary for survival.
But if one side sees itself as being the eventual winner in the DFS industry endgame, would it agree to a merger? A merger would take both companies, and the money behind them, to think they would be better off together than separate — something that is not a given for both FanDuel or DraftKings. It also leads to the logistical questions of a merger.
If DraftKings and FanDuel were to merge, what would that look like? Would the two sites merge into a single DFS platform, or would they continue to operate as somewhat separate entities?
Both possibilities come with potential problems. First off, a merger would not mean a huge number of new users for the resulting company. A player survey conducted last year indicated that more than 60% of DFS players are active, paying customers at both DraftKings and FanDuel already.
It’s also not a certainty — or even likely — that they would merge into a single site.
A single DFS platform would almost certainly not equate a one-to-one ratio of revenue being generated by DraftKings and FanDuel in the current environment vis a vis a hypothetical post-merge environment.
There would likely be some contraction of the market, as part of what attracts users is the differences between the two sites. Users would likely not continue spending like they are now in the world where the new, hypothetical site exists.
Both sites have a tremendous amount of brand value and awareness at this point, so a single site, under either the FanDuel or DraftKings banner, might not make much sense.
Pooling liquidity under two different brands could make sense, but there are issues there, as well. While the FanDuel and DraftKings platforms seem very similar, visually, the technology behind the two sites likely does not necessarily lend itself to an easy merge into a single site.
And, just like the “single DFS site” scenario, pooling liquidity would mean getting rid of some of the differences and nuances between the sites.
That leaves the possibility of continuing to run two standalone sites, but the cost associated with that likely would not be justifiable.
Yes, there are logistical benefits to a merger, such as:
Would all of that outweigh the concerns above?
On the final point, there has already been a “cease fire” in trying to outspend each other, after both sites spent huge amounts of money on TV and other advertising in the fall of last year. Whether that continues when the 2016 NFL season begins remains to be seen.
While one might be able to make an argument that a merger might work fiscally, it could potentially bring up legal problems.
FanDuel and DraftKings, together, hold in excess of 90% of the DFS market. A merger would create a near monopoly of the industry — Yahoo is a distant No. 3 in terms of marketshare — and one that would be exceedingly difficult for any company to dislodge.
DFS legal expert Marc Edelman — who also works on antitrust matters — said he believes the Federal Trade Commission or the Department of Justice would be extremely likely to challenge a DraftKings-FanDuel merger under antitrust law.
“It is very rare that the FTC or DOJ would allow the No. 1 and No. 2 players in a highly concentrated industry to merge without further investigation,” Edelman said.
Edelman went onto say that the two companies — in the scenario of a hypothetical merger — would have to prove that a merger would not substantially decrease competition in the DFS industry.
Edelman said that would be a high hurdle to clear, given the relationships FanDuel and DraftKings already have in place with professional sports leagues and the barrier to entry being created for new operators in states like Indiana and Virginia.
Finally, a merger would also open up a new legal front — when resources are already being dedicated to legal and lobbying efforts across the country. Edelman also wondered if DraftKings and FanDuel would want the type of documents that must be submitted for an antitrust case to become public knowledge.
It’s not the first time there has been consolidation in the DFS industry; DraftKings acquired DraftStreet in 2014. Of course, the number of people in government concerned about DFS in 2014 was virtually nil compared to 2016, when a lot more money is flowing through the top two companies.
Could we see a DraftKings-FanDuel merger down the road? It would be silly to say “never.” But turning a DFS duopoly into a single, giant company does not look like the most likely outcome in the near future.