DraftKings, FanDuel Talking Merger
DraftKings and FanDuel, the two largest daily fantasy sports (DFS) sites, have been discussing a possible merger, according to Bloomberg.com. In a brief video interview on Bloomberg’s website, reporter Alex Sherman said that the talks have been going on for about three months, but things have gotten more serious of late.
A merger of relative equals does make some sense, as the two sites offer essentially the same product and have been, for the most part, only competing against each other. DraftKings and FanDuel entered into a well-publicized marketing battle leading up to and into the NFL season last year, spending ad dollars like they were Monty Brewster and the clock was about to strike midnight. Not a commercial break could go by on ESPN or during just about any sporting event during which we didn’t see some backwards cap-wearing fantasy sports bro jumping for joy at winning an oversized novelty check.
According to iSpot.tv, DraftKings and FanDuel consistently ranked amongst the top ten television ad spenders last fall, sometimes sitting at the very top of the spend rankings, ahead of such companies as AT&T, GEICO, and Verizon. Their presence on the airwaves was overbearing. Take this from AdAge.com from the end of September 2015:
As much as Twitter delights in jokily bemoaning the metronomic frequency with which the DraftKings spots run, the actual booking data is almost beyond comprehension. DraftKings ads have aired a skull-clutching 16,259 times over the course of the month, which works out to 135 hours and 25 minutes of 30-second spots. That’s more than five and a half days, or a full work week, of commercial messaging that’s been hammered out in the span of a 29-day period.
This is all to say that the two companies have spent an awful lot of money – hundreds of millions of dollars – marketing against each other, so a merger would certainly help them save a massive chunk of change. And that money is needed as they are both embroiled in legal battles in various U.S. states in which DFS has been declared illegal. The two companies have exited eleven states while FanDuel has also left the Texas market. The fiercest fight is currently in New York, where Attorney General Eric Scheiderman went after DraftKings and FanDuel with a vengeance. Lawsuits were filed and the sites eventually agreed to give up the huge customer base, but there is still a possibility that DFS could be made legal via legislation this week. It will have to be this week, too, as the state legislature adjourns Thursday. If nothing happens, it’s back to the courts.
The legal messes have tanked the companies’ valuations. According to Bloomberg, they were both valued at more than a billion dollars each, raising money left and right. But now, with the loss of players and growing legal bills, those valuations are said to be around half of what they were. Half a billion ain’t bad, but compared to where they were, that’s a steep drop.
As Legal Sports Report points out, even though a merger makes sense from some angles, it doesn’t from others. DraftKings and FanDuel are basically on equal footing as it stands right now, with established software platforms, generally the same contest offerings, and a heavy overlap in customer bases. There isn’t much to gain for either as far as the product is concerned.
And even though the two big companies would be bigger together, their combination might serve as a negative sign to the investors that have put hundreds of millions of dollars into these ventures. The potential returns on their investments would likely be less with a combined company than if the two stayed separate. A source told LSR, though, that a strategy behind a possible merger could be to save the investments. If one of DraftKings or FanDuel were to go under without a merger, “it could result in a chilling investment market for the surviving company.” A merger could just be a necessary precaution because of the uncertain future of the DFS industry.
As it is, the future of the DFS industry in the United States seems better than the future of the online poker industry. Various groups and lawmakers have been working in to get online poker legalized and regulated in some form for about a decade, yet there has been very little movement on the federal level and only three states of legalized online poker (New York is getting close, though). DFS, despite its current legal problems in some states, has gained much wider and more rapid acceptance by lawmakers and non-participants, perhaps because season-long fantasy sports have been a staple of fandom for decades now. Six states have passed pro-DFS legislation this year and in contrast to poker bills, which have often dragged on for years in states, these DFS laws have typically passed fairly quickly.