Posted by: Mike Cornelius | July 13, 2017

Thanks For The Memories, DraftKings And FanDuel

A NOTE TO READERS: NASCAR comes to New England this weekend, and On Sports and Life will be at New Hampshire Motor Speedway taking in the action. Since the Overton 301, Sunday’s main event, doesn’t begin until 3:00 p.m. that day’s usual post will be delayed until Monday. Thanks as always for your support.

It was never a marriage made in heaven, so few observers were surprised when it came undone. Thursday afternoon the two leading daily fantasy sports companies, DraftKings and FanDuel, announced that their proposed merger was being called off. It’s been less than two years since Boston-based DraftKings invaded our living rooms with a tidal wave of television advertising as the 2015 NFL season approached. FanDuel, headquartered in New York, rushed to follow suit and a wild, cutthroat competition for subscribers began. Both companies raised prodigious sums of money, much of it through marketing and sponsorship agreements with major sports teams and leagues. But each spent their capital just as fast, and when controversy erupted after the New York Times reported that employees of both DraftKings and FanDuel were potentially using insider information to play, and win, on the competing website the harsh glare of legal scrutiny turned on the high flyers of daily fantasy sports.

The firestorm that followed the initial report by the Times led to calls to ban the sites as illegal gambling venues, and that in turn resulted in a long and expensive state-by-state battle for the two companies. Lawsuits were filed in multiple jurisdictions, even as DraftKings and FanDuel looked for help in legislative chambers in state capitals across the land. Membership peaked and started to decline, as small-time players figured out that both sites catered to the fantasy sports equivalent of Las Vegas high rollers, full-time players who used computer algorithms and sophisticated metrics to select lineups and generate scores of entries in multiple contests. In one-on-one games against so-called little fish, these daily fantasy sharks reliably devoured the competition.

With membership falling, some of their early sponsors looking for ways to back out of marketing agreements, and cash flying out the door to lawyers and lobbyists in multiple jurisdictions, the advertising deluge ceased and both companies looked for ways to retrench. Last October New York Attorney General Eric Schneiderman reached a $12 million settlement with DraftKings and FanDuel, with each company paying half that amount to resolve false advertising claims. A few weeks later the once bitter rivals announced their intention to merge, saying that “By combining and streamlining resources, FanDuel and DraftKings can work more efficiently with state government officials to develop a standard regulatory framework for the industry.” Both also promised that they commission fee structure would remain competitive.

But the merger was in trouble from the moment it was announced. Aside from the difficulty of creating synergy and a common corporate culture between two companies that had spent millions upon millions of dollars trying to do each other in, the very success of DraftKings and FanDuel meant the proposed union was going to draw close legal scrutiny. The two companies had either scooped up smaller daily fantasy websites or driven them into oblivion; together they controlled more than 90% of the market. The Federal Trade Commission has objected to merger proposals producing far less of a concentration of market share.

DraftKings and FanDuel argued that the real market wasn’t just daily fantasy sports, but the broader range of fantasy games spanning longer periods, even up to a full season. This included numerous websites, most of which don’t charge players to participate, and even thousands of local fantasy football leagues whose members gather once a year at a favorite watering hole to kick off another season with a beer-fueled draft party. But that was an argument the FTC wasn’t buying. Last month the Commission announced its opposition to the merger and filed suit to stop it.

In retrospect, it wasn’t Thursday but really the day of the FTC’s announcement that the proposed merger ended. Legal analysts pegged the costs for DraftKings and FanDuel to contest the government’s action as easily running $12 to $15 million, with no promise of a successful outcome. In a court room it would be the two companies, both increasingly strapped for cash, playing the role of small fish while the FTC took on the guise of predatory shark.

Predictably enough, efforts were made to spin abysmal failure into a promise of future success. DraftKings CEO Jason Robins said, “This will allow us to singularly focus on our mission of providing the most innovative and engaging interactive sports experience imaginable, forever changing the way fans connect with teams and athletes worldwide.” In a separate statement Nigel Eccles, the CEO of FanDuel promised that “There is still enormous, untapped market opportunity for FanDuel, and we will continue to execute our strategy to grow our business and further expand the fantasy sports industry.”

Both companies claim they are about to start raising fresh capital while busily rebuilding their subscriber bases. But since each is privately held it’s impossible to determine the validity of those claims. Both admit that they have yet to achieve profitability and neither can promise when or if that will change. While DraftKings and FanDuel may survive in some diminished state, their halcyon days are over. Once they combined to spend $32 million on television ads in a single week. Now they bowed to the FTC rather than risk less than half that amount in legal fees, and in the settlement with New York AG Schneiderman, they begged for and got three years to pay up, with fully half of the total paid at the end. Oh, how the mighty have fallen.

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