Experts: Time good, but rumored fantasy deal challenging
DraftKings and FanDuel are downplaying media reports this week that the two biggest daily fantasy sports companies could team up. But given their swift change of fortune this past year, industry watchers say the timing's right for a deal.
Media reports say the companies have spoken about a merger, though officials at both DraftKings and FanDuel have dismissed the reports as speculation.
Last fall, the rivals waged a costly advertising war in the run-up to the NFL season as they battled for supremacy in the rapidly growing industry. While the blitz attracted new customers, it also led to more scrutiny from viewers annoyed at ads and lawmakers learning about the new form of gambling.
Both DraftKings and FanDuel -- along with other companies in the daily fantasy industry -- are fighting for survival as states seek to impose greater regulations or ban their online contests, which involve players picking teams of real life athletes in order to win cash prizes based on how those athletes perform.
"I have to believe these two companies see that continuing to bang heads is wasteful," says Daniel Etna, a sports lawyer in New York. "They have to see it makes sense to have less competitive pressure and consolidate, rather than go at it alone."
A merger would allow the companies to end their marketing war, save on operational costs and consolidate mounting legal and lobbying expenses, says Kevin Cochran, a D.C.-based legal analyst at GamblingCompliance, an industry publication.
Other experts say it could soften the blow if and when states begin to impose stricter regulations and fees on the industry.
Attorneys general in New York, Illinois, Texas and other states have declared the companies illegal gambling operations and ordered them to cease operations, forcing the companies to fight back in court. Most state legislatures, meanwhile, are considering a range of proposals -- including some advanced by the industry and its cadre of lobbyists -- that are meant to regulate the games.
DraftKings and FanDuel both said this week that rumors of a merger were speculation after Bloomberg reported investors have been pushing for a merger and company officials are discussing a deal, citing unnamed sources familiar with the situation.
"These rumors have existed for as long as both companies have been in operation," said Femi Wasserman, a vice president at DraftKings. "We don't comment on speculation."
Executives at Boston-based DraftKings have hinted in the past they might be open to a merger; officials at the larger, New York-based FanDuel, though, have publicly been more reluctant.
But increased regulatory scrutiny has affected each company's ability raise money from outside investors, a critical lifeline for the privately-held companies, which still aren't profitable, observers note. At their peak, the companies were each valued at over $1 billion, but analysts say those assessments have dropped significantly.
"The lower that valuation, the more enticing or realistic a deal becomes," says Adam Krejcik, managing director at Eilers & Krejcik Gaming, a California-based gambling industry research firm.
Industry leaders hope a merger makes the overall daily fantasy sports landscape stronger.
Justin Park, CEO of RotoQL, a New York company that offers software and analytical tools for fantasy sports players, suggests staff consolidations at the two firms could be a boon to other companies.
"The whole economics of the industry would shift," he said. "You're going to have an influx of human capital and a wealth of experience out there. Marketing opportunities could change too. Every single facet will be different."
Paul Charchian, president of the Fantasy Sports Trade Association, suggests transitioning players to a new, merged system would be fairly straightforward since the companies offer a similar product.
"I expect it will be a drama-free merger because of the similarities in the platforms, play and users," he said. "We'll have one healthy company and that's a net positive to the industry, if it ends up happening."
An open question is how federal regulators would view such a move.
A merged company would effectively control over 90 percent of the daily fantasy sports market, creating a potential monopoly that may run afoul of federal antitrust laws, says Dustin Hecker, a Boston-based business lawyer.
Others, though, aren't convinced there's a problem.
"I don't see how the consumer would be harmed," said Jeff Ifrah, a D.C.-based lawyer who represents several smaller daily fantasy companies. "What are they losing out on? How are they going to be paying a higher price? I haven't seen that argument made yet."
Charchian, the trade association president, says it isn't fair to compare a possible merger to high-profile ones in other industries.
"This isn't like Comcast and Time Warner merging," he said, referring to the proposed 2014 deal between the two telecommunications giants, which was ultimately scuttled after the Department of Justice threatened to challenge it in court. "This is two companies fighting for their lives."
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