When DraftKings and FanDuel announced last month that they planned to merge, it spelled the end of a costly war for market share in the daily fantasy sports industry. FanDuel, founded in 2009, and DraftKings, which came on the scene three years later, had spent hundreds of millions of dollars on advertising and ended in a virtual tie.
A major factor motivating them to team up came from the common threat of a crackdown by regulators seeking to brand their games as gambling. DraftKings and FanDuel have so far survived that challenge, but it's left them in no shape to keep battling each other. (According to Legal Sports Report, there are 10 states in which DraftKings does not offer games and 11 in which FanDuel doesn't, due to legal concerns.)
Before they can join forces, however, the companies will have to get past a new regulatory problem: After a merger, the combined company would control 90 percent of the daily fantasy market, a level of market power that could raise eyebrows at the Federal Trade Commission.
In the coming days, the companies are expected officially to notify the FTC and the Department of Justice of their plans to merge. The FTC, which will take the lead in the review process, can decide either to reject or approve the deal, possibly with conditions.
An agency spokesperson declined to comment, as did DraftKings and FanDuel. But while their conversations are being conducted behind closed doors, people who follow fantasy sports say the companies will avoid the strongest argument they could make—that a major competitor is the sports betting market.
The standard playbook for merging companies is to make expansive claims about how many companies are their competitors. “You can point to legal and illegal sports betting—for which daily fantasy sports is a substitute—or non-daily fantasy sports,” said Thomas Brown, a partner at the law firm Paul Hastings who focuses on antitrust law.
Indeed, the untold hundreds of billions Americans spend every year on legal and illegal wagers dwarf the $290 million in revenue the daily fantasy industry made last year, according to a report from research firm Eilers & Krejcik Gaming. And there is some precedent for merging companies to point to black or grey markets as competition: When record labels Universal Music Group and EMI merged in 2012, for instance, they argued digital piracy limited their pricing power.
Unfortunately, DraftKings and FanDuel just spent tens of millions of dollars in lobbying and legal fees to label themselves games of skill and not sports betting. “DraftKings and FanDuel are not going to define themselves as an online gambling company, because they don’t like that word,” said Jeff Ifrah, an attorney who has represented companies in the fantasy sports industry.
Instead, DraftKings and FanDuel are expected to be eager to say they’re up against traditional fantasy sports leagues, which are run by behemoths such as ESPN and Yahoo.
Yet there's not much evidence customers see the market this way. Of the 57.4 million people who play fantasy sports, just 17 percent play in both traditional and daily contests, down from 21 percent in 2015, according to a 2016 survey conducted by Ipsos on behalf of the Fantasy Sports Trade Association. (The FSTA says the data suggests most players don't have time for both, so they choose one or the other.)
David Kaplen, a 42-year-old living in San Antonio who spends tens of thousands of dollars per week on daily fantasy entry fees, says traditional leagues are no substitute. “It’s more of a casual thing,” he says of the traditional season-long contests.
Yahoo, whose traditional-league offerings count tens of millions of users, began offering daily fantasy games in July of 2015 with the premise that it could convert traditional fantasy players into daily players. But it has captured a small slice of the daily fantasy market. According to an analysis by Legal Sports Report, Yahoo's revenue from Week 12 of the NFL was only about 1 percent of what DraftKings and FanDuel together made in the same period.
The key question for regulators may be whether the combined company would be able to raise prices more than either DraftKings or FanDuel could on its own. In a statement on the proposed merger, the companies say they intend to keep fees and structure competitive "in order to offer consumers a compelling experience."
The truest measure of pricing in daily fantasy sports is the rake, or the percentage of entry fees paid by players that the operators keep from each contest. For players, there a handful of factors that go into measuring value for money: the rake, the quality of completion, the number of winners per contest, the size of the prizes, and so on. So even if the companies raised the rake, winning players might not see the service as more expensive if there were more players and bigger prize pools. Or rakes could stay flat, but competition could get stiffer.
In the end, the measure is how much money a player wins or loses. “I would never stop playing altogether,” says Kaplen. “If it felt like I was beating my head against a wall and I wasn’t profitable any more, I would drastically cut down my play to where it would just be a hobby.”
This attitude could benefit DraftKings and FanDuel in their argument to antitrust regulators. Daily fantasy, after all, didn't exist a decade ago, and there's no reason it must a decade from now. The FTC could decide sports betting is a competitor, whether or not the companies make that case, or it may simply decide the young industry is too fragile and small to survive more interference from regulators.