Fanstasy Sports now

Fanstasy Sports now

Draft Kings v FanDuel

Draft Kings v FanDuel

DraftKings and ESPN

DraftKings and ESPN

ESPN is currently in the second place (13% market share) position of the fantasy sports market that generated an estimated $1.5B in revenue in 2014, but the self-proclaimed, “Worldwide Leader in Sports,” appears to be waving the white flag when it comes to the fast growing and insanely popular daily fantasy sports market.  One would imagine that ESPN’s immense content collection, huge user base, and established relationships with sports leagues would make it a formidable opponent and clear favorite to take over the daily sports league market.  However, for some reason ESPN has decided to pursue a different strategy.

For years individuals have participated in season long fantasy leagues with their friends, where they bet on the outcome using informal systems to make up for the platform providers money collection shortfall.  With the passing of the 2006 Unlawful Internet Gambling Enforcement Act, fantasy sports was designated a game of skill, which allowed it to skirt the law and allowed for the creation of daily sports leagues.  Today DraftKings, one of the market leaders has over 2 million users and is expected to generate $100MM in revenue in 2015. Revenue for daily fantasy leagues is generated from a 10% commission that sites take on customer entry fees.  In contrast, ESPN, which offers free fantasy sports leagues, is expected to generate $200MM in revenue from fantasy sports through advertising on the fantasy site.

Despite the astounding revenue growth ESPN has decided to pass on this craze and many people including myself believe that it is because ESPN is owned by Disney, which is uncomfortable with owning a gambling website.   Beyond the moral and brand considerations, while the revenue from the business is significant, the costs of competing in the segment are even greater.  To date, the two major players in the daily fantasy segment have raised over $725MM in funding.  Given the way in that payouts (expected to reach $14.4B in 2020) and thus revenues scale with users, the two major market participants are treating the competition as a winner take all game.  Right now, in order to attract users, DraftKings is subsidizing some of its contests payouts, offering users free credit and spending roughly $500MM in advertising over the next three years.   All of these competitive actions are making the business economics unappealing.  Given the businesses low homing costs, it is hard to imagine that the battle between Fan Duel and DraftKings will end any sooner or any better than the battle between Lyft and Uber.  It is even harder to imagine ESPN being able to support such a money losing product especially now as it battles rising content costs (larger tv deal contract prices) and upstart competition from Fox Sports 1, both of which are putting pressure on ESPN’s core business.

Although it is not investing directly into daily leagues like many of its competitors, ESPN is treating this new offering as compliment rather than substitute and leveraging its own valuable resources to still generate revenue off of the phenomenon.  For example, the Fox Sports COO believes that 80% of DraftKings users spend more time watching and reading about sports because of their participation in fantasy leagues.  Thus for major content producers like ESPN that owns the rights to major sporting events and has tv shows and websites catering to fantasy players, ESPN stands to benefit from the uptick in fantasy participation from increased viewership and higher advertising revenue.  Additionally, ESPN was able to leverage its user base and content expertise to strike a $250MM three year advertising partnership with DraftKings, an amount that will increase its annual fantasy earnings by ~40%.  Everyone in the organization, however, does not believe that ESPN is any less involved in the daily deal market than those that invest directly in those companies.  On one of his first broadcasts of the new Sportscenter, Scott Van Pelt went on a tirade about the hypocrisy of everyone including ESPN for jumping on the bandwagon for daily leagues despite being against sports gambling.  As gambling and sports continue to become more legally intertwined it will be interesting to see how the major players react, how their stances on the issue evolve, and how their business models adjust to monetize on the changes.

http://ftw.usatoday.com/2015/09/scott-van-pelt-calls-out-daily-fantasy-leagues-in-surprising-sportscenter-segment

http://www.thestreet.com/story/13214600/1/espn-struggles-to-adapt-to-rapid-growth-of-streaming-sports.html

http://www.highya.com/draftkings-reviews

http://www.cnbc.com/2015/07/31/draftkings-ceo-looks-to-the-future-of-fantasy-sports.html

http://www.thestreet.com/story/12990595/1/draftkings-1-billion-fantasy-momentum-could-mean-a-big-ipo-in-2016.html

http://espn.go.com/chalk/story/_/id/12380815/the-skills-required-succeed-daily-fantasy-sports-espn-chalk

http://clients1.ibisworld.com/reports/us/industry/ataglance.aspx?entid=4577

 http://www.startribune.com/draftkings-fanduel-and-the-new-american-dream/329931151/

http://recode.net/2015/07/26/another-unicorn-is-born-draftkings-snags-300-million-and-massive-fox-ad-deal/

http://www.forbes.com/sites/darrenheitner/2015/07/27/draftkings-brings-in-300-million-led-by-fox-sports/

http://www.betaboston.com/news/2015/06/24/draftkings-wins-big-espn-ad-deal-but-no-word-on-investment-rumors/

http://fsta.org/research/industry-demographics/

http://espn.go.com/fantasy/

 

By: DeRon Brown


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