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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In recent years, there’s been an increased amount of scrutiny on online gambling and in particular, online poker. The states of Nevada, Delaware and earlier this week, New Jersey have approved and launched online gaming markets.

POLITICAL CONTEXT
There has been increased scrutiny from government players with Republican politician, Joe Barton advocating the roll out of nationwide law that will help regulate and legalize online gaming. Barton had introduced a bill in the US Congress that would help create a licensing system for online poker companies. Whilst, this was welcomed by many, it was also simultaneously opposed by many and this can be seen by the fact that the bill was introduced in July and has not made any progress in the last 4 months. Making things illegal can increase the price of the illegal activities – there have been instances in the past where the prohibition of marijuana or the prohibition of texting & driving, went on to increase the occurrence of the prohibited activity post the passage of the law. Pro-online gamers have supported a controlled and closely monitored legalized online poker world. Whilst this is easier said than done, the golden question is whether the government can help the online poker companies to take baby steps in the near future?

ECONOMIC AND ETHICAL CONTEXT
Whilst we are still recovering from an economic recession, arguments can be made to support banning online poker – gambling can easily become an addiction and cause serious mental and economic harm. Having access to online poker via the internet can provide easy access to the wrong individuals which can only exacerbate the current economic condition. But one can argue that similar addictions currently already exist in the form of the lottery, cigarettes, alcohol, drugs etc. Furthermore, the underground gambling market without access to casinos can potentially operate in an open monitored environment and hence enable the government to collect taxes on winnings while enforcing necessary regulations to protect consumers. There are ways to curb abuse of IP addresses, credit cards, age of players etc. by monitoring patterns of play among many other sophisticated security measures. However, is this enough to give parents the comfort that underage children will not have easy access to online poker?

 

COMPETITION
The best form of innovation eliminates wastage in the system and removes inefficiencies. We have seen e-commerce disrupt the traditional brick and mortar retail model benefiting consumers tremendously. E-retailers are able to pass down costs savings from zero physical store rent to consumers in the form of lower prices, better selection of products and quicker & convenient service. This very concept can be applied to online poker — the casino business is a high fixed cost business which runs continuously regardless of the occupancy rate or utilization level. By providing consumers with the ability to play poker online, consumers are able to save money on travel and hotel charges and casino companies can save on rent and other fixed/variable costs. It’s a win-win for both sides of the network. Also, legalization of online poker will be a breath of fresh air for dynamic and entrepreneurial companies such as Zynga, thereby enabling and supporting innovation in the gaming industry.


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