Daily fantasy sports betting continues to go mainstream. In fact, if current negotiations produce results, one of the two major competitors in the one-day fantasy sports industry might have one of the mainstream purveyors of American pop culture on their side.
At present, Boston-area startup DraftKings is in talks with the Walt Disney Corporation about a venture investment. If those talks lead to a partnership, DraftKings will be worth over $1 billion.
DFS Marketing Competition Advantage
The deal would give DraftKings a new source of income in its expensive competition with FanDuel to become the #1 daily fantasy sports website. An arrangement with Disney also would provide DraftKings with an elite media partner, because Disney owns ESPN (and ABC Sports).
Now that FanDuel is aligned with NBC Sports and Comcast, having ESPN and ABC on DraftKings' side could be an important piece of the picture. FanDuel's NBC tie-in threatened to be a major boon in the coming NFL season, while the Comcast deal was a subtle, yet huge, advantage.
Advantages for DraftKings
The deal would make DraftKings a member of the Unicorn Club, startups which have entered into billion-dollar business. While that might sound like an intangible advantage, intangibles are important when considering publicly-traded companies. Such a distinction would confer legitimacy and make big impressions with investors.
That distinction was made even more important recently when it was learned that FanDuel is shopping around its own billion-dollar deal. FanDuel, which is based in Manhattan, has stepped up the competition with DraftKings in the past year, because the industry is at a tipping point.
Valuation of DFS CompaniesFortune Magazine has both companies estimated at $1 billion in value. Biz Journals recently questioned Fortune's valuation formula. FanDuel has a revenue of $57 million and a public membership base twice the size of DraftKings. DraftKings, on the other hand, has revenue of $30 million a year.
Both companies have similar business models, so DraftKings is not more efficient. Each company signs up players for daily and weekly fantasy contests. Both collects about 9% to 10% in rake from each bet, leaving the rest as prize money for the contestants. Biz Journals believes FanDuel therefore should be valued at twice the value of DraftKings, unless DK greatly increased its player signups in 2015.
ESPN Advertisements
DraftKings and FanDuel continue to advertise heavily on the networks which target their demographics the heaviest, such as ESPN and other sports networks. For that reason, both need to continue to bring in capital investments. If one stops pouring dollars into their advertising budget, they are sure to lose this pivotal stage of the competition.
Fundraising Competition
In the last round of fundraising in Summer 2014, FanDuel won by a margin of 2-to-1, but the investor gap seems to be closing. FanDuel raised about $86 million, including about $70 million from Karlani Capital and KKR.
DraftKings raised $41 million from an impressive collection of investors, including Atlas Ventures, Redpoint Ventures, GGV Capital, and the Raine Group. In the six months since, that amount has grown to $75 million.
Fanduel Press StatementJustine Sacco, a spokesperson for FanDuel, gave a pat answer when asked about her company's latest round of fundraising. Sacco said, "I don't know of a startup that wouldn't want to raise $100 million at a $1 billion valuation."
Bringing Disney into the fold would be a huge coup for DraftKings, both for the pure capital investment and the alliance it would being with ESPN. If the deal happens, DraftKings would be well-poised to surge ahead in the overall competition with its previously more successful rival.
About Daily Fantasy Sports
Draftkings and FanDuel only began operations in 2008 and 2009. Daily fantasy sports sites is an outgrowth of fantasy football and fantasy baseball. In traditional fantasy sports competitions, local team owners join with friends for yearly or seasonal competitions. Winners play in a year-long regular season format, then battle it out in the playoffs for prize money, trophies, and bragging rights.
In the daily fantasy sports industry, gamblers bet on one-day competitions by filling out a roster of players from multiple games, matches, or contests. It skirts sports betting rules, because it isn't a wager on one contest, but many of them. Lawmakers did not want to offend the 30 million to 40 million American voters who play fantasy sports every year when they passed the UIGEA into law, so such betting was given an exemption.
FanDuel and DraftKings exploited that loophole to create billion-dollar businesses, essentially bringing in sports betters in a different form. If ever the federal government considers changing the laws, powerful interests like Disney, NBC, ABC, ESPN, USA Today, and Sports Illustrated (all vested in the industry) are going to be powerful allies for the DFS services.
Disney's impending partnership with a sports gambling company is ironic, given the vehemence the family-friendly company has opposed gambling initiatives in its home state of Florida.
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