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Fan Duel/Draft Kings merger would be a mistake




The gambling world has been abuzz the last couple of weeks regarding a rumor that DraftKiings and FanDuel may be preparing to merge in an effort to cut costs. . .

The gambling world has been abuzz the last couple of weeks regarding a rumor that DraftKings and FanDuel may be preparing to merge in an effort to cut costs. According to a Bloomberg article, the two daily fantasy sports (DFS) companies have been talking about a merger for some times but those talks picked up in the last three months as revenues for both companies have declined while advertising costs increased. The companies were apparently valued at over $1 billion last year but that valuation has been cut as a result of the DraftKings scandal and the consequential requirement for the companies to withdraw from several lucrative markets, including New York, Texas and Illinois. According to the unnamed source in the article, management at both FanDuel and DraftKings believe by merging it will allow them to use synergies, thus cutting down on staff, but most importantly they will not need to advertise as much since a single company wouldn't have to spend big  dollars to lure new customers, since there would be far less competition

There's several reasons why this merger could be troublesome.

First and foremost, the fantasy sports companies have completely different mindsets.DraftKings Fan Duel merger FanDuel has always been the conservative company that has tried to avoid controversy at all costs, while DraftKings has been the more insurgent company willing to take risks. Nigel Eccles, the CEO of FanDuel can be credited with trying to be completely transparent and ensuring that FanDuel does not violate any provisions of the carveout in the Unlawful INnternet Gambling Enforcement Act (UIGEA). For example, according to the rules regarding fantasy sports, the wagers must involve at least two different games or sporting events, so FanDuel has stuck strictly to football, basketball, hockey and baseball and they have set up partnerships with the NBA and some NFL teams. DraftKings, on the other hand, decided to challenge that rule by offering golf, NASCAR, MMA and even e-Sports, suggesting that because those sports involve multiple periods (i.e. golf is played over 4 separate days, NASCAR occurs over many laps, MMA occurs over several rounds etc.) and because each team/player is independent of each other, that offering those sports is allowed under the law.

Jason Robbins, one of the founders and CEO of DraftKings can be credited with the novel approach but he was also smart. Robbins realized that there was little chance the company would be challenged by legislators for offering non-traditional sports so after conducting some research from their clients who indicated they would play them, they decided to offer the expanded fantasy sports menu, and let the chips fall where they may. At the same time, they partnered with NASCAR and MMA to ensure they would get the support if they needed.

Aside from the sports offered, the companies also have had a completely different viewpoint when it came to withdrawing from questionable markets.

It seems whenever the Attorney General from a state objected to DFS being offerred there, suggesting it violated anti-gambling laws, FanDuel almost always was willing to withdraw immediately, while DraftKings was willing to wait. Even in the case of New York, FanDuel immediately withdrew its services from the state, while DraftKings continued to offer their product to New Yorkers until a court decision was made. Eventually DraftKings withdrew as well, but only when they knew it was worth it to them in the long run. So how a risk taking company and a conservative company could provide a synergy when it comes to these issues is questionable.

The second reason the merger would make little sense is that the main reason they seem to be anxious to get together (the number of states that are demanding DFS sites withdraw, thus eating into revenues) could soon be a moot point. As was pointed out in my last article, almost every state in the U.S. has some sort of legislation on the docket relating to DFS and it's quite conceivable that over 40 states could have legalized DFS within the next 2 years. While the companies are similar there's no question that there is room for both in the industry and players seem to like one site or the other for a different reason. Moreover, with two strong sites it creates a form of barrier to entry the same way that the co-existence of PokerStars and Full Tilt was a deterrent to other sites entering the U.S. online poker market. If PokerStars and DraftKings became one, then with only one company at the top, Yahoo and various other sites could beef up their advertising and marketing figuring that they could make an impact far more easily against one site then 2 behemoths. Of course both companies could continue to operate individually under one management but that would defeat the purpose of merging in the first place.

...one can expect that the biggest losers will be the players themselves...

That leads us to the third problem with the merger – anti-monopoly laws.

DraftKings and FanDuel make up almost 95% of all DFS in the United States so it's uncertain whether the Department of Justice or Federal Trade Commission will even allow the merger to go through, but if it does the United States Anti-Trust law will demand fair competition and one can expect that other companies led by Yahoo will increase their market share in an effort to guarantee that there is fair competition and the FTC will ensure the new merged company abide in any format the FTC demands. Some analysts believe that the FTC will have no interest in this particular instance since it's online gambling, but as we have witnessed many times in the past the FTC takes a very hard stance when they believe a company is effectively operating as a monopoly.

There are some other issues as well, especially with financiers and the question as to whether venture capitalists would be interested in a merger or whether they would want to continue to back an independent company. There are also some concerns about differing technologies. Of course there are a lot of positives for the businesses with a merger, mostly cutting staff and lowering acquisition costs, but the negatives definitely outweigh the positives.

Without question, however, if there is a merger then one can expect that the biggest losers will be the players themselves. As has been witnessed with online poker and sports betting when there are multiple sites offering similar products there's an incentive to increase the payout to the consumer to win their patronage. In the heyday of offshore sportsbooks, bonuses were rampant, vig was cut way back and the number of sports offered was quite large. In the early 1990s it wasn't unusual to see 120% signup bonuses, 10% rebates on losses and very generous affiliate programs. After the UIGEA was passed, however, when manty top online sportsbooks left the U.S. market, it all changed. Sportsbooks that continued to cater to Americans realized there wasn't a need to be as generous to players so they increased vig, cut out sports they deemed were losers for them and reduced all reload or signup bonuses, while increasing play through requirements. And most players nowadays will tell you that customer service at these sportsbooks has become less friendly and many managers act as if they are doing the customer a favor by allowing them to bet there. And with poker, before Black Friday, PokerStars and Full Tilt ensured that the rake was low and incentives were high to lure new customers and convince them to play there rather than at other sites, like Absolute Poker or any other real competitor. But once they left, the remaining poker sites immediately increased their rake and PokerStars even raised their rake and cut bonuses to existing customers in non U.S. markets.

In the last few days management at both sites have started downplaying merger talks possibly because of the change of heart in New York. For the sake of DFS players let's hope it was all just a rumor and the merger doesn't take place.

Read insights from Hartley Henderson every week here at OSGA and check out Hartley's RUMOR MILL!