If you interacted with any form of sports media in the last week, chances are your ears are still ringing with the promises of million-dollar paydays from DraftKings and FanDuel. DraftKings and FanDuel are Daily Fantasy Sports (DFS) sites that allow you to choose a lineup of professional athletes, earn points based on their statistical performance, and compete against other players’ lineups — for money. They’re essentially sports gambling websites, and they’re engaged in a customer-acquisition arms race that has resulted in an unprecedented deluge of sports advertisements.
If you felt like the commercials were everywhere, you weren’t imagining it. According to Awful Announcing, DraftKings was the #1 TV advertiser the week ending Sep 9 with $23m spent, while FanDuel was #7 with nearly $11m.
So where is this industry headed, and can either of the major players win? We’ll look at legality, then strategy.
How is DFS legal?
Daily Fantasy Sports are legal because they are categorized as ‘games of skill’ that do not depend on the outcome of related sporting events. However, after getting everyone’s attention the last two weeks, the legal footing for DFS may soon be under Congressional review.
How do DraftKings and FanDuel make money?
So far, neither is profitable. They are intentionally reinvesting revenues for growth (via ads). DFS sites earn money by skimming an industry-standard 9% of the entry fees into their contest. It’s a simple equation: more players, more games, more revenue — hence the customer acquisition barrage.
Got it. So what happens when they’ve acquired the available customers?
The industry will likely encounter enduring challenges even if its legal status is upheld.
As McKinsey & Co. pointed out, Daily Fantasy is a game where a small number of skilled players feed off a high volume of casual fans. Over 95% of players are expected to lose money, while the top players dominate. It’s sharks eating minnows.
This means that DraftKings and FanDuel could be in big trouble once they saturate the market and run out of new customers. Rational players will grow tired of losing money on Daily Fantasy and quit playing. It’s very possible that the peak period of revenue for DraftKings and FanDuel will happen in the next 3–4 weeks when trial is highest and we haven’t yet broken our TVs from seeing the ad 475 times with these guys winning a million dollars. Deep breaths.
How can they keep customers from quitting the site?
The company that wins will build sticky customer relationships that survive the inevitable wave of churn. Customer stickiness will come from two things: the chance to win money, and the ability to interact socially.
The best solution combines both of these tenets. DFS sites need to invest in delivering a user experience that makes it seamless and enjoyable to play against your networks — office pools, families, friends. It could be similar to when you get a March Madness pool organized, only easier to do week in and week out. It’s safe to assume that groups have similar ‘skill’ for DFS, so they won’t win or lose enough to ruin the experience when playing against their networks. The camaraderie of sharing close calls with friends also makes it more fun.
So who can pull this off and ultimately win?
The answer may in fact be neither DraftKings nor FanDuel. Who’s best equipped to win in the space? The company that already knows your sports consumption and Fantasy sports habits. The ones writing the content suggesting players and delivering the TV analysis. The owners of the TV rights we’re betting on. We’re talking of course about ESPN.
ESPN, owned by Disney, has an exclusive advertising deal with DraftKings that pays ESPN $250m over two years but does not include any investment in DraftKings. According to its 10k filing, Disney had an operating income of $7.3b last year from its Media Networks (ESPN, ABC, Disney Channels, A&E). Why haven’t they either rolled out their own DFS solution or just purchased DraftKings or FanDuel, both of which are valued above $1b?
Our best guess: why fork over a billion for DraftKings, which earns ESPN $125m annually, when the entire business model could be deemed illegal? ESPN can wait it out and pick their moment to enter. They are already so ingrained in the entire Daily Fantasy Sports ecosystem by holding rights and providing content & analysis, that the day they decide to roll out their own solution is the beginning of the end for one or both of DraftKings and FanDuel. It’s not like the software is hard, and ESPN has every other competitive advantage.
In summary, if we were running DraftKings or FanDuel, we’d continue this customer acquisition binge, invest heavily in social applications that facilitate customer stickiness, and look to sell out while the valuations are high, the industry is legal, and your biggest competitive threat is still playing nice.