On paper — and fantasy sports fans know all about great matchups on paper — the prospective merger of FanDuel and DraftKings looked tantalizing. Naming rights aside (FanKings? DraftDuel?), uniting the fantasy sports powerhouses screamed dynasty — and control of more than 90 percent market share. LeBron James joining Chris Bosh and Dwyane Wade on the Miami Heat? That was tiddlywinks by comparison.
Then in July, the Federal Trade Commission sued to kill the FanDuel-DraftKings deal. And with the swipe of a regulator’s pen, the two would-be teammates stood on the cusp of becoming bitter sporting rivals in quest of that ultimate winner’s cup: the initial public offering.
Like ball clubs that keep their tactics under wraps, FanDuel and DraftKings could make the move to become public investments any time they so choose. And that has pundits, experts and prospective investors waiting to see what happens next.
Make no mistake: Fantasy sports, once the stuff of frat boys scribbling pro jock names on damp bar napkins, is now the serious stuff of very big business. According to Peter Schoenke, chairman of the Fantasy Sports Trade Association, the industry attracted 59.3 million players this past year. That’s triple the 19.4 million in 2007 — and almost 120 times the 500,000 in 1988.
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“It has grown to a $7.2 billion industry,” Schoenke says.
FSTA figures also show that players spend an average of $556 on fantasy sports — an almost 600 percent increase over 2012.
Given that kind of astronomical expansion, it’s no wonder Schoenke says he’s “very optimistic” about the future. He acknowledges that “companies in the daily fantasy sports space need to continue to innovate and refine their business models.” That noted, “I’m confident with the growing consumer interest in their product the segment will have many successful profitable companies.”
Consider that DraftKings, founded in 2011, is powered by more than $700 million in venture funding from some 15 companies. These include Major League Soccer, Major League Baseball and the National Hockey League, says Christopher Ma, director of the George Investments Institute at Stetson University in DeLand, Florida.
Meanwhile FanDuel, founded in 2009, saw revenues jump from $57 million in 2014 to $170 million in 2015. Its backers include Google Capital and Time Warner (NYSE: TWX).
“The fantasy sport industry,” Ma says, “is not a fantasy industry.”
One secret to the big growth lies in establishing market share via “mindshare,” says Andrew Brandt, executive director of the Moorad Center for the Study of Sports Law at Villanova University in the Philadelphia area.
“There was method to their madness; they separated themselves from the other companies,” Brandt says, “They had to know that the heat would come, in the form of state regulatory action, but by that time their market share was established.”
But some insiders take a cautious view of the sector — and one has a pretty impressive record as fantasy sports guys go.
“Customer acquisition cost is very high in sports gaming, a risk for a public offering. There is value creation, but I suspect they’re more likely to be sold than go public,” says Dan Orlow, founder of Game Sports Network.
Orlow’s resume includes work on Capitol Hill, a payments economist stint with the Federal Reserve of New York and success as a machine learning entrepreneur.
Orlow has a law degree, and points to one possible time out for fantasy sports: a Supreme Court review of sports wagering scheduled for later this year.
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“The rate of growth,” he says, “seems to have peaked.”
To the sports wagering question, Orlow questions the connection between the fantasy marketplace and the major league organizations of sport.
“There is some sort of inherent contradiction in the fact that professional sports — which were opposed to gambling of any kind for so long — are involved with these companies,” he says.
“FanDuel and DraftKings have established a position based largely on a ‘loophole’ in the Unlawful Internet Gambling Enforcement Act, which technically allows online fantasy sports to exist,” says Joseph Mahan, associate professor and chair of the sport and recreation management department at Temple University’s Fox School of Business in Philadelphia.
One expert is betting against fantasy sports, if you will.
“The race to go public will be a short one,” says Derrick Morton, CEO of Seattle-based FlowPlay, a developer of browser-based virtual world tech and social casino games. “Ultimately, investors are looking for a return on their investment. Both DraftKings and FanDuel have already proven to be unprofitable, not to mention leveraging a business model that is legally questionable, so it’s unlikely that potential investors would see value in either company.”
DraftKings and FanDuel, he adds, “are suffering from the new trend to grossly overinflate the valuations of tech startups. … Cloudera ( CLDR) and Snapchat ( SNAP) are great case studies for the type of IPO either company would experience.”
At least one pioneer in the arena points to other possibilities.
“While FanDuel and DraftKings may ultimately go public, it’s also possible that these companies will find alternative strategic opportunities,” says Christopher Russo, managing director at Houlihan Lokey, a global investment firm. Russo launched pro football’s first fantasy football games on NFL.com in 2000.
And of course, there is always the sporting question of expansion “fanchises” offering different games and live events.
“There is much room for innovation and new competitors in the fantasy space,” Russo says. “While some view the industry as simply FanDuel and DraftKings, the reality is that many other companies participate in the overall fantasy space via a range of business models and products.”
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Until then, and with a maze of differing state regulations, “we almost certainly will not see a window for a public offering (in fantasy sports) until there is critical mass on clear rules and regulations,” says Rob Phythian, founder and CEO of Fanball and based in Minneapolis. “However, the repeal of the Professional and Amateur Sports Protection Act of 1992, and new laws that incorporate legalized sports betting and fantasy sports could spark enough growth to support an IPO.”
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Is It Time to Bet on Fantasy Sports? originally appeared on usnews.com