Scott Longley - Disney Shows Daily Fantasy Sports is No Mickey Mouse Market
Scott Longley, Editorial Director of Regulus Partners, takes a look at the turmoil in the dream sports market triggered by last week's arrival of Disney.
News reports that the Walt Disney Company was preparing a $250m investment in DraftKings set the seal on the rumours that had actually been running around the world of dream sports that the owner of the ESPN sports network was about to put its own stamp on the nascent market.
According to the story in the Wall Street - to date the only source of information on the yet-to-be-announced offer - the investment will value DraftKings at just under $1bn. This drastically raises the stakes for the DFS market in general. The last time DraftKings went to investors was in August in 2015 when it raised $41m in a series D funding round. This was trumped the following month by DFS market leader FanDuel which tapped its financiers for an additional $70m in a series C financing round.
The size of the Disney investment - if it occurs - modifications the perception of the worth of the DFS market as far as investors are concerned but it isn't simply the valuation that was notable. According to the report the deal also commits the second in the everyday dream sports market to a whopping $500m in ad invest on ESPN alone over the next 3 and a bit years.
To put this costs commitment into perspective this is higher than the advertising and marketing expense of the entire of the DFS market in 2014, which Adam Krejcik, expert at Eilers Research, estimates to have actually been around $70m.
For all the enjoyment generated by the news of the proposed Disney financial investment and the concomitant marketing project, DFS is still a fairly little market in revenue and in the meantime an efficient duopoly. According to Eilers Research, FanDuel achieved incomes in 2014 of $57m while DraftKings notched up $30m and the remaining market participants struggled to make $3m between them.
No surprise, then, that some sceptics have actually questioned the $500m ad invest figure. One market insider went as far as to recommend that if true, such a spending dedication makes it almost unavoidable that DraftKings will be looking for another round of funding quicker rather than later on.
But the headline figure does raise problems for any potential new entrants, consisting of Amaya and the other name frequently tipped as waiting in the wings, Yahoo. "The advertising deal that DraftKings is apparently going to finish with ESPN essentially sets the bar in regards to just how much cash you will need to invest to effectively complete versus the big guys in the US in 2015/16," says Krejcik.
He explains that PokerStars invest on consumer acquisition worldwide in 2013, the last full year before the Amaya buyout, was $180m. "We think Amaya/PokerStars would likely require to spend a minimum of US$ 100m in year one to be competitive, which would be exceptionally dilutive to its incomes," he states. "They certainly have the capital, balance sheet, and facilities to go head-to-head with DraftKings and FanDuel, but it comes down to whether management wants to sacrifice margins in order to access to this brand-new market. We anticipate Amaya to take a much more determined and conservative approach to DFS."
The impression of connection
In a teleconference with financiers at the statement of Amaya's 2014 results, president David Baazov specifically made mention of the 86 million total registered PokerStars gamers, recommending they were a prepared market for a DFS offering. "A great deal of the US players that were formerly PokerStars players wish to see us introduce fantasy sports," he added.
But the claim of a big poker/DFS crossover capacity is disputed by those on the inside of existing DFS operators. One source suggested there was the "visual fallacy of correlation" between DFS and poker, recommending that at most 5% of the existing DFS gamer pool had actually played online poker at any point online. "The individuals who play fantasy are sports fans," states one DFS insider. "They desire to view sport once they have actually gone into the competitors. They will see six hours of sport, generally. The mentality is various."
What is unquestionably real is that PokerStars has the ability to construct a competitive DFS platform. But with Baazov claiming last week that his business would be up-and-running with its own DFS offering before the start of the next NFL regular season, it would suggest the company will need to pursue the second of the "parallel tracks" discussed on the call, that of "strategic acquisition".
Says Krejcik: "Amaya is really smart when it concerns M&A. I'm not sure if it understood all of the information relating to ESPN/DraftKings, but it made it known that it was looking at acquisition targets in this sector, so analyze that as you will."
DraftKings and FanDuel control near sufficient 90% of the DFS market between them. In this sense it resembles the car-sharing market where Uber and Lyft are competing for supremacy. But still in DFS there are at least 20 more business in the minors which Amaya may look at in order to enter the marketplace. While the cost of completing will still be steep, the price of entry might not be all that expensive if all that was needed was a platform from which Amaya might develop on.
Amaya aside, the next huge news from the DFS sector is likely to come from FanDuel which is rumoured to be near to securing its next round of financing, this time with PE clothing KKR, and is anticipated to value the company at around $1.5 bn. "That will offer it with a war-chest to go head-to-head with DraftKings," says Krejcik.
For those that follow the world of VC investing in largely US-based tech companies, this is unicorn area - business that are worth over $1bn pre-IPO. Appropriate, perhaps, because fantasy sports is extremely much a form of protected types in the US, exempt from UIGEA, for example, and particularly legal in all however a handful of states. But while the leisure activity itself may not be classified as betting, those that are fronting up the cash to capture market share are quite punters of the high-roller range.