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IN-DEPTH 23 May 2019
Is DFS under threat?
Industry experts help Tim Poole examine the future of daily fantasy sports, with legalised sports betting now exerting its influence over several markets in the US
By Tim Poole

You’ve just bought a Ferrari. The engine roars as you race past traffic like it’s not even there. But, as you cruise down the freeway, you notice an eye-catching advert: a new Lamborghini, available now in limited states only.

A similar dilemma faces daily fantasy sports (DFS) players following the repeal of the Professional and Amateur Sports Protection Act (PASPA) in May. Customers already have their Ferrari (DFS). Are they tempted by that Lamborghini (sports betting)?

For operators, it’s a question of whether Lamborghini sales will ultimately overtake those of the Ferrari. The DFS industry has already faced numerous challenges since its inception, namely from regulators keen to strike it down as a form of illegal gambling. Ironically, the legalisation of regulated sports betting will help on that front – but it’s still easy to interpret as a competitor.

According to a 2017 Fantasy Sports Trade Association (FSTA) study made available to Gambling Insider, there are around 59.3 million fantasy (DFS and traditional league format) players in North America. This data was extrapolated from around 3,000 respondents. Of these, 56% additionally play mobile/social, lottery or casino games and 55% already take part in sports betting. In total, the industry is worth an estimated $7.22bn, with over $1bn in ancillary spend.

The research highlights the fantasy industry’s stability, but asks how it can grow and acquire more customers. It also asks what the next disruption will be: how about legalised sports betting?

So far, major operators like FanDuel have kept their cards close to their chest. The Paddy Power Betfair-owned firm signed a partnership agreement with the NHL in November, both as the league’s official DFS and sports betting partner. As an example of gaming’s already-apparent influence, though, the FSTA has already rebranded as the Fantasy Sports & Gaming Association (FSGA). Justin Park, CEO of analytics provider RotoQL, believes such developments promise a happy co-existence. He tells Gambling Insider: “I think DFS and sports betting can definitely co-exist. There was early data from FanDuel saying they didn’t see any cannibalisation between sportsbook and DFS in New Jersey.

“They are different anyway; DFS is very analytical and data driven. The types of people really enjoying that get a utility outside of just betting. There’s overlapping utility, but it’s different.”

Chris Grove, Managing Director, Sports & Emerging Verticals at research firm Eilers & Krejcik Gaming, agrees. He sees DFS and sports betting as two standalone verticals. Like that Ferrari, DFS has the advantage of a “larger addressable market.”

“Think about the casino floor: Blackjack tables can live alongside slot machines,” he explains to Gambling Insider. “Sports betting and DFS are two related but distinct products that sit at the intersection of money, predictions and sports. People play each for different reasons. The addressable market for DFS will remain quite a bit larger in the US than sports betting for the near term.”

But there is no denying the introduction of legalised sports betting outside Nevada will impact the composition of the DFS industry. Even if only a handful of states have regulated so far, Sportradar’s Vice President of Legal and Regulatory Affairs, Jake Williams, predicted four to eight states will "probably be accepting bets" in time for the next NFL campaign. There are bills constantly being put forward across different states.

The two biggest DFS operators, FanDuel and DraftKings, have made strong, early moves into sports betting markets. Although he feels this will not necessarily hurt DFS, Grove acknowledges the duo will be “more motivated to grow DFS as a way to solidify their position in sports betting.”

Park echoes that sentiment, remarking: “I think DFS is ultimately going to be a cash-generating business line for DraftKings and FanDuel. I suspect they will allocate more resources towards sports betting. I think DFS has hit some level of maturity, so I don’t think the industry will be growing that quickly.

“There’s still a very loyal customer base that will continue playing. It’s about catering to that customer’s needs and taking the margin from DFS to finance expansions for sportsbook.”

Performance Predictions CEO and board member of the FSGA, Adam Wexler, sees the companies operating “two different businesses.” In other words, they won’t be forgetting DFS any time soon. He tells Gambling Insider: “Even while many of their resources will be dedicated towards building their sports betting products, FanDuel and DraftKings plan to rely on their legacy fantasy product to generate revenue over the next few years.

“As a veteran entrepreneur, I’m a big believer in maintaining a focus if you want to out-execute the competition. FanDuel and DraftKings are seemingly operating two different businesses – but ones that share a common audience.”

Wexler, however, admits investment is a problem for the DFS market, trailing back to before PASPA was struck down. It’s an issue he can’t quite get to grips with.

“I can understand why the investment community may have got cold feet when regulators came into the industry in 2015,” he says. “But, once state after state implemented fantasy sports-specific laws over the last few years, why would the investment community not come back in?

“Did FanDuel and DraftKings ruin their impression of the industry? I would hope and assume not. The fact remains more than 50 million people play fantasy sports in the US. The consumers never left. For the time being, the fantasy industry has basically settled with approximately 20 regulated and 20 unregulated jurisdictions – that's a 40-state digital footprint for a real-money gaming category.”

The year ahead could offer a number of key indicators for the future. Will the market remain steady? If the number of states offering sports betting doubles, will operators still prioritise DFS as heavily?

As our analysts have so far argued, early data points to the affirmative. But a question RotoQL CEO Park poses is: how much will sports betting have increased and DFS decreased in three years’ time?

“I don’t see a lot of new entrants and a lot of investors making bets in DFS,” he explains. “What I do see is a lot of players and investors who were educating themselves in DFS on the sidelines now moving into betting.

“There will be more innovation and resources going into the betting side. I think there are a lot of learnings people will pull from DFS. But it’s not where DraftKings are going to be focusing all the time.”

Crucially, Park adds: “I think there will be a natural decay over a 10-year period. Over that timeline, I can see DFS decreasing.”

Eilers & Krejcik is more confident, with Grove stating the company has revised its DFS outlook upward, “thanks largely to the introduction of single-game DFS.”

“The strong New Jersey sports betting numbers will certainly motivate some new companies to jump into the sports betting fray,” he says. “There may be some fantasy-focused companies who now decide to make the shift to sports betting. But I think sports betting ultimately gives more fuel to companies looking at fantasy, as it's a far easier market to enter from a regulatory perspective, while being close enough to ensure you're well positioned to capture upside as sports betting expands.”

For Wexler, 2019 has more to do with an intrinsic growth beyond “the salary cap format.” He says: “In 2019, I expect the definition of DFS to grow beyond its synonymous association with the salary cap format. I look forward to the day the mainstream public, the investment community and more realise DFS means a wide variety of formats.

“That day will come sooner rather than later, especially now there's a spotlight on the legalised sports betting ecosystem and most companies notice the drastically larger digital footprint of legalised fantasy sports.”

Rather than cannibalization, then, the noise coming from the gaming industry points towards more of a merging effect. While it’s clear the future of DFS will be impacted by sports betting, it seems that impact might not necessarily be a negative one.
DISCUSS THIS ARTICLE
IN-DEPTH 16 August 2019
Roundtable: David vs Goliath – Can startups really disrupt the industry?

(AL) Alexander Levchenko – CEO, Evoplay Entertainment

Alexander Levchenko is CEO of innovative game development studio Evoplay Entertainment. He has overseen the rapid expansion of the company since it was founded in early 2017 with the vision of revolutionising the player experience.

(RL) Ruben Loeches – CMO, R Franco

Rubén Loeches is CMO at R. Franco Group, Spain’s most established multinational gaming supplier and solutions provider. With over 10 years working in the gambling, betting and online gaming industries, he is skilled in operations management and marketing strategy.

(JB) Julian Buhagiar – Co-Founder, RB Capital:

Julian Buhagiar is an investor, CEO & board director to multiple ventures in gaming, fintech & media markets. He has lead investments, M & As and exits to date in excess of $370m.

(DM) Dominic Mansour – CEO, Bragg Gaming Group:

Dominic Mansour has an extensive background of nearly 20 years in the gaming and lottery industry. He has a deep understanding of the lottery secto,r having been CEO at the UK-based Health Lottery, as well as building bingos.com from scratch, which he sold to NetPlay TV plc.

What does it take for a startup to make waves in gaming?

DM: On the one hand, it’s a bit like brand marketing; you build an identity, a reputation and a strategy. When you know what you stand for, you then do your best to get heard. That doesn’t necessarily require a TV commercial but ensuring whatever you do stands out from the crowd. Then you have to get out there and talk to people about it. 

AL: Being better than the competition is no longer enough; if you’re small, new and want to make a difference – you have to turn the industry on its head. Those looking to make waves need to come up with a new concept or a ground-breaking solution. Take Elon Musk, he didn’t found Tesla to improve the existing electric cars on the market, he founded it to create the industry’s first mass-market electric sports car. It’s the same for online gaming; if you want to make waves as a startup, you have to bring something revolutionary to the table.

JB: Unique IP is key, particularly in emerging (non-EU) markets. As does the ability to release products on time, with minimal downtime and/or turnaround time when issues inevitably occur. A good salesforce capable of rapidly striking partnerships with the right players is vital, as is not getting bogged down too early on in legal, operational and admin red tape.

How easy it for startups to bring their ideas to life? How do they attract capital?

AL: It depends on the people and ideas behind the startup. Of course – the wave of ‘unicorns’ is not what it used to be. Some time ago the hype was a lot greater in terms of investing in startups, but that’s changed now. Investors now want more detail – and even more importantly, to evaluate whether the startup has the capacity (as well as the vision) to solve the problem it set out to address. That’s not to say investors are no longer interested in startups – they certainly are – but now more than ever, it’s important for startups to understand their audience as well as dreaming big.

JB: To get to market quickly, you need a great but small, team. If slots or sportsbook, the mathematical engine and UX/UI are crucial. Having a lean, agile dev team that can rapidly turn wire framing and mathematical logic into product is essential. Paying more for the right team is sometimes necessary, especially when good resources are scarce (here’s looking at you, Malta and Gibraltar).

Building capital is a different beast altogether. You won’t be able to secure any funding until you have a working proof of concept and, even then, capital is likely to be drip fed. Be prepared to get a family and friends round early on to deliver a ‘kick-ass’ demo, then start looking at early-stage VCs that specialise in growth-stage assets.

How do you react when you see startups coming in with their plan for disruption?

RL: We welcome the innovation and fresh thinking startups bring. This is particularly the case in Latin America, with a market still in its infancy. One area we’d especially like to see startups making waves is in the slot development sector. Latin America is a young market that needs local innovation suited to its unique conditions – especially in regard to mobile gaming.

Operators eyeing the market have Europe‐focused core products, which creates a struggle to work to the requirements of players and regulators. To succeed there, it has become more important than ever to work with those with a knowhow of the local area to adapt products and games to besuitable from the off; we welcome the chance for local talent to develop and grow.

Do you think it’s easier for established companies to innovate and establish new ideas? 

AL: From a financial perspective, yes. It is without a doubt easier for incumbent companies to establish a pipeline of innovation via their R & D departments, as well as having the tools to hand for data gathering and analysis.

But it stops there. Startups hold court in every other way. Not only are they flexible, they can easily switch from one idea to another, change strategy instantly as the market demands and easily move team members around. Established companies know this – and this is why we’re seeing an emerging trend for established companies to acquire small, innovative online gaming start-ups. They have the right resources and unique ideas, as well as the ability to bring a fresh approach to businesses’ thinking.

RL: For me, it’s always going to be established companies. Only with the resources, industry experience and know‐how can a company apply technology and services that truly make a difference. Of course there are exceptions. But when it comes to providing a platform that can be approved by regulators across multiple markets – as well as suiting an operators’ multiple jurisdictions – it is simply impossible for a couple of young bright minds with a few million behind them to get this done.

DM: I actually think it’s harder for established companies. It’s key to differentiate between having a good idea and executing one. That’s where the big corporates struggle most. They’re full of amazing people with all sorts of great ideas but getting them through systems and processes is nearly impossible.

Is it essential to patent-protect innovative products?

AL: It’s a very interesting subject. If we take IT for example – patents can actually become a block to the evolutionary process within the industry. Of course, getting a patent future proofs yourself from the competition copying your concept but, having said that, if you’re looking to protect yourself from someone more creative, smarter and agile, you’ve probably lost the battle already!

In our industry everything is moving faster and research takes less time than the development itself. No matter how good you are at copy pasting, you can’t copy Google or Netflix. The most important thing is not the tech itself but rather its ‘use-case’ – or in other words, does it solve what it’s meant to solve? Competition is healthy and the key to innovation. If you spend your whole time looking behind you, you’ll never be able move forwards.

JB: Tricky question, and one that depends on what and where you launch this IP. It can be difficult to patent mathematical engines and logic, mostly because they’re re-treading prior art. Branding, artwork and UX is more important and can easily be copied, but the territories you launch will determine how protectable your IP will be once patented. US/EU/Japan is easy but expensive to protect in. But China/South East Asia is a nightmare to cover adequately. Specialised patent lawyers with experience in software, and ideally gaming, can help you better.

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