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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.
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ANALYSIS
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IN-DEPTH 11 October 2019
Landing on a monopoly

Matthew Enderby asks who benefits from a monopoly-driven gambling market and if there is any point in maintaining one.

It can appear anti-capitalist, like the government wants total control. Players are ushered to a single, often state-run operator, and only one supplier is contracted to provide the platform, making the gambling market seemingly easier to manage. But does that hold true? When monopolistic gambling markets are enforced, who is the winner? Do the players benefit from what is meant to be a safer environment? Will the public perception of gambling be more positive than in an open market?

To answer these results-based questions, the motivations behind a monopoly-driven market need to be looked at first. The initial question is always: Why? A few quick answers spring to mind. It might be testing out gambling and observing how its country responds once the option to have a bet is made legal and available. With only one operator in place, player protection seems like a reasonable motivator.

It would be easier to keep track of addiction and factors leading to problem gambling as all the data, theoretically, could be accessed in one location. The main motivator however, is revenue. With the market dominated by a single legal operator, all of the country’s gambling revenue will flow through it and to the government. But for this to be effective, there cannot be any offshore operators present.

The Swedish gambling market was opened up at the start of the year, and private companies were free to apply for a license. The reasoning for this, according to state-run operator Svenska Spel, was to achieve fair market conditions and bring order. Life before the update in legislation was not entirely different to what it is today. Despite being closed to private companies, Patrik Hofbauer, CEO of Svenksa Spel, says the previous market was only a monopoly on paper.

He tells Gambling Insider: “Around 90% to 95% of the companies now operating with licenses in the Swedish market have been here for more than 10 years, so we are already used to competition.”

Offshore operators were present in Sweden for more than 10 years. They did not pay tax and found ways to navigate around the law. Up until the start of the year, there were three legal operators. Svenksa Spel handled betting, ATG specified in horseracing, and Postkodlotteriet managed the lotteries.

A MediaVision study from October showed 60% of Swedes aged between 18 and 74 had a registered account at the end of June 2018; a 12% rise year-on-year. Roughly 58% of these accounts were with one of the three state-run operators.

On the surface, this seems like a success story for the monopolistic market, but where are the rest of them registered? Nearly half of Sweden’s gamblers, 42%, were registered with international operators. These companies held no Swedish license or authority to offer a service in the country.

What’s worse, where the monopoly is concerned, is 60% of all new accounts registered within the 12 months leading up to 30 June were with these businesses. With so many players setting up with unregistered companies, the idea of a monopoly making gambling safer, with upheld regulation, is incorrect.

Now the market has gone through its changes and levelled out, Hofbauer finds order is in place and player protection has improved. He says: “We now have a level playing field for gambling operators, increased revenues for the state, and clear rules to protect customers against excessive gambling thanks to stronger and better consumer protection. It has ultimately benefitted the Swedish customers, which is the biggest win.”

The move away from a monopolistic approach has not exactly produced a goldmine for other operators, and certainly not for Svenksa Spel. A look at its first quarter results shows a 6% year-on-year decline in revenue to SEK 2.05bn ($197.4m). Its land-based operations, Casino Cosmopol & Vegas, fell 17% to SEK416m, while lottery dropped 6% to SEK 1.1bn. It reported SEK 544m in revenue from sport and casino, a 4% increase. Operating profit for the quarter decreased 55% to SEK 519m. Svenska Spel paid SEK 401m in gaming taxes for the quarter.

While it won’t be impressed with revenue for Q1, the operator stressed one of the biggest challenges in the transition was launching three new products. Hofbauer says: “Business wise, it is positive that we now can offer our customers products like online casino and horseracing, and also offer more competitive pricing."

Improved pricing is another reason Swedish customers will be happy with the change in legislation. So who exactly has been benefitting in the monopolistic structure besides state operators making easy tax revenue? Suppliers might have the most to gain from a monopolistic market. Being selected by the government to provide technology solutions for its online or land-based operations signifies trust. Suppliers will have to earn that trust by proving their platforms can generate the most revenue for the government’s operator.

The appeal behind branding in this case is also undeniable and the opportunity for a supplier to be the leading face is not one to be missed. Building brand recognition in a country where you are the only brand is obviously much easier. The competition exists, but only through unlicensed companies that will not want to attract further attention to their operations in that specific location.

In April, Kambi extended its contract with Bulgaria’s National Lottery JSC, parent company of the Moldovan National Lottery, to supply online and retail sportsbook. The operator is expected to enter Moldova in the summer, where a monopoly is in place.

Kambi CCO Max Meltzer spoke exclusively to Gambling Insider after the deal and said: “From a technological standpoint and user experience, it will be like going into an ATG shop in Sweden right now. We are really excited to say this is not a monopolistic situation where players will get a bad experience from a bad solution."

The sports betting supplier was keen to emphasise that players in this monopoly would not be neglected as a result of the structure set out by the government and it would supply the same level of technology as it would to any market across the world. Only time will tell if Moldova’s bettors do receive this standard of solutions. But what we do know is, with a lack of legal competition for market share, the Moldovan National Lottery will not be pushing its supplier as much as it would have in an open market, to develop niche solutions.

The evidence is stacked against monopolies and it is clear governments still using them are doing so in a misguided attempt to stay in total control and generate state revenue. The irony is the complete opposite is true. More state tax is made in the open market and players are being protected better when operators are acting under approved licenses. Drop the monopoly, it’s good for nobody.

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