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.