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Sports >> The Playing Field Remains Unsettled for Daily Fantasy Sports

April 11, 2017

After playing defense for most of 2016, the leaders of the daily fantasy sports (DFS) industry made an announcement they hope will allow them to move ahead on offense in 2017. However, mounting legal and regulatory costs might doom them before they can cross the goal line.

Last year, New York passed a law that explicitly made DFS legal and put to rest lingering uncertainty that it might constitute illegal gambling in that state. However, the New York law did not end the debate nationwide, and the two biggest DFS companies, FanDuel Inc. and DraftKings, Inc., continue to try to persuade state legislatures across the country to allow their unique brand of fantasy sports to operate in their states.

Industry commentators cited mounting legal and lobbying bills for both companies as a significant reason the two companies announced a merger in November 2016. But the merger presents a new set of challenges. FanDuel and DraftKings are by far the two largest companies in the DFS field, together accounting for more than 90 percent of the market. The U.S. Department of Justice or the Federal Trade Commission, or both, could choose to scrutinize the deal for antitrust violations. That level of market concentration within an industry historically has resulted in significant regulatory scrutiny.

The DFS industry is on a much different trajectory than it was just a year ago. Earlier forecasts anticipated DFS revenues to reach $2.5 billion by 2020, but recent forecasts have lowered these estimates a hundred-fold. Moreover, it is unclear at this juncture how aggressively the new administration will pursue antitrust matters.

A central issue in analyzing the merger will be defining the scope of the market. FanDuel and DraftKings certainly will argue that DFS is a small portion of the larger fantasy sports and sports gaming market. Even combined, the two entities represent a small portion of the gaming market.

Defining themselves as part of the larger gaming market for antitrust purposes poses its own challenges. They have based their arguments for legalization with state regulators on the premise that DFS should be considered distinct from gambling. A pivot to be considered part of the gaming market could jeopardize those arguments in states still considering whether to legalize DFS. One possibility is that regulators determine, for example, that the market for daily fantasy baseball is different and distinct from daily fantasy football and permit a merger but prohibit the combined company from conducting games in certain sports.

Regardless of how the merger is resolved, the DFS industry will continue to face challenges, including skeptical state regulators and a market whose growth has slowed. Sponsors, marketers and others interested in partnering with DFS providers should be aware of the long term issues facing the industry.

Key Takeaways

  • The DFS industry continues to face antitrust scrutiny and state regulatory challenges.
  • Sponsors, marketers and others interested in doing business with the DFS industry should use caution in the face of ongoing legal uncertainty.