Bud Selig, the former commissioner of Major League Baseball, once warned about the legalization of sports betting and its impact on sports viewership. In a statement submitted to federal court in 2012, he wrote: “Players would not be viewed by fans as exceptionally skilled and talented competitors but as mere assets to be exploited for fast money”.
One year later, the MLB became the first major sports league to enter the daily fantasy business when it purchased a small stake in DraftKings in 2013 (the NBA followed shortly after with an investment in rival FanDuel). DraftKings recently secured $300mn in a funding round lead by Fox Sports, the MLB, the NHL, and the MLS.
Value Creation to Sports Fans: Launched in 2011, DraftKings has revolutionized the overall sports industry with its unique product offering: daily fantasy sports. Legal in nearly all states, daily fantasy sports is a condensed form of traditional fantasy sports, whereby sports fans draft teams based on real athletes in leagues with their friends and compete in a season long competition. Unlike traditional fantasy sports where payouts occur at the end of the season (for baseball that’s 162 games!), DraftKings offers customers daily competitions across 10 sports with immediate payouts. Entry fees range from $1 to $1,000, with the company earning revenue by taking a percentage of each pot. In 2014, they awarded ~$300mn in prizes, which is expected to more than triple in 2015 to ~$1bn.
Value Creation to Sports Leagues: Daily fantasy sports’ rise has completely changed the way consumers absorb sports content. In daily fantasy sports, every second of every game counts regardless of who is playing and what the score is. As a result, fans consume 40% more sports content across all media once they start playing (according to FanDuel). Additionally, they want to watch more “out of market” games as they cease to care as much about their local teams as they do about their fantasy teams (hence the rise of offerings like NFL Sunday Ticket by DriecTV and NFL RedZone). They also want to see the results as they happen, so they watch live games until the end, regardless of the score since “garbage time” is just as important as a nail-biter. Interestingly, according to surveys done by DraftKings, 50% of customers have adopted and gotten into a sport they were not previously following once they started using the site. As a result, daily fantasy sports has significantly increased the value of TV rights contracts for American sports as it has boosted advertising and television viewership. This in turn can be seen as having a direct impact on the valuations of individual teams as well, specifically benefitting smaller markets with smaller viewership.
The growth in fantasy sports is indicative of the value proposition offered to fans and sports leagues. The fantasy sports market is estimated to reach $1.7bn by 2017, according to IBISWorld. In fact, the number of people participating in fantasy sports is expected to hit 56.8mn this year, a gain of 37% from 2013, according to the Fantasy Sports Trade Association. Eilers Research estimates that the daily fantasy sports market will hit $1.18bn by 2020, indicating a CAGR of 55%. These trends bode considerably well for DraftKings’ trajectory.
The rise of daily fantasy sports has threatened the businesses of ESPN and Yahoo, which are the two largest players in traditional fantasy sports. In response, ESPN has entered a partnership with DraftKings, naming the company the official provider of daily fantasy sports games across all its platforms. Yahoo, on the other hand, is attempting to create its own daily fantasy sports platform and directly compete with DraftKings. Time will tell who “loses”.
According the Sal LaRocca, the NBA’s president of global operations and merchandising: “Daily fantasy could not have been possible a short time ago based on technology’s limitations”. That technology has arrived and DraftKings has been one of the big winners in the field. They have a clear value proposition that benefits fans, sports leagues, and advertisers.
Bud Selig was both right and wrong. Sports betting does lead people to care more about winning money than they do about the outcome of real games. However, when it comes to daily fantasy sports, that can only be seen as a positive to sports leagues.