DraftKings – How a fantasy is changing the sports industry

Through daily fantasy competitions, DraftKings is changing the way sports fans consume content.

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.

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6 thoughts on “DraftKings – How a fantasy is changing the sports industry

  1. Bud Selig’s quote begs an interesting question on the value of sports. Should the quality of engagement with fans (i.e. focus on the player’s athleticism and talent) be considered the amount of engagement (dollars spent & time watching)? Either way, I think the leagues and media companies will have to deal with ethical questions and the potential conflict of interests that stem from investments in betting platforms.

    Sports betting also makes it really hard to watch games with people who root for both teams because they are only interested in the individuals whom they have bet on..

  2. Definitely agree that daily fantasy sports will change fans’ engagement with sports in all the ways you mention above. Two interesting outstanding questions for me are –
    1: Who’s going to win within the daily fantasy sports providers? DraftKings and FanDuel are out there, yet their success will continue to attract other competitors to the market (i.e. Yahoo). Both seem to be spending incredible amounts of ad dollars this season to increase users and get as big as possible as fast as possible – is sheer volume what will win the day for these companies, or are there other differentiating factors that will determine the winners?
    2: What is the impact not only on the sports industry but on the gambling industry? Are daily fantasy leagues simply opening a new form of gambling to previous non-gamblers (increasing market size), or are they actually stealing share from traditional casinos or sports books?
    While DraftKings certainly looks promising, it will face a host of new startup and entrenched competitors in the future, and it’ll be fascinating to see how the market pans out.

  3. Fascinating post!
    Sports is the last entertainment content that has to be consumed live (as oppose to all the other things you can watch on Netflix). Thus sports attracts big money from advertisers and gamblers. I wonder if it will have a positive affect on the games that we all love. On one hand it could bring in more money (as we already witness huge TV right contracts). On the other hand it could also lead eventually to selling out game and ruining the sport that we all love.

  4. I am curious what effect this will have on players. If large amounts of money start riding on certain player statistics, will this have an impact on the player’s motivation? Just like how fantasy football creates annoying fans who have little team loyalty as they instead just care about their fantasy team, I wonder if players will start to value their own statistics over the team’s by the same logic. Obviously betting on sports and fixing has always been a problem, but as money pours into solo athlete stats, it could have a large impact on athlete performance, whether it is for legal or illegal reasons. GO SEAHAWKS!!!

  5. It’s amazing how much money FanDuel and DraftKings have pulled in… this market is massive and is blurring the line between fantasy sports and sports betting. Once sports betting is finally legalized and loses its social stigma, I see many innovative markets arising. Can’t wait for a fully liquid sports prediction market that disrupts the existing sportsbook model.

  6. I feel that the daily fantasy sports business model is quite similar to the lottery. It’s legalized betting except it’s not owned by the state like the lottery is. It is a for profit entity that maximizes shareholder’s values. I can’t help but to think if there is any moral hazard concerns that the MLB and NBA have ownership in these daily fantasy sports companies.

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