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The companies have been under intense scrutiny, and might combine to ward off legal challenges
On the same day that we saw one of the biggest, and most potentially consequential, acquisitions in years, it may have been easy to overlook another potential deal that is currently in the works.
The daily fantasy sports space has been dominated by two companies, FanDuel and DraftKings, with few others making much of a dent or impact. Now it looks as though the two are potentially going to join forces, according to a report out from Bloomberg on Monday.
The merger talks are currently ongoing, and no final transaction has been agreed upon. In fact, the deal may still fall apart.
This is a case where both companies involved with the merger are very popular, and lucrative. FanDuel has over 12,000 leagues open every day, with over $10 million in real cash prizes paid out every week. The company says that it now represents 65 percent of the daily and weekly fantasy sports market. In 2014 the company paid out more than $560 million to users and generated $57 million in revenue. The company has raised $363 million in funding.
DraftKings, meanwhile, currently has over one million users, and several hundred thousand monthly active users, and its growth can be seen in how much it has been giving out in prizes: In 2012, there was $5 million given out, a number that jumped to $45 million in 2013. That number jumped to around $300 million in 2014. The company has raised $445 million in venture funding.
There are two main reasons the companies might merge, First is that they would stop spending so much to compete against each other (the two companies have reportedly spend hundreds of millions each on ad campaigns, which resulted in some oversaturation).
More importantly, it would allow them to combine resources to weather the unfriendly environment the space has been dealing with since last year, ever since New York Attorney General Eric Schneiderman launched an investigation into whether the companies committed fraud after a DraftKings employee named Ethan Haskell inadvertently admitted that he had bet on FanDuel using insider information on NFL lineups before they had been publicly posted. He won $350,000 on the site.
Both companies responded by banning their employees from playing in daily fantasy leagues, along with creating advisory boards to help them sort through legal matters, but Schneiderman continued his persuit and, in December, a judge in New York banned both companies. That decision was suspended the same day, but both companies ceased operating in the state in March.
Other states have since followed suit, and 15 of them currently some type of legislation to regulate, or ban, fantasy sports, including California, Florida, Michigan, New Jersey, Pennsylvania and South Carolina. Fantasy sports has also been challenged, most notably in New York, in 11 states, and there are also five states that have banned it completely: Arizona, Iowa, Louisiana, Montana and Washington.
Most recently betting on fantasy sports was banned in Idaho, though the companies are still allowed to offer free leagues in the state.
The scandals have taken their toll, not only on the space in general, but on the individual companies as well. Both of them were once unicorns, valued at over $1 billion, but, according to what sources told Bloomberg, those have now been cut in half.
Perhaps the belief is that a market that is shrinking can only handle one company, not two, and that it would be better to combine than to let one of them die.
"These rumors have existed for as long as both companies have been in operation. We don't comment on speculation," Femi Wasserman, VP Corporate Communications at DraftKings, told me when I reached out for comment.
FanDuel would not comment on the report.
(Image source: adweek.com)
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Hubdub Ltd is a VC funded start-up based in Edinburgh and San Francisco that aims to be the world’s largest developer of premium social games for sports fans. Its main product, FanDuel, transforms traditional fantasy sports ($1bn, 30m people market) into an instant gratification daily game where users win cash prizes every day. It is played on FanDuel.com, via white label partners such as Philly.com, and in future on Facebook and mobile.