DFS 2.0: The death of the salary-cap era?
Recent movements in the DFS sector suggest operators think the salary-cap format has taken them as far as they can go. EGR NA investigates what will come next
The demise of the salary-cap format is hardly a secret to those in the DFS world. However, the decline was made very evident when in early March it leaked that FanDuel was being lined up for a reverse takeover. The ‘buyer’, as it were, was Platinum Eagle – a special purpose acquisition company (SPAC), essentially created to raise money and buy other businesses.
While FanDuel and Platinum Eagle have yet to comment publicly, there are several clues as to the motivation for the deal. For starters, Platinum Eagles was founded this year by veteran Hollywood executives Jeff Sagansky and Harry Sloan. Upon launch, Saganksy said the firm would be looking to invest in media companies.
“Everything is now moving toward streaming,” Sagansky told Vanity Fair. “Now, we think it’s a very good time to do a media SPAC. With our fourth acquisition vehicle, we will continue to look for companies where we can add value based on our experience, particularly media and entertainment companies that can benefit from the digital disruption that has transformed the business on a global basis.”
In other words, it’s fair to assume the acquirers of FanDuel want the nine-year-old company because of its nascent streaming business rather than its DFS product. And that’s perhaps fair enough given the outlook for each segment. While DFS revenues have stagnated for well over a year now, FanDuel recently agreed a deal to integrate the NBA’s streaming service League Pass into its platform, with more partnerships potentially on the way.
It’s a similar story and plan over at DraftKings, where co-founder Matt Kalish said recently that the Boston-based firm wanted to become a “one-stop shop” for sports streaming. “[Fans] don’t want to have to get eight different subscriptions to a bunch of different products. You’re going off to NBA League Pass and NFL RedZone and all these different places,” Kalish said on the SportTechie podcast.
“So if we can really bring all that together for our players, it’s something that increases the experience tremendously for them. And I think the leagues, teams, media companies see the value in providing a great experience at least for the fans and players.”
See what sticks
FanDuel is undoubtedly pitching a similar vision to potential buyers – and it looks like it’s got at least one bite. “They are in ‘throw-something-to-the-wall mode and see if it sticks’,” says Boom Fantasy CEO Stephen Murphy.
“Clearly, FanDuel is desperate for a sale, and some of the most price-ambivalent targets could be large media companies like Sinclair, Comcast and ESPN. The more they incorporate streaming into their offerings, perhaps the more they believe they can find a suitable buyer.”
But what does this pivot mean for the salary-cap format, and for some of the more recreational formats that have helped firms like Boom Fantasy and Draft grow and attract major investors?
“Salary-cap will likely have a place for the statistical diehards, but it never was going to be the future of US sports gaming, because it isn’t mass-casual enough,” says Murphy. “The winning product will be one that can be played nationwide by sports fans of all skill levels.”
Paul Charchian, the founder of DFS site Fanball, also sees a hard ceiling for salary-cap formats. “The salary-cap era is probably over for everyone but DraftKings and FanDuel,” he suggests. “There aren’t many compelling reasons to play salary-cap anywhere else. Fantasy contest providers will find much more room for growth in differentiated products. Look no further than the success of Draft as an obvious example.”
Of course, not everyone is so bearish on the format. Steve Krombolz, CEO of salary-cap-first DFS platform FantasyDraft, says he foresees a “big future” for salary-cap, albeit with a caveat. “It will get bigger again when there’s potential to add it to offerings from sports betting operators,” he says. “It’s an interesting acquisition product to add to an international gambling operator.”
Krombolz says the impending legalization of sports betting has brought renewed interest the DFS sector, with Fantasy Draft involved in active discussion involving several potential acquirers, although he refused to specify what type of company was inquiring.
Disruptive forces
Of course, it also important to remember what companies are buying when they acquire a salary cap-led operator like FantasyDraft, compared to a more recreational-friendly operator like Draft. Do sports betting operators really want to acquire a database of model-driven prediction experts?
Because in a sports betting market, these players are taking money from the operator rather than each other. On the surface, then, alternative DFS formats are more attractive to existing players, and more attractive to acquirers with one eye on sports betting.
Paddy Power Betfair said recently it was planning to invest another seven figures in Draft, with CFO Alex Gersh adding: “We actually see a very reasonable growth in Draft. We’re very pleased with the performance and we see this as an opportunity ahead of any potential regulation changes to continue to step on the gas and to drive customer acquisition.”
Meanwhile, Murphy says that Boom Fantasy is “doing great”, having grown another 8x year-over-year by “building a product that American sports fans actually want.” “FanDuel and DraftKings acquired nearly 12 million depositors, and by our estimates they have churned through 95% of them,” Murphy adds.
“That means there is now a huge educated market that is desperate for a real-money gaming product that is fun to play. Boom is nicely filling that void and we’re growing rapidly toward profitability.”
New directions
It’s pretty apparent that FanDuel and DraftKings see the direction of the trend too, with both companies introducing new formats like DraftKings’ Pick ’Em, or FanDuel’s free bingo game around big events. Their forays into sports betting and live streaming are also tacit admission that pure salary-cap games cannot sustain a DFS company.
In Eilers & Krejcik Gaming’s base case prediction for 2018, DFS grows at a meagre 2%, with most of the uptick coming from new states regulating – and these aforementioned new products. “The upshot will be a greater diversity of fantasy products, many of which will bear very little resemblance to the salary-cap format that has formed the foundation of the industry for the last five years,” the analyst notes.
The curtain appears to be closing on the first era of DFS, with more recreational products set to take over as perhaps the ideal complement to legalized sports betting. Say hello to casual-centric DFS.