Drawing dead?

To some inside the industry, DFS has a lot to learn from the history of betting exchanges in the UK. Both industries let their customers pit their sporting knowledge against each other with cash on the line, and both were populated at birth by two main competitors. Back in 2000, Flutter was the world’s first ever betting exchange and the darling of venture capitalists, raising more than £30m ($41m) in funding. However the company that founded the industry was ultimately beaten out by the second firm to the party, Betfair.

Observers at the time said Flutter’s technology was less slick and user friendly than Betfair’s, while company insiders said Flutter management misunderstood what the public wanted from a betting exchange. “They completely got the wrong end of the stick,” one employee said at the time. “They thought people would bet with friends on whether they would beat each other at squash on Friday.”

By the time Flutter switched to pure exchange betting, allowing anyone to bet on anything, most of the £30m ($41m) they raised had gone, and Betfair had become the clear market leader. In 2001 Betfair then bought out its main rival and became the dominant player in the industry.

Joe Brennan, CEO of DFS firm SportAD, argues that FanDuel’s story to date is eerily similar. The firm founded the DFS industry but, having seen its main rival DraftKings surge past it, faces an uncertain future.

In the last three months two of its co-founders have departed to pastures new. Nigel Eccles left in November to tackle a project in esports, and was more recently joined in his new Flicker venture by Rob Jones. In fact, Jones was the last of the original five co-founders to eave the company.

The departures have left FanDuel arguably lacking in identity. “They’re in a tricky spot,” says one DFS executive, speaking off the record. “They really have no growth and no leadership.”

Nigel Eccles and Tom Griffiths, FanDuel Founders, former CEO of DraftDay and now chief executive of social sports business FaceOff. “You lose everything about the business.”
Taking stock

Indeed recent estimates for Eilers & Krejcik Gaming show FanDuel generating around two thirds of the revenues of DraftKings for the NFL season through November. It’s a clear second spot in the market, with the Boston-headquartered firm possessing all the momentum.

“In the technology world, it’s very difficult to become new again once the shine is off,” notes Brennan. And the shine is indeed off. In October 2017, FanDuel’s auditor, Deloitte, raised questions over the company’s ability to continue as a going concern.

The Deloitte report noted: “If the group is unable to obtain additional financing or unable to generate sufficient cash flow from operations, the directors intend to take additional steps to improve its liquidity position through further reducing expenditures.

“However, these uncertainties represent a material uncertainty that casts significant doubt on the group’s ability to continue as a going concern, and therefore its ability to realise its assets and discharge its liabilities in the normal course of business.”

Departed FanDuel founders Nigel Eccles and Tom Griffiths

New CEO Matt King indeed slashed costs with a slew of layoffs and cost efficiencies, and the company claims it will be profitable in Q4 2017 and 2018. However the accepted wisdom is that more needs to be done. DFS is no longer a growth industry, with recent figures from the New York State Gaming Commission showing 2017 revenues for the entire industry at $327m, down from an estimated $350m in 2016. Chief rival DraftKings has arguably shown what it thinks of the future of the DFS market with its recent slew of initiatives to expand the company’s revenue stream beyond DFS.

“Based on the numbers I’m hearing, [FanDuel] is having challenges maintaining even their core business,” says Roberts. “And as player numbers keep dropping off, so does their ability to offer those massive prize pools. And then it’s a self-perpetuating spiral downwards. It’s just going to keep getting worse.”

So how does FanDuel stave off that slow death and avoid going the same way as Flutter all those years ago?

On the block

The prevailing wisdom is that FanDuel is setting up for a sale. King has previously worked at private equity house and major shareholder KKR and it was rumored those investors forced Eccles out in favour of King. That King’s first steps were job cuts and efficiency measures did little to dispel those rumors.

As Roberts posits: “They’re looking for an acquirer. Will a foreign sportsbook entity or a large US casino property like a Penn National come and get them? Maybe.”

The problem of course is what does FanDuel have that a potential acquirer would want? “The technology isn’t worth anything,” says Roberts. “Someone like Penn might want the user acquisition and cross-sell benefits that comes with DFS, but they could just go to DraftKings or another operator a few times a year and pay to have a branded contest without having to stump up a guaranteed prize pool (GPP).”

What is perhaps more interesting to acquirers is the database of several million players, acquired at no little cost. Roberts argues the best exit now is to cut marketing costs, squeeze as much money as possible out of those existing customers, before selling the database to a sportsbook which is looking to set up in the US should PASPA be overturned.

“If you’ve got millions of players and no marketing spend, by definition you should be able to squeeze out some profit,” Roberts says. “I’m sure there’s a plan where the investors can claw back as much as they can.”

“In the technology world, it’s very difficult to become new again once the shine is off,” – Joe Brennan. 

Given the initial moves made by Matt King, this is arguably FanDuel’s most likely exit route, but it’s far from the firm’s only out.

Moving into position

Much like DraftKings, FanDuel has also been making moves in recent months to position itself as a sports media company. In December FanDuel announced it had integrated NBA’s streaming service League Pass into its platform, letting League Pass subscribers watch games through the FanDuel apps.

Although FanDuel didn’t not comment directly on whether the integration was part of a wider pivot toward sports media, the company hinted at that transition when asked about employee layoffs.

A spokesperson told Legal Sports Report: “With the Supreme Court hearing oral arguments regarding PASPA and audiences increasingly watching sports through alternative platforms like ours, FanDuel restructured the operational functions within its core business to enable employees to maximize product innovation and delivery, and capitalize on the momentum across the sports tech industry.”

Not a lot of clues there, but given DraftKings is making very similar efforts to get users watching content through their platform, it hints at a way forward for the firm in the sports media sphere. FanDuel may even have some inherent advantages here, with Comcast – the largest broadcasting company in the world – among its investors.

Ride it out

However, there are those who think FanDuel’s struggles are being overrated, and the firm would be best served by riding out the current issues and sticking with the DFS industry that made its name.  Paul Charchian, the founder of DFS site Fanball, says FanDuel is at its nadir right now, but a sale to the right buyer could see FanDuel returned to its former glory.

“I’m pretty positive about the company,” Charchian says. “Nigel was fantastic and will be missed but Matt King is great. He’s very savvy and will be an effective leader for as long as they want him.”

“Beyond that they still have a tremendous number of users, great loyalty and incredible mindshare that everyone else in the industry would love to have. When and if there’s an ownership change, the new owner will inject some new cash, new ideas, new features and enhance an already sizable company.”

Charchian says specifically some new cash could help FanDuel expand beyond its core salary cap format into new forms of DFS that the market is “clamoring for”, and which could provide a route back to growth.

Formats like DraftKings Pick’Em, Draft’s snake drafts or Boom’s in-game questions are all proving popular for their respective operators.

Of course the identity of any prospective buyer is still uncertain. One industry source, speaking off the record says he has heard “industry chatter” and would not discount an existing investor “doubling down on FanDuel.” The source went on to suggest that King’s ties with KKR could portend a closer relationship in the future.

Long shot

And of course lurking in the background of this maneuvring is the prospect of US sports betting. Charchian argues it is a key value driver for FanDuel’s valuation, with the firm possessing the brand, database and trust factor to add a sportsbook to its site and start offering betting as it gets regulated in states.

“There’s something like 12 states with sports betting bills in motion,” Charchian notes. “If PASPA goes away, adoption is going to come very quickly and that adds a lot of value to any acquirer.”

Of course his optimism is not shared by everyone. One concern is how quickly sports betting would be allowed online. While New Jersey has said it would be, other states are less comfortable with online gambling. Roberts also notes that sports betting is a completely different beast to DFS, starting with compliance pressures.

“The difference for being licensed for DFS and being licensed for gambling is the difference between a first-grade education and having a doctorate,” he says. “The DFS license for New York State is basically proving you’re a legitimate business, whereas New Jersey goes through every transaction for the last few years; they vet your family members. It’s a year and a half-long process.

“So FanDuel has to go through the checklist. One, do they have the technology? Two, do they have a team that understands sports betting? Three, do they have the investment dollars to pay for licensing and marketing against the big guys like William Hill, Betfair, Scientific Games? Four, do they have the investors willing to go through that long licensing process? That’s a lot of questions.”

It is indeed a lot of questions but the doom-mongering over FanDuel appears to be somewhat overblown. There’s an inherent negativity towards the firm, having fallen short of its initial unicorn status, but that negativity shrouds a business that can already claim profitability and a stable user base, with a clear path to growth should PASPA be struck as expected.

As Charchian puts it: “In the hands of the right acquirer, FanDuel will be an excellent property. We’re at the nadir right now, but the only way is up.” Perhaps there’s some truth in the old saying that it’s always darkest just before the dawn.