The blossoming of daily fantasy sports is starting to look more like a daylily than a rose.
Or, in the famed but more prosaic words of Andy Warhol, DFS might already have had its 15 minutes of fame.
Until recently, DFS was the rage. Conference seminars on DFS were standing room only. Every day, a major league sports team or entire leagues themselves, were signing deals. Giant media companies like 21st Century Fox, Google, Disney and Warner Brothers were showering DraftKings and FanDuel with investment money.
You couldn’t watch a sports event on TV without being barraged with DFS advertisements trying to part you from your money with the promise of big wins that sounded oh so much like gambling, not some cerebral game of skill.
Now, there are deep cracks in the edifice that threaten its collapse.
It started when the over-the-top advertising prompted anti-gamblers, legislators and attorneys general to question whether DFS is really gambling, thus illegal almost everywhere. That got a big boost from Nevada regulators who said DFS operators have to be licensed as gambling operations.
Since then, the reaction to DFS has become almost as loud and frequent as the industry’s autumn advertising campaigns with attorneys general in big states like New York and Illinois classifying it as gambling and legislators in at least 22 states introducing bills to ban or legalize the activity.
The result is an impaired business, and the result of that might be the drying up of investment needed to keep a still money-losing infant industry alive.
The first clear break occurred two weeks ago when 21st Century Fox revealed that it had written down its $160 million investment in DraftKings to $65 million.
For a company whose earlier investments loosely valued it at $1 billion, that would calculate to a value of just $400 million.
Adam Krejcik and Chris Grove provided some interesting statistics on the vulnerabilities of DFS in a report published last week by Eilers & Krejcik Gaming.
DraftKings was $280 million EBITDA negative last year and chief rival FanDuel minus $137 million, they estimated.
Further, the great expense of player acquisition, including that TV ad bombardment, means DraftKings spent $174 to acquire a player and FanDuel spent $123.
That means it will take them 15 to 24 months to break even on an acquired player, Krejcik and Grove calculated.
Further, value is highly concentrated in a very small number of players. Just 1 percent of players provide 60 percent of revenues, they estimated.
Even though Krejcik and Grove expect DraftKings and FanDuel to focus on bringing down costs this year, an observer has to wonder about the viability of the business model.
Indeed, DraftKings has all but admitted as much with its attorney telling the Boston Globe that the company could go out of business if it loses its lawsuit in New York and can’t serve customers there.
One expects that in this environment it will be difficult, if not impossible, to raise fresh money to replace the dollars bleeding away.
A final nail could be driven by the 3rd Circuit Court of Appeals.
If the federal judges clear the way for sports betting in New Jersey, and other states follow, fantasy sports could revert to its original niche of hard-core sports fans acting like sports fans, while gamblers move over to the main attraction—betting on games.
