Don't Hold Your Breath for That DraftKings IPO

The future of daily fantasy sports is now in doubt, after New York's attorney general dropped the hammer

Nov 12, 2015 at 9:09 AM
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    About three months ago, DraftKings and FanDuel were on the fast track to a couple of overpriced and overhyped IPOs. Prominent and influential investors? Check and check. It's a "who's who" of venture capitalists, TV networks, team owners, and sports leagues themselves.

    The money was flowing. But then a funny thing happened. What to do with all that cash? Apparently, management decided to spend like crazy on advertising, with an almost unprecedented blitz ahead of the start of football season.

    It worked, in the sense that it bought huge, instant growth. But it failed spectacularly in the sense that the ads were so repetitive and so annoying to many that it invited all sorts of unwanted attention and scrutiny.

    It brought to light the precious lack of much in the way of self-regulation, highlighted by a real live (albeit misnamed) insider "trading" scandal. Turned out employees were using some non-public data to play on competitor sites. It was more a case of advantage-playing, in my humble opinion. But it's all about getting an edge, and if you can use non-public info to gain positive expectancy, it's not a real level playing field for the masses. And then yada yada yada, a big hammer dropped on Tuesday night:

    "New York attorney general Eric Schneiderman declared Tuesday that daily fantasy sports constitute illegal gambling in his state, and he sent game operators DraftKings and FanDuel cease-and-desist notices in a significant blow to the embattled, billion-dollar industry.

    "Schneiderman demanded DraftKings and FanDuel, the two industry giants, stop accepting 'wagers' from New York residents. He is not, at this point, asking the companies to discontinue operations in the state.

    "'Our review concludes that DraftKings'/FanDuel's operations constitute illegal gambling under New York law,' Schneiderman wrote in the letter obtained by ESPN's David Purdum and Darren Rovell and ABC News."

    For a great rundown on where it all stands, check out Legal Sports Report. I watch a ton of sports. I like actual point spreads and over/unders and all better than DFS, but I personally think it should all be legal, so that's where I'm coming from. It all obviously adds swaths of interest and viewership to sports leagues. Of course, the leagues know that. I understand to some extent why leagues want to keep straight spread betting at arm's length. Refs botch a game every week, and it would add huge headaches if they tied direct gambling to it.

    The whole wink-and-nod "we're anti-gambling, but thrilled you like gambling on our product" works for them. Unless they figure out a way to get a big cut of gambling revenue, the leagues figure to drag their heels on legalization. In England, it's all legal, and so embedded that you can bet at kiosks right outside the stadiums (see betting house logos on team jerseys, e.g.). The NFL is so offended by it all that they add more games in London each season.

    DFS looked like the perfect monetization path for everyone. In addition to leagues themselves and team owners investing, there are massive tie-in and sponsorship deals. Watch NFL RedZone for 10 minutes one Sunday, and you'll hear host Scott Hanson mention DraftKings about 700 times. And that's all on top of the added viewer interest it creates. It doesn't matter anymore if a given game on TV is a dud of a matchup, when half the world has fantasy players going.

    The New York AG news reads like the walls between DFS and gambling are coming down. It's important to remember that the walls exist in the first place thanks to massive NFL lobbying. This whole "game of skill" carve-out came out of the legislation of 2006. I doubt many foresaw the DFS boom -- but hey, it worked very well for a while.

    Where does it go from here? Re/code looks at the potential evaporation of what's now a huge ad buyer. As far as actual players go, we're not at all likely to see a Black Friday moment, like we did with online poker. There's too much money and too many power players involved for this to just completely go away.

    Three months ago, I would have guessed DFS was the gateway to more gambling legalization. NBA commish Adam Silver's support of legalization felt like a serious turning point. Now it looks like it's heading the other way. DFS is most certainly going to get more regulated. Then, who knows? I doubt those IPOs are anywhere close, though.

    Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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