DFS: fantasy not so fantastic so far

DFS giants DraftKings and FanDuel dominate the market in the US, but both have yet to turn a profit despite substantial advertising and player acquisition drives. What is holding them back and will the EU market be more productive for them?

Amanda McCormack

Daily fantasy sports has grown in popularity over the past few years in the US, having the clear advantage of being legal in some states where online gambling is not.

But growth seems to have stalled of late — based on entry fees, the DFS market grew by just 4% to $3.26bn (£2.46bn) between 2015 and 2016, compared with 220% to $3.13bn from $971m between 2014 and 2015, according to data from Eilers & Krejcik Gaming. 

When comparing the vast growth that DFS saw in 2015 with the small amount of further advancement in 2016, it could be concluded that industry expansion rates are levelling out in established states.

Therefore the DFS industry’s efforts to look for new revenue sources and expand into new regions to boost profits is hardly surprising.

DFS recently returned to Delaware after leaving the state in July 2016 following Delaware's Department of Justice sending cease-and-desist letters to FanDuel, DraftKings and Yahoo, the state’s three largest DFS companies.

However, Delaware is one of only three states in the US, alongside Nevada and New Jersey, to have legalised online gaming. More significant for the vertical is that DFS was legalised in Maine in August, in Illinois in June and last year in New York.

It has not been an easy ride and DFS firms have faced expensive legal battles in the US, suffering a blow when the Massachusetts Special Commission on Online Gaming, Fantasy Sports Gaming and Daily Fantasy Sports brought DFS under the umbrella of ‘online gaming’.

Meanwhile, a California district court upheld its decision that the payment of entry fees to enter daily fantasy horse racing contests, which are returned to winners as cash prizes, constituted a wager.

Profit proves elusive
With so much red tape to contend with, it’s perhaps no surprise then that media company Axios recently revealed that both DraftKings and FanDuel were yet to turn a profit and had actually lost a combined $151m last year.

This is despite the fact that the companies have drastically cut back on the amount they are spending on advertising during big sporting periods like the NFL season in 2015.

DraftKings spent an estimated $80m on sales and marketing in 2016, according to Eilers & Krejcik Gaming, a not inconsiderable sum, but still 80% down on 2015. Meanwhile, FanDuel spent approximately $60m on marketing in 2016, again down a significant 81% from its 2015 spend.

Axios figures showed that DraftKings had generated sales of $160m last year, while reporting an operating loss of $92m, but it’s worth pointing out that that was a big improvement on 2015, when the company recorded a loss of $509m. Meanwhile, FanDuel’s losses over the first 10 months of 2016 totalled $59m, with revenues of $91m.

Problems with US business model?
Despite major investments and advertising restraint, the two dominant companies are still some way from breaking into a profit in the US, it seems.

Jeffrey Haas, chief international officer at DraftKings, told iGaming Business that the company had just passed the 8.1 million mark of registered players.

Haas argues that it is actually the speed of its growth and its race to the top that is hampering DraftKings’ ability to turn a profit: “We continue to invest in player acquisition, with an understanding that it may take time for us to recoup. Having more players means we also have the broadest and deepest DFS offer in the marketplace for consumers. If we wanted to grow slower, we could be profitable more quickly.”

Jon Trigg, operations director at gamification solutions company Snack Gaming, told iGaming Business that although the US DFS market is still growing, it is not at the level predicted in 2015 and remains dependent on “how long traditional sports betting is prohibited”.

He explains: “[Growth] may be not at the rate forecasters anticipated in 2015. The simple model was that if you got 20% of the 59 million playing DFS competitions you would have a market of 11.8 million with an annual spend of $559 per customer (Fantasy Sports Trade Association stats); you have an industry worth $6.5bn.” 

John Gordon, chief executive of fantasy football social gaming website and app Premier Punt, provides a potential, but double-edged, solution to the DFS giants’ issues and says: “In theory they could stop advertising and start making an operating profit, but that would mean fewer new signups, a drop in active user numbers and most importantly, loss of customers to the competition.”

Another way the two firms could have gotten into the black faster was via their planned merger, however this was scrapped when the US Federal Trade Commission (FTC) raised competition concerns because together the companies amounted to approximately 90% of the DFS market.

Trigg adds that the companies had become distracted with legal cases, PR disasters and heading into Europe over the last 12-18 months and argues they should refocus their efforts on the US market and the next NFL season.

The EU market
Although it may have taken some of their focus away from US markets, does the European market hold the potential of profit for DraftKings and FanDuel?

It’s hard to see how DFS could thrive in Europe if it is struggling in the US even with little competition from other forms of sports betting. With the latter firmly established and thriving in Europe, how could the European market possibly be a more favourable environment for the two DFS giants?

Bjørn Fjellby, chief operations officer for fantasy solutions provider Scout Gaming Group, says he sees potential for the two areas of the market to have combined success: “We believe in the cooperation opportunities between media channels and igaming companies in relation to DFS [in Europe] as a very interesting driver with content on the one end, and operators offering real money games on the other.”

Valéry Bollier, chief executive of OulalaGames, also sees opportunities, but cautions: “DFS is the answer to a new market need, but this demand is constantly changing. DFS firms therefore have an obligation to constantly be innovative in order to cope with it.”

At DraftKings, Haas says the current focus of its EU strategy is the UK and Germany. “Later this month, we intend to launch in a few additional European markets, including Ireland where there is already good demand for our product,” he says.

However, FanDuel notably left the UK market in July, saying that it may return “in the future”. It  did not officially disclose the reasons behind the move, although the UK’s well-established sports betting tradition is likely to have been a factor.

Trigg argues that despite having invested a year creating a product, brand and database, leaving the UK market was the right thing for FanDuel to do. “It has wisely identified that running a separate operation in the UK has and will be a distraction to what must be their core focus of growing their North American business.” 

There are mixed views on whether or not the DFS behemoths can overcome competition from sports betting in the EU and break into profit in future after failing to do so in their home turf. But in the US, they do at least seem to be heading in the right direction, albeit more slowly than initially hoped.

Related articles: Delaware House passes daily fantasy sports bill
Legal blow for DFS in California
DraftKings, FanDuel scrap merger plan
FanDuel withdraws from UK
European DFS for 2016-17: what operators need to be successful in Europe (paywall)