After playing defense for most of 2016, the leaders of the daily
fantasy sports (DFS) industry made an announcement they hope will
allow them to move ahead on offense in 2017. However, mounting
legal and regulatory costs might doom them before they can cross
the goal line.
Last year, New York passed a law that explicitly made DFS legal
and put to rest lingering uncertainty that it might constitute
illegal gambling in that state. However, the New York law did not
end the debate nationwide, and the two biggest DFS companies,
FanDuel Inc. and DraftKings, Inc., continue to try to persuade
state legislatures across the country to allow their unique brand
of fantasy sports to operate in their states.
Industry commentators cited mounting legal and lobbying bills
for both companies as a significant reason the two companies
announced a merger in November 2016. But the merger presents a new
set of challenges. FanDuel and DraftKings are by far the two
largest companies in the DFS field, together accounting for more
than 90 percent of the market. The U.S. Department of Justice or
the Federal Trade Commission, or both, could choose to scrutinize
the deal for antitrust violations. That level of market
concentration within an industry historically has resulted in
significant regulatory scrutiny.
The DFS industry is on a much different trajectory than it was
just a year ago. Earlier forecasts anticipated DFS revenues to
reach $2.5 billion by 2020, but recent forecasts have lowered these
estimates a hundred-fold. Moreover, it is unclear at this juncture
how aggressively the new administration will pursue antitrust
A central issue in analyzing the merger will be defining the
scope of the market. FanDuel and DraftKings certainly will argue
that DFS is a small portion of the larger fantasy sports and sports
gaming market. Even combined, the two entities represent a small
portion of the gaming market.
Defining themselves as part of the larger gaming market for
antitrust purposes poses its own challenges. They have based their
arguments for legalization with state regulators on the premise
that DFS should be considered distinct from gambling. A pivot to be
considered part of the gaming market could jeopardize those
arguments in states still considering whether to legalize DFS. One
possibility is that regulators determine, for example, that the
market for daily fantasy baseball is different and distinct from
daily fantasy football and permit a merger but prohibit the
combined company from conducting games in certain sports.
Regardless of how the merger is resolved, the DFS industry will
continue to face challenges, including skeptical state regulators
and a market whose growth has slowed. Sponsors, marketers and
others interested in partnering with DFS providers should be aware
of the long term issues facing the industry.
The DFS industry continues to face antitrust scrutiny and state
Sponsors, marketers and others interested in doing business
with the DFS industry should use caution in the face of ongoing
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