It’s one bet that the house may not allow.
DraftKings and FanDuel Ltd., the two biggest names in the world of online daily fantasy sports, are wagering that a merger will create a Golden State Warriors-type superteam, but their proposed combination has been put on hold by the Trump administration.
The Federal Trade Commission last month filed a lawsuit to block the combination, citing antitrust concerns that the combined company would have nearly 95 percent of the market for online fantasy players who compete for cash by picking the winners of baseball, basketball, football and other sporting events.
“The proposed merger would deprive customers of the substantial benefits of direct competition between DraftKings and FanDuel,” said Tad Lipsky, acting director of the FTC’s Bureau of Competition.
The companies insist they are not ready to fold, even after a federal judge on June 21 issued a temporary restraining order to block the deal while the antitrust case proceeds.
The companies were “considering all our options at this time,” FanDuel CEO Nigel Eccles and DraftKings CEO Jason Robins said in a joint release.
“We are disappointed by this decision and continue to believe that a merger is in the best interests of our players, our companies, our employees and the fantasy sports industry.”
The merger was in part a truce between the fiercely competitive fantasy sites, which flooded the airwaves with a combined $500 million in advertising in 2015 alone in a bid to establish dominance over a market of an estimated 4 million daily fantasy sports users.
The two firms competed intensely even as they waged a state-by-state legal war over whether the fantasy sites amounted to unregulated online gambling. The two firms ended their war with the merger announced in November.
The FTC case, which was joined by the District of Columbia and California, is also being closely watched by business analysts and legal scholars as one of the first real-world tests of antitrust policy under the Trump administration. On Friday, drugstore giant Walgreens announced that it was sharply scaling back its proposed $9.4 billion deal to acquire RiteAid, saying government regulators were warning that they would not approve the deal.
While revenue for FanDuel and DraftKings has jumped from the single-digit millions to the triple-digit millions in a matter of three years, the legal and lobbying headwinds that faced the industry forced them to consider a combination. The Fantasy Sports Trade Association, the industry’s lobbying arm, said that nearly two-thirds of the companies that jumped into the market closed in the year before the November merger.
“Everyone thought [daily fantasy sports] was the next gold rush,” Daniel Barbarisi, author of a book on the rise of the industry, told The Associated Press in April. “It couldn’t sustain that level of speculative growth, especially from small operators. Now that the barrier to entry is higher, I’m not surprised at all to see many of them falling by the wayside.”
FanDuel and DraftKings argue that they already face competition from ESPN and other major players that run leagues for fantasy players to select teams and compete in leagues on their sites. California-based gambling research firm Eilers & Krejcik Gaming said in a recent analysts’ note that the companies have a point.
“Regulators will come to recognize that blocking the merger will likely result in one [if not both] companies failing — an outcome that realizes the worst of both worlds,” the note said.
A lot to gain
DraftKings and FanDuel stand to gain a lot from pooling their assets. They would be able to share the skyrocketing advertising costs and partnerships with the NFL, NBA and other sports leagues, and they would consolidate legal bills run up to avoid the label as an illegal “online gambling” website.
Regulators in California and the District of Columbia argue that the two companies are trying to seize control of the “market for daily fantasy sports contests.”
A source close to the matter who disagreed with the FTC’s ruling said daily fantasy sports is considered to be a small part of the broader fantasy sports market and that the merger would “enable increased competition in the industry, as DraftKings and FanDuel would be able to better compete against these larger industry players who are likely to launch daily fantasy sports platforms in the foreseeable future.”
While FanDuel and Draft Kings would dominate their daily fantasy niche, 57.4 million people were playing fantasy sports in the U.S. and Canada last year, according to the Fantasy Sports Trade Association.
Geoff Manne, the founder and executive director of the Portland, Oregon-based International Center for Law and Economics, said he found it surprising that a Republican-led FTC decided to try to block the deal in a nascent market by two firms that have yet to turn a profit. Mr. Manne predicted that the merger will eventually go through because there is a clear interchangeability between seasonlong fantasy sports sites and the daily fantasy sports offerings of FanDuel and DraftKings.
“A daily fantasy sports-only market definition means that the FTC believes that neither seasonlong fantasy sports nor online gambling imposes competitive constraints on [daily fantasy sports],” Mr. Manne said in an email. “But that’s indefensible.”
Mr. Manne said most casual players of daily fantasy sports come to it from seasonlong fantasy sports, and most casual users who stop playing daily fantasy sports return to seasonlong fantasy sports — meaning there is a lot of overlap and competition in the overall market.
“Products do not have to be identical to function as substitutes and thus [put] constraints on each other’s prices,” he said. “What matters is whether players will switch from DFS to other products if the price of DFS is too high. And it’s clear that they do just that.”
Baruch College law professor Marc Edelman acknowledged that there was some interchangeability between the markets, but he said the FTC was still justified in trying to block the deal because DraftKings and FanDuel are parts of a distinct subset of the broader fantasy sports market.
Mr. Edelman cited a 1962 case in which the courts ruled that “well-defined submarkets” constitute “product markets for antitrust purposes.”
Mr. Edelman said there “may be a glimmer of hope” for FanDuel and DraftKings if their market-share analyses can cite other seasonlong fantasy sports companies.
Mr. Edelman said that the companies can also help their case if they can show that competitors still can enter the market with relative ease. But in an industry where the two companies have a stranglehold over three of the four major professional sports leagues, 10 states ban daily fantasy sports outright, and several states impose varying financial regulations and upfront fees as high as $50,000, that argument may be tough to spin.
Case in point: Yahoo launched a daily fantasy sports game package this summer. Despite Yahoo’s market base, the push has captured just 2 percent of the daily fantasy sports market, Mr. Edelman said.
Mr. Manne said that the two companies would be better off devoting more money to improving their products and less money on marketing and legal ventures.
“One of the biggest problems companies are facing is retaining casual users,” Mr. Manne said. “Professional gamblers clean up against casual users, making daily fantasy sports less appealing for them. No one likes to play games they never win.”
Steven Norris, a college student who played FanDuel every day last year, said he cut back his daily fantasy sports habit because he “found better gambling options.”
“[It’s] still very fun to play,” Mr. Norris said. “When I win, it’s really special, because you lose most of the time, to be honest.”