If a report by The New York Times is true, daily fantasy sports giants DraftKings and FanDuel would have been better off not buying up what felt like every single television commercial slot during every National Football League game in the 2015-16 season.
DraftKings and FanDuel Losing at Their Own Game
In the course of reporting about a potential settlement of New York Attorney General Eric T. Schneiderman’s investigation into the companies for fraud, Joe Drape of the Times wrote that his sources close to the negotiations stated that DraftKings and FanDuel are asking the Attorney General’s Office if they can pay their fines in installments because they lack the funds to pay the $8-$12 million lump sum.
None of the Bills are Getting Paid
That’s only the beginning of the reported financial troubles for the two DFS behemoths, however.
Drape goes on to say that DraftKings and FanDuel are having trouble meeting the financial obligations of their day-to-day business.
This includes direct employees – FanDuel has laid off over 60 people – and contractors. Lobbyists and public relations firms are some of the best examples of these vendors, and both companies are months behind in their payments.
A Necessary Evil
DraftKings and FanDuel are caught in a classic “Catch 22” regarding the services of those political lobbyists and public relations firms.
These PR firms and lobbyists are vital to the future success of DraftKings and FanDuel, as they are on the front lines of legal battles in a myriad of states, fighting to make or keep DFS games legal for thousands of potential customers. If these companies start withholding their services due to non-payment, that could represent serious damage to both companies’ existences.
At the same time, it’s exactly these costs that are preventing both companies from showing any profits. The revenue brought in minus the winnings that players claim and the costs of operation has simply put DraftKings and FanDuel in the red each month, for months now.
The Future Landscape of DFS
If this trend continues, without any significant new investors or new markets, the long-rumored merger between DraftKings and FanDuel may be unavoidable from a business strategy perspective. The two companies would be stronger together than separate.
That might prove tricky, however. Smaller players in the DFS arena, like Yahoo!, could file an antitrust claim. Additionally, the market share that both companies already possess, along with fraud investigations already undertaken, could cause the Federal Trade Commission to intervene in a potential merger. It’s unlikely that DraftKings and FanDuel would be excited about further legal fees to fight an antitrust suit or dispute a FTC blockage.
Eventually, bankruptcy may be the best option for both companies. In that scenario, returning to the market would require some massive restructuring of the business model and give other competitors room to make up the void left in the industry.
That would represent a prime opportunity for competitors, like afore-mentioned Yahoo!, to invest more resources into their own already-existing DFS products. Companies like Yahoo!, with more diversified assets, could be better situated to fight the costly and long legal and perception battles that are currently bankrupting DraftKings and FanDuel.
One thing is for certain. DraftKings and FanDuel can’t continue to operate under the current status quo for much longer.
