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Why DraftKings and FanDuel Merging is Bad for Fantasy Players

Tuesday, February 21, 2017 22:49
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DraftKings and FanDuel in Talks of Merger

Recently news has broke that DraftKings and FanDuel are in talks of a merger, according to “people familiar with the situation”.

The two companies, both of which have been valued at over $1 billion, have been fiercely competing to acquire new customers in the booming Daily Fantasy Sports industry.  During the NFL season it seemed every commercial was for one of the two Daily Fantasy giants.  Unfortunately for the DFS giants, recently the legality of the DFS industry as been questioned by state governments.  Not only have DraftKings and FanDuel had to fight each other for market share, but they’ve also had to fight legal battles.  The proposed merger would allow them to combine their efforts in the fight to continue operations, while saving them money on advertisements.

As a Professional Daily Fantasy Player, who plays on both DraftKings and FanDuel, a merger would have a tremendous impact on me.  It’s not just professional players that should be concerned with the merger though, this will affect everyone who enjoys one day fantasy contests.  Consequences of a merger include changes to rake, game offerings, and prize pools.

Comparison of DFS to Online Poker

Daily Fantasy Sports is often compared to online poker.  While there’s many differences between the two, the ecosystems of both work similarly.

For the operators of these gaming products to succeed, they must be able to acquire new customers, while also maintaining some of their old customers.  Creating an enjoyable product is of course important to keeping customers, but it’s also important host a game that players can win.  Players who are profiting from these gaming products are more likely to continue playing, whether a professional or casual player.  For players to be able to win, rake (the portion of an entry fee the site keeps) must be low enough to allow an edge to players.

To illustrate this with an extreme example, the best poker player would not be able to beat the worst poker player if the house kept 99% of the pot every hand.  The winning player does not have a high enough win rate to beat this rake (not even close in this example).

The Biggest Online Poker Merger

In 2011, the United States Department of Justice shut down the two largest online poker sites, PokerStars and Full Tilt.  This day was dubbed “Black Friday” by online poker players.  Unlike DraftKings and FanDuel, the poker sites were operating illegally offshore and infringing on the UIGEA.  Pokerstars and Full Tilt were ordered to cease operations in the United States, pay huge fines, and pay out U.S. players their balances.  Full Tilt did not have sufficient funds to cover this and PokerStars was eventually allowed by the DOJ to acquire Full Tilt, 15 months after Black Friday.  This created a monopoly in online poker.

Now’s about the time where I should mention, before starting to play DFS for a living, I was a professional poker player.

Initially all was well after the acquisition of Full Tilt Poker from PokerStars.  The two sites continued operating as they had before the merger.  While they were now owned by the same company, they each kept the unique features that made them what they were.  There were no significant changes to rake or games offered.  Prizes pools were larger on PokerStars than Full Tilt, but that could be attributed to the loss in confidence after the Full Tilt fiasco.  People just felt less safe playing on Full Tilt compared to PokerStars.

In 2014 the company that owned both PokerStars and Full Tilt, Rational Group, was purchased by publicly traded Amaya Gaming.  This is when things started to go south for online poker.

Over time online poker has continuously become more difficult as the skill of the average player has increased, yet PokerStars has continuously increased the rake.  These two things combined have been a huge hit to the ability to make money through online poker.  With edges so small, many online poker players relied on the PokerStars VIP Rewards program to still come out ahead, but PokerStars then cut the level of rewards they offered.  Lastly PokerStars and Full Tilt removed many of the types of games they had offered in the past, and focused their efforts on promoting games where edges were even smaller.

While this may seem like it only effects professional poker players, keep in mind break even players now become losing players and losing players are losing faster than they did previously.

PokerStars’ Monopoly

You may be asking yourself, “Why don’t poker players just play somewhere else”?

The problem is the monopoly in online poker that Amaya and PokerStars has achieved.  Players looking to be able to consistently play at high levels are forced to play on PokerStars, because they’re the only site with enough traffic.  PokerStars is still one of the best places to play online poker, but they’ve taken advantage of their grasp on the industry and now offer a worse product in the hopes of making more profit themselves.

Potential Cons of DraftKings and FanDuel Merger

Now that I’ve forced you to read 3 sections of an article about online poker, let’s get back to the point of this article.

DraftKings and FanDuel are by far the biggest providers of Daily Fantasy Sports and a merger could lead to many of the same negative changes we saw in online poker.  If you take away the competition between the two largest DFS sites, there’s little incentive for them to offer the same level of product they’re currently offering.  We can’t be sure that the products will be effected, but I believe it’s more likely if they do merge.

Rake increases are a likely side effect of a merger.  Right now, if DraftKings increased their rake 5%, it’s a guarantee FanDuel would be advertising that they have lower fees.  This of course would lead to more players switching to FanDuel’s better product.  However if the two companies combined and they both increased their rake by 5%, smaller sites offering lower rake would have much less impact.

The competition between the two sites also leads to innovative product offerings.  DraftKings has started to offer DFS contests for a variety of less common sports, including soccer, golf, and eSports.  If the companies merge they would have less incentive to better their product offerings, as there’s essentially no one to compete with.

Potential Pros of DraftKings and FanDuel Merger

I think it’s most likely that, if the sites merge, they’ll continue to operate two products under the same company.  If they do decide to combine both products into one, get ready for some gigantic prize pools.  It’s likely we see multi million dollar first places up for grabs on Sundays if this were the case.

The biggest benefit to the two sites combining would be their ability to focus on making sure DFS remains legal.  The two sites could combine their resources to fight legal battles and remain operating in the United States (although things are looking great on that front).

In summary I think a merger between DraftKings and FanDuel is almost entirely bad news for DFS players.  We likely would face many of the issues online poker players have been facing.  The good news is if attempting to merge DraftKings and FanDuel, they are likely to run into issues regarding Antitrust Laws.


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