Growing up: What does DraftKings do next?

The business trajectory of DraftKings has featured all the classic ups and downs of a prototypical tech start-up, lurching from billion dollar valuations to desperate funding rounds. However over the last year, the firm has started to show signs of maturation. The advertising hailstorm of the past has slowed to a mere drizzle, regulatory progress is slow but steady and there are even whispers of profitability. And along with this maturation, another theme is emerging from DraftKings HQ in Massachusetts – that the operator no longer sees itself purely as a North American DFS company.

In 2017 alone, the firm has launched its DFS product in five new international markets, added original content and live streaming to its product portfolio and boosted its advertising revenues through a widening range of branded contests. To some, the reason for the diversification is clear; DFS will never be the money spinner it was thought to be back in 2015 when DraftKings CEO Jason Robins said new users had a lifetime value of up to $1,000, compared to an acquisition cost of around $80. Now however that same LTV could be around $45, according to estimates from Boom Fantasy CEO Stephen Murphy, based on DraftKings’ reported revenues and active users.

“They [DraftKings] are seeing DFS doesn’t have the unlimited upside they thought it once did,” says Daniel Barbarisi, author of the DFS industry book Dueling with Kings. “Even two years ago they were wholly focused on DFS and thought it would take over the sports world. And while there’s still a market for it, it’s probably more of a niche business. And so if they want to grow into a big company, they have to leverage what they do have, which is a massive database of millions of sports fans who are willing to put money on the outcome of sports contests. That can be a very valuable resource which they can leverage into other areas.”

Indeed, recent figures obtained from the New York State Gaming Commission by Legal Sports Report suggest the growth of DFS has largely stagnated in the last couple of years, with 2017 revenues for the entire industry at $327m, down from an estimated $350m in 2016. “Arguably, they’ve attracted everyone that’s going to play DFS, ie. young men,” Barbarisi adds. “There are still some gains to be made, but there’s not a big boom coming. Now they have a stable user base which will persist but if you want to get bigger than that you have to do something differently.”

Eilers and Krejcik agree, noting that the firm’s recent pledge to add around 300 jobs in the next 18 months suggests there “has to be some underlying pivot in the
works”

“Doubling headcount for a vertical that’s basically flat when you’re already burning cash obviously doesn’t make a whole lot of sense,” the analysts note.

The question is, pivot to what? Well, perhaps the most important step down this path is the addition of live streaming. Starting in early 2018, DraftKings will offer users the chance to watch EuroLeague basketball matches on the company’s mobile app. The idea, according to Robins, is to get people playing contests on the EuroLeague which they might otherwise not have entered. He said if the partnership increased interest and revenues as expected, “other sports will be eager to work with us in the same way.”

Live the stream

Using live streaming to encourage customers to place more money on sporting contests is not a new idea. The concept helped propel bet365 to the top of the sports betting world for instance and is a proven path for growth. Of course, the experience differs somewhat for DraftKings, which doesn’t currently offer in-play contests, and will rely on pregame tournament entry fees, which might not spike in the same way.

Indeed, in-play DFS remains a relatively small niche within the industry, with most players preferring to set and forget line-ups and enjoy the games rather than staying glued to a computer for three hours. DraftKings tells EGR an in-play product is “not on our product roadmap right now” but it is “always testing new ideas and exploring new options to enhance the overall DraftKings experience.”

Of course the DFS operator is not necessarily interested in driving up revenues on EuroLeague basketball. This is much more of a trial to help the firm fine-tune its streaming service, to see if users will indeed watch content via DraftKings, and to work out how to properly monetize those users. Monetization could come in the form of pop-up ads, a branded streaming screen or even the rights holder paying DraftKings to simply put eyeballs on their product, as Robins has suggested.

Appearing on Bloomberg radio back in November, Robins talked about the potential for becoming much more of a media company, via distributing content. “What we are interested in is figuring out how we can partner with those [sports video] rights holders that are looking for ways to distribute their content.

“The idea is we’re a platform, we don’t need to be the ones who own the rights or even broadcast the content. We just want to be the ones that connect the customer that wants to see that content with the content rights owner or content producer … and using our platform, and our data, and our wallet relationship to do it.”

In the same radio appearance, Robins told the hosts the media company ambitions were part of the wider strategy to build a great business and make that business stand on its own merits. “That really would lead to the IPO path…. Right now we’re marching towards an IPO path,” Robins admitted.

Which explains much of the diversification strategy. Investors after all are hardly likely to be too impressed by the currently stagnating industry. But the evolution of the Massachusetts-headquartered company is not happening in a vacuum. It is also strongly tied to an evolving business and regulatory landscape, and one of the key moving pieces is the looming spectre of US sports betting. Most analysts now make New Jersey a favorite to win its Supreme Court case to have PASPA struck. As a result, sports business professor Marc Edelman suggests DraftKings needs more revenue streams to dampen any loss of customers and spend to sports betting.

The right bet

“While DFS will continue to have the opportunity to be profitable, if traditional sports gambling were to become legal in many US states, DFS operators will find themselves facing new competition from international sportsbooks like William Hill and Paddy Power Betfair,” Edelman says. “Sports betting would bring real competition to a DFS market that has so far functioned as an oligopoly, and one way to mitigate that risk is to diversify.”

Edelman says he has seen DraftKings significantly evolve over the past year in line with that strategy. “Some of the early executives came from the gambling world and they operated much like a gambling company,” he says. “It seems there’s been a major change in leadership and ethos and a movement to operating as a multimedia company. While I have no idea who’s been leading the shift inside the company, it seems to be smart on many different levels,” he adds.

And while the potential for US sports betting is one of the reasons behind the changing nature of DraftKings, it could also be an opportunity. After all, who has a better database of high-value customers likely to bet on sports than DraftKings itself?

Bloomberg recently reported Jason Robins said the company would “weigh options if sports gambling is legalized nationwide,” and “could become a sportsbook.” So how would that work in practice? The simplest option would be for DraftKings to partner with a sports betting provider and have a sportsbook integrated into the site. Several European bookmakers already have DFS on their site, so the concept of combining the two is simple albeit not necessarily a proven money-spinner yet.

One concern is how quickly sports betting would be allowed online. While New Jersey has said it would be, other states are less comfortable with online gambling. But then, like the live streaming this is a long term play for the company.

“It makes perfect sense to pivot to sportsbook,” says DFS analyst Dan Back. “Their model has always been to offer as much as possible to their customers in terms of games, sports and contests, so this is kind of a continuation of that. “And they’ve already started down that path in a sense. They have that geolocation already built in, for example, and the amount of money bet on sports compared to fantasy is staggering.”

Back raises some concerns about DraftKings’ ability to partner with land-based gaming brands like the casinos and the horse-tracks which fought DFS so vehemently in the past, but international sportsbook suppliers would have no such qualms. “They’d be foolish not to look at that opportunity,” Back says.

For comparison’s sake, while the entire US daily fantasy industry handled around $3.2bn last year, it is estimated somewhere between $150bn and $400bn was bet illegally in the US. That’s a pretty significant blue sky opportunity for a firm whose current sector is stagnant.

DraftKings’ Ezra Kucharz tells EGR: “Jason has said that as our CEO, he has a responsibility to ensure DraftKings continues to grow and is ready for major changes like the potential legalization of sports betting.”

Tides of change

The other key piece of context for DraftKings’ changing identity is the nature of the DFS industry itself. DraftKings has won the war. The firm is unequivocally the largest single player in the industry. For proof, look no further than the success of its international plans versus those of its main rival.

While DraftKings has successfully launched in five new markets this year, FanDuel packed in its UK operations to save money for home soil. FanDuel CEO and industry godfather Nigel Eccles was also sent packing in November, amid rumors he was forced out by private equity investors KKR, which has strong links with new top man Matt King.

The reasons behind the two companies’ divergent paths is clear. While FanDuel opted for caution in the face of the regulatory firestorm of 2015/16, DraftKings stayed aggressive. It offered more sports, bigger prize pools and stayed active in more “questionable” states. In that context then, the company’s recent efforts to diversify is simply more of the same. The firm has its eyes on the lucrative sports media and sports betting sectors, and as DraftKings has proved in the past, it usually gets what it wants.