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Daily fantasy sports is at a crossroads heading into 2018

Daniel Roberts

It has been a weird year in the daily fantasy sports (DFS) industry.

The two leading companies in the space, DraftKings and FanDuel, canceled their planned merger, eight months after announcing it, and after their lead executives spent many more months working together behind the scenes to pull it off. It was supposed to be a synergistic combination of two close competitors into one dominant platform.

Instead, as we head into 2018, DraftKings is, by most reports, the definitive leader in DFS by market share and has taken a step into streaming live sports. FanDuel CEO Nigel Eccles, credited with fueling the rise of DFS (FanDuel launched four years before DraftKings), has left the company.

Perhaps most important: On Dec. 4, the U.S. Supreme Court will at last hear the New Jersey sports betting case, Christie et al v. NCAA et al, which will determine whether New Jersey can allow sports betting despite the existing federal ban, PASPA (Professional and Amateur Sports Protection Act of 1992).

If New Jersey wins, there would be an immediate domino effect of state-by-state efforts, and major implications for the pro sports leagues. (The NBA, for one, now says it will lobby Congress for a change to sports betting law after the case, regardless of the outcome.)

What the SCOTUS sports betting case means for DFS

While DFS isn’t specifically an issue in the New Jersey case per se, it is seen as a factor that has helped drive the general momentum toward repealing PASPA. Geoff Freeman, president of the American Gaming Association, told Yahoo Finance that DFS, “has been the most significant thing when it comes to raising attention to the demand consumers have to no longer be passive, but to be engaged in these games one way or another.”

DraftKings CEO Jason Robins said recently that the company would weigh its options if PASPA is repealed, a suggestion that it might become a regulated sportsbook despite years of insisting that its contests do not constitute betting.

And last year, DraftKings and FanDuel both applied for, and received, UK gambling licenses, and DraftKings opened an office in Malta, an influential country in issuing overseas gaming licenses. As a UK sports lawyer recently commented on the Yahoo Finance Sportsbook podcast, DFS, “looks like betting… We view it as probably betting.”

NFL declining, DraftKings and FanDuel revenue still small

Meanwhile, the NFL has had a down year, characterized by a 5.7% average decline in TV ratings and endless political controversy. That certainly isn’t good news for DraftKings and FanDuel, but on the bright side, it is actually NBA, not NFL, that is driving the growth in DFS contest entries, according to Eccles of FanDuel.

Alex Rikleen is a DFS NBA writer for RotoWire and other fantasy sites (including Yahoo). He says DraftKings, “has completely passed FanDuel in popularity. When people ask me for DFS advice, I just assume they are asking about DraftKings unless they specifically say otherwise. But FanDuel still has a large, loyal fan base.”

How large, though?

An October story at Legal Sports Report, the results of a FOIA request the site made, suggests that this industry, for all the attention it gets, is bringing in far less money than most people thought.

DFS operators, led by DraftKings and FanDuel, generated only $327 million in revenue from September 2016 to September 2017. (Their “handle,” which is the total amount of entry fees that users paid, was over $3 billion, but the $327 million is their revenue after paying out prize money—and they still aren’t profitable.) As Adam Krejcik of Eilers & Krejcik Gaming tweeted, “Unicorn status for DK and FD hard (or impossible) to justify.”

On the other hand, the year was a positive one in terms of the legal landscape. After fighting New York Attorney General Eric Schneiderman in court for a year, during a time of intense legal scrutiny on the industry, New York passed a bill expressly legalizing and regulating daily fantasy sports. More than 15 states followed suit.

It would appear, for now, that the regulatory momentum is mostly with, not against, this industry.

DraftKings CEO on 2017 regulation, IPO possibilities

Amidst all the sweeping change in the industry, Yahoo Finance sat down for an extensive interview with DraftKings CEO Jason Robins in October.

The conversation took place exactly two years after Robins spoke to Fortune for a 2015 cover story that came out just days before a scandal over a DraftKings employee winning $350,000 on FanDuel rocked the industry and arguably ignited all of the state-by-state legal challenges.

“Things have changed a lot” since the start of the 2015 NFL season, Robins said. “Two years ago, it was all crazy growth, people throwing money at us. It was this wild rocket ship and we were trying to navigate it as best as possible but also not do anything to slow it down. Now it feels more like I have room to navigate, and I like that better. But it’s also fun when you’re on the rocket ship, obviously. After that phase, how do you get it from good to great?”

Getting the business to “great,” for a tech startup, depends on innovation and product improvements, and Robins said that two years of focusing on compliance has impinged on tech innovation at DraftKings.

“There was a very deliberate shift for the last couple years to focus on compliance,” he said. “There was a lot of time spent on that, and I feel like we’re behind. I want to be farther ahead than we are in terms of everything that’s happened with technology in the last couple of years. We would have been right on the cutting edge, but we’re a step behind. We’ll catch up. I hate being behind.”

According to widespread reports, DraftKings has a $1.2 billion valuation, though Eilers & Krejcik estimates that it’s more like just $1 billion now. Either way, many wonder if an IPO is now on the near horizon for DraftKings.

Robins answered this way: “Honestly, I don’t really ever think about that. I shouldn’t say never, people ask you about it, so it comes up. But day to day I don’t think about it. I don’t feel like we’re there right now. I think when you start to get there you know, and then you start preparing, but we’re not. Right now, it makes sense to try to grow the business, and I think when it gets time, whether it’s IPO or a sale, if that’s the right thing to think about, I’ll know. I have rough ideas in my head about when it could happen, but it’s hard because you can only tell so much of the future.”

In terms of the near future, the next major event is the New Jersey sports betting case. Robins referred to the case as one of “many different things going on in the backdrop right now that we’re watching.” Indeed, everyone who cares about DFS is watching too.

Disclaimer: Yahoo offers its own daily fantasy sports product.

Daniel Roberts is the sports business writer at Yahoo Finance. Follow him on Twitter at @readDanwrite

Read more:

UK sports lawyer on DFS: ‘It looks like betting’

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