Edelman: FTCs Challenge Makes DFS Merger a Longshot

Jun 23, 2017

By Christopher Calnan
 
The daily fantasy sports industry is facing its biggest challenge yet with the legality of the merger between its two largest players being challenged by federal regulators.
 
The Federal Trade Commission disclosed this week antitrust concerns about a merger of New York-based FanDuel Inc. and Boston-based DraftKings Inc.
 
The proposed union was announced in November 2016, but on June 19 the FTC and two state attorneys general announced plans to challenge the deal because it would “deprive customers of the substantial benefits of direct competition,” according to an FTC news release.
 
FanDuel and DraftKings combined have captured 90-95 percent of the DFS market share. As a result, it’s going to be a long shot for them to get past federal antitrust regulators, said DFS expert Marc Edelman, a law professor at Baruch College’s Zicklin School of Business.
 
“All along I thought this was a merger the FTC would challenge,” Edelman told Sports Litigation Alert. “The odds of this merger going through are incredibly slim.”
 
The definition of the specific market in which FanDuel and DraftKings operate may play a role in the case. It’s probable that attorneys in favor of the merger would argue that the combined company would be a small part of the overall online gaming market — and not limit the argument to DFS, Edelman said.
 
“In essence it would mark the end of market share being the determining factor of market power,” he said.
 
The offices of the attorneys general in the California and the District of Columbia joined the antitrust case. The FTC and the AGs plan to file a complaint in federal district court seeking a preliminary injunction to stop the proposed merger, the FTC release indicates.
 
DraftKings, which was founded in 2012, is the nation’s largest DFS company based on entry fees and revenue. It operates contests in football, baseball, basketball, hockey, golf, stock car racing, mixed martial arts, soccer, Canadian football and eSports, the FTC reported.
 
FanDuel, No. 2 in the nation, launched in Scotland in 2009. It operates contests in football, baseball, basketball, hockey, soccer and golf.
 
DraftKings CEO Jason Robins and FanDuel CEO Nigel Eccles issued a joint statement after the FTC’s announcement.
 
“Today, the Federal Trade Commission (FTC) announced it will attempt to block the proposed merger between DraftKings and FanDuel.
 
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. We are considering all our options at this time.
 
As we work together to determine our next steps, we would like to thank DraftKings and FanDuel players, partners and employees for their patience, support, and continued loyalty.”
 
Edelman estimates a ruling on the case could take more than one year.
 
The commercialization of fantasy sports began in the mid-1990s when ESPN Inc. became the first major company to provide fantasy sports games to consumers on the Internet. Many of ESPN’s contests charged users an operating fee for management of team data, although ESPN’s fantasy sports contests never paid cash prizes to their winners, according to Edelman.
 
Today, an estimated 50 million Americans participate in fantasy sports contests. The DFS business has grown so quickly the activity has attracted the attention of regulators that question whether it’s a form of illegal gambling. Indeed, the legal issues surrounding DFS in some states such as Nevada, Illinois and New York have dampened industry forecasts.
 
In 2015, fantasy sports paid out more than $3 billion in contest winnings. The top 1.3 percent of the players took home 91 percent of the total. Also, consumers spent $450 million on DFS research and third-party data in 2015, according to LegalSportsReport.com.
 
Several states have been wrestling with questions about the legality of the burgeoning online activity and how to regulate it. In mid March, Mississippi became the 12th state to enact DFS legislation.
 
The crucial question states are resolving is whether DFS are games of skill or chance. Last year, eight states enacted DFS-related legislation. If the activity is deemed a game of chance, then states are effectively faced with endorsing legalized gambling.
 
In late 2016, rising scrutiny coupled with litigation and lobbying costs sparked speculation that DraftKings and FanDuel were considering a merger.
 
On the federal level, regulators are dealing with an entirely different issue. They want to ensure vigorous competition that benefits DFS participants, said Tad Lipsky, acting director of the FTC’s bureau of competition.
 
“The FTC is committed to the preservation of competitive markets, which offer consumers the best opportunity to obtain innovative products and services at the most favorable prices and terms consistent with the provision of competitive returns to efficient producers.”