How And Why Daily Fantasy Sports Might Be A Wise Play

by: Samuel Rae

In its traditional format fantasy sports has long been in the hearts and minds of the sports enthusiast. Offering participants the chance to pit a combination of accumulated sports knowledge, organisational skill and predictive power against one another, the concept's allure is far from unclear.

What is a little unclear as of late is the future direction of the fantasy sports industry, and just how much of an opportunity recent changes to its core model can present investors.

Currently the fantasy sports world is dominated by two major players. These are Yahoo! (YHOO) and ESPN, owned and controlled by The Walt Disney Company (NYSE:DIS). Whilst it is assumed that Yahoo! control the most users, ESPN has an undeniable reach into the heart of the sports fan through its media influence which coupled with the fact that it attracts over 40 million unique visitors per month to its website,, means an investor looking to choose between the two might lean towards the Disney owned service provider.

Why might the fantasy sports industry represent an opportunity?

In recent times as with almost every other element of the entertainment world, fantasy sports has seen an internet fuelled boom. At current count there are just over 35 million fantasy sports players in the United States and Canada alone (up from around 9 million in 2005) each of whom spend around $95 each year to participate. This 60% increase over the past 7-8 years is not just organic growth. Improved user interface and software capabilities coupled with high performance mobile technology has opened up fantasy sports to a huge number of participants who were previously redundant. Users no longer have to make time to sit at a computer and conduct their sports team management; they can do it from their tablets or phones anytime, anywhere.

The exciting part for investors is the idea that it seems another boom might be just around the corner, if not already upon us. This one is not being fuelled by improvements in technology or any other industry supportive factor but by a remodeling of the concept itself.

Traditional fantasy sports participation involves selecting a fantasy team at the start of a season, and managing that team throughout with the ultimate goal of accumulating points based upon individual and team performance in the real world. An individual pays for the right to enter into leagues of other users and their points translate into standing. Often the service provider will offer financial incentives for participation based upon league standing.

Whilst still the leading form of user involvement, a different model has of late been commanding considerable media attention, namely daily fantasy sports. Daily fantasy sports is a concept that closely resembles its traditional counterpart in that users select teams or individuals and accumulate points based on real world performance, but with one major difference. The leagues are compressed into a twenty-four hour period.

This model has a few key advantages over the season long fantasy league, the major one being instant gratification. Users no longer need to wait until their respective season draws to a close to experience the pleasure of competitive success, they can subject themselves to it on a daily basis. There is also the commitment factor. Taking part in a season long fantasy sports league involves a high level of user commitment. On average each user spends about 3 hours a week managing their teams, a task which if not completed could have serious detrimental effect on their league standing and in turn their season end result. In stark contrast daily fantasy sports enables users to dip into the fantasy world when they please, and leave it again without damaging their chance of success. Both of these factors seem not only to be persuading current fantasy sports players to try their hand at the daily game, but also attracting fresh customers to the industry.

What about the response of the financial world?

Much of the media attention that has been focused on daily fantasy sports in the past has revolved around its legality. This was effectively put to bed in 2007 when a Jersey court ruled against a plaintiff who tried to sue a number of pay for play fantasy sites. The ruling was taken to indicate that fantasy sports was a skill based endeavour, and in turn should not be subject to gambling restrictions outlined in the Unlawful Internet Gambling and Enforcement act of 2006. What this ruling has served to do is remove much (but not all) of the legal risk associated with investing in such an industry and as a result a number of holding firms are starting to take notice.

In conjunction with this, and freed from its legal focus, the media has turned to the actions of the financial world as a barometer of fantasy sports', and in particular daily fantasy sports' future. If the actions being taken and in turn presented through the various media outlets are indeed an indication of what this future might hold, then there might well be reason for investors to sit up and take notice. To illustrate why, consider the incumbents.

The current leader in the daily fantasy industry is FanDuel was launched in 2009 by Hubdub, has grown to employ over 40 people and attracts over 4 million users. Since its inception it has seen rapid growth in it user figures and as a result consistently succeeded in its efforts to raise finance. In 2009 it raised $1.2 million in series A financing from Pentech Ventures and Scottish Enterprise, followed by a further $4million in series B financing from Piton capital and existing investors in 2011. Its latest announcement as of January this year was the closing of its series C funding round during which it raised a further $11 million from a combination of its existing investors and the newly involved Comcast Ventures, the venture capital arm of Comcast Corporation (NASDAQ:CMCSA).

Second place in the daily fantasy market goes to DraftKings, Inc. DraftKings and their corresponding website have recently closed a round of series A financing led by Atlas Venture during which it raised $7 million. This is in addition to the $1.4 million in seed capital it raised last year in a round also led by Atlas. The driving force behind this funding, and Atlas' involvement in it is their own suggestion that by 2020 the daily fantasy league industry will outweigh the traditional existing concept. Bearing in mind that the traditional model currently attracts 35 million users, if this is to be the case then the industry must undergo growth to the tune of 2000%.

Such rapid growth, exponential expansion predictions and consistently successful financing campaigns suggest that short term participation in fantasy leagues could not only be here to stay, but that it could become a much more dominant presence in the years ahead. This, of course, offers investors an opportunity to garner financial involvement at a relatively early stage in the concept's lifecycle.

Where does this opportunity lie?

As is so often the case with fledgling industry, there is at present a battle raging for market share. Not only are participants fighting for current users, but also driving campaigns to attract new users to the concept. The relatively small user participation when compared to traditional fantasy sports could indicate that through strong marketing campaigns many new users could be enticed towards the short term variation.

The idea that there exists a widely untapped customer base that could be unlocked through increased marketing spend has driven investment in a number of the smaller, but still prevalent industry participants.

One such example is that of Launched in late 2012, it has just seen a 65% acquisition from MGT Capital Investments (MGT) valuing it at $4 million. The site's user number growth seems impressive, currently standing at just short of 20,000 up from around 11,000 less than two months ago. now represents a commanding percentage of MGT's total holding and in doing so presents investors looking to participate in the field of daily fantasy sports a chance to do just that. MGT itself seems well set, with a strong balance sheet and the possibility of compensation related to the infringement of a gaming patent in which it commands a majority share, which if successful could seriously bolster its financial position.

Having said this the relative youth of the fantasy service provider offers itself up as a red flag; the risk of investing in a holding company whose primary concern is a relatively new and unproven entity, coupled with the fact that said entity is operating in an equally new, and as of yet not totally proven industry might outweigh the opportunity for some, but for those looking for direct involvement the chance is there.

Another possibility is that of Interactive Corp (IACI). Interactive Corp have recently confirmed their participation in the industry with the announcement that they have invested in DraftStreet. DraftStreet offer a very similar service to that of its competitors. They successfully raised $1.6 million in series A funding in 2010. Whilst the exact details of IAC's agreement remain undisclosed its financially backed involvement in this fledgling industry again seems to indicate potential. Couple DraftStreet's growth capability with IAC's experience and proven track record in previous rapid growth sector sites (an example being and you have opportunity that might be enough to get investors excited.

Choosing between the two opportunities outlined could be a difficult task. Whilst MGT offers the more direct route into the daily fantasy sports growth potential, and in turn the higher potential for gain, IAC represents an opportunity to out yourself in a position whereby it is possible to profit from the upside potential whilst avoiding overexposure to what is essentially still a fledgling concept. To make things even more complicated more likely than not the success of one over the other will be determined by its ability to rapidly acquire users, the responsibility of which will undoubtedly lie with external marketing companies.

The only thing that is for sure is that as things stand a lot of money is being channeled towards backing this so called 'fledgling concept', and if that is anything to go by then now could be a good time take a look yourself. It goes without saying however that money has been thrown at similar supposed pre-boom industry in the past, and all too often investors have found themselves on the wrong side of the speculative fence.

Due diligence and a level headed approach therefore is paramount, but for the bulls out there, we might be just seeing the start of something big.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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