When one thinks of seismic mergers and acquisitions, daily fantasy sports don't immediately come to mind. But DraftKings' acquisition of IAC/InterActiveCorp's (NASDAQ:IACI) DraftStreet last month is set to shake things up in the industry.
The financials of the deal weren't disclosed. But as USA Today reports, the merger of the sites, which were No. 2 and No. 3 in the industry, will boost the new company's user base by at least 50%. That, in turn, should move DraftKings closer to FanDuel, the largest daily fantasy sports provider.
So, what are the impacts of the DraftKings-DraftStreet deal? With billions at stake -- the FSTA estimates the entire fantasy space brings in $3.6 billion annually -- it's worth taking a look.
What the merger means for users
Post-merger, DraftKings CEO and co-founder Jason Robins tells me existing and future customers can expect "bigger games and better prizes, as well as a wider selection of different contest types." Exact numbers vary, but it's thought the site had at least 1 million customers a year before the DraftStreet acquisition, Forbes reports. The number should now be much larger, which leads to higher payouts.
"The goal is to build up enough of a player base to drive liquidity -- critical mass means full games and large cash payouts," Robins says. "Our acquisition of DraftStreet increases our player base, and therefore our liquidity, which creates a virtuous cycle in terms of game design and payouts."
According to Forbes, DraftKings paid out $20 million during the 2013 fantasy baseball season -- an average of just under $1 million a week. Its take ranges from 6%-10% of all user fees, the Boston Business Journal reports. FanDuel, which takes a 10% cut, according to SportsBusiness Daily, says it's currently paying out $6 million weekly.
As Robins reveals, the deal should also improve the variety of DraftKings' product offerings. In a space as homogeneous as daily fantasy sports, that's critical. FanDuel founder Nigel Eccles recently explained what DraftStreet brings to the table, in an interview with the FSTA's Paul Charchian:
I thought the [DraftStreet] guys were real innovators. They came up with some great features and games. They were really willing to try new things, like pick 'ems and snake drafts.... The good news is it looks like DraftKings plans to keep that part up.
There could be a new No. 3
Charchian, writing in a monthly newsletter, also says the DraftKings-DraftStreet merger could create "an opportunity for a different, strong, third daily site to emerge." Among the potential new No. 3s are StarStreet, DraftDay, Star Fantasy Leagues, and IAC's own Skyllzone, he says.
Consolidation is the natural result of any maturing industry. The only question is how popular daily games will become going forward.
Unlike traditional fantasy leagues, which force fans to sit on the picks they've made for an entire season, DraftKings, FanDuel, and others give users a new life as soon as the sun comes up. Of the 40 million-plus people who play fantasy sports, the former still outnumbers the latter, but that can always change.
Robins, for one, believes the future is bright. "For the daily fantasy sports," he says, "it means that 2015 payouts across all companies will be well over $1 billion, an incredible accomplishment for such a young niche."
Sports fans are crazed enough without money on the line. If the prizes continue to flow out, daily games should more than keep their attention.
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Jake Mann has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.