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Can DraftKings Be the Netflix of Online Betting?

By Daniel B. Kline – Updated Jul 2, 2020 at 8:44AM

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There are real similarities in how this upstart digital gambling-focused company is flying under the radar into a market-leading position.

When Netflix (NFLX 0.01%) first pivoted to streaming content from mailed DVDs, it was a relatively small company. It faced potential competition from major players like Disney (DIS 0.08%), Comcast, HBO (which was then owned by Time Warner but is now owned by AT&T (NYSE: T)), and even Blockbuster.

All of those companies could have squashed Netflix by competing with the current streaming leader's moves in 2007. None did quickly. By the time the first rival, Blockbuster, tried to, it was too late.

Netflix had the first-movers advantage, which more than compensated for the fact that it was a relatively unknown company offering a streaming library of reruns and movies people had already seen. The company owned nothing, but by being first, it was able to gain customers and make favorable deals with content owners who thought they were getting free money for content that had already been sold to DVD, TV, and syndication formats.

DraftKings (DKNG 1.45%) now sits in a similar position. It's surrounded by giants that are better positioned to become leaders in digital gambling. It's possible, however, that the early moving upstart will make enough noise and gain enough customers to force its way into the lead.

A group of young adults looks happy watching something on an iPad.

Image source: Getty Images.

What DraftKings faces 

The online betting and daily fantasy sports app faces a number of problems. All major casino companies have eyes on digital gambling. The big boys, including Caesars (CZR) and MGM (MGM -1.36%), have online gaming capabilities and multistate footprints. Right now, there are limitations -- you have to be in Nevada to place a sports bet using the Caesars' app, for example. Still, those players have huge marketing lists and massive rewards programs.

Caesars and MGM rewards program members can earn tier credits and achieve a higher status that comes with real perks like free parking and waived resort fees. These are major draws that DraftKings can't compete with. Any loyalty offering DraftKings launches can't provide what casinos do in terms of comps and other perks. 

DraftKings may also face competition from Disney. That may seem unlikely, but Disney's ESPN now has programming devoted to sports betting. As that platform continues to cater to hardcore sports fans -- and cord-cutting trends suggest that it will -- it's easy to envision ESPN-branded sports betting.

Are these red flags?

Call them yellow flags. All of these companies can and may crush DraftKings. But Disney, Blockbuster, and others had every opportunity to stop Netflix before it mattered. This narrative may play out again with DraftKings.

Many states have been slow to legalize gambling. That could seem like a handicap for DraftKings, but it might actually prove to be an advantage. 

The lack of legislative support has made it seem like there's no rush for the big boys to address this space. That may give DraftKings time to grow its customer base and build out its services, decreasing the risk that people will leave its platform for bigger and slower players. 

Is that the likely scenario? Perhaps not -- but neither was Netflix winning the streaming race.

DraftKings has its team on the field, while its rivals haven't entered the space (aside from apps aimed at players who are in or near casinos). It's possible that Caesars, MGM, Disney, and others may stay away long enough for DraftKings to sneak in and become a market leader.

Daniel B. Kline owns shares of Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool recommends Comcast and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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