Tune into virtually any sporting event this month, and you're certain to hear an advertisement for daily fantasy sports site DraftKings. Or for its rival FanDuel. Or, more likely, for both of them.
It's time for these two companies to merge.
For consumers, there is little that distinguishes DraftKings from FanDuel. The former offers a wider range of contest options, while the latter has been around a few more years. Beyond that and some front-end cosmetics, the user experience is virtually interchangeable. In fact, the two sites are so similar that a small scandal erupted yesterday after a DraftKings employee allegedly accessed user data from his company to win big on FanDuel.
From a business perspective it's much the same. Boston-based DraftKings has raised slightly more outside capital, while New York-based FanDuel has a slightly higher valuation. Neither is profitable or publicly-traded. Together, they make up an estimated 95% of the real-money fantasy sports market, but are facing new challenges from longtime "free" fantasy giants like Yahoo (yhoo) and CBS Sports (cbs), which have both built their own platforms for "daily" fantasy.
A merger might bruise some entrepreneurial egos, but is the smart thing to do for both companies and their investors.
For starters, each company is spending a fortune in advertising -- almost all for the purpose of acquiring new users before the other one does. DraftKings and FanDuel spent a combined $100 million ($80 million and $20 million, respectively) in television advertising during the first week of this year's NFL season. Yes, just in a single week. Imagine if they had combined their firepower. Even if a combined "DraftDuel" had purchased the exact same number of ads, it would have gotten better pricing from media outlets that would be unable to play the two companies off of each other (not to mention 'bulk buying' discounts).
Second, the challenge posed by Yahoo and CBS Sports is real. "They’ve got easy, cheap access to so many existing users that they don’t need to make the same dramatic marketing spend," points out Paul Charchian, president of the Fantasy Sports Trade Association. "That’s a huge advantage."
Not only would a DraftKings/FanDuel merger create a more powerful incumbent, but it also would remove the possibility that one of them gets acquired by the larger media company. You want to give DraftKings CEO Jason Robins a nightmare, let Yahoo buy FanDuel. And CBS buying DraftKings would do the same to FanDuel CEO Nigel Eccles. (The exclusive partnership DraftKings scored with ESPN, which begins in January, is already a loss for FanDuel, although Eccles frames it as something FanDuel wouldn't have wanted anyway since it requires a long-term commitment to a company not known for its technology.)
Finally, there are some decent parallels to the 2005 merger between satellite radio providers Sirius and XM Radio. Those two companies were clear leaders in a relatively new consumer tech market, and also spent a fortune advertising against one another. Neither had been profitable. The merger created an unassailable industry leader—even if the value of that particular industry had already tumbled substantially from its dotcom-era highs.
"Yeah, it makes sense for them to do it, particularly when you look at all of the money they're spending right now," one DraftKings investor tells Fortune. When asked for a compelling reason for them not to merge, he quipped, "Want me to make one up?"
This isn't to say there aren't some drawbacks. The daily fantasy sports market has been enabled by pro sports league partnerships, particularly when it comes to making sure lawmakers continue to view their contests as "games of skill." (See: Are DraftKings and FanDuel legal?) But, as with advertising pricing, the big leagues benefit from the DraftKings vs. FanDuel competition. (MLB and all its teams partnered with DraftKings; the NBA partnered with FanDuel but allows its teams to go with one or the other; the NFL has resisted a league partnership, but the NFLPA made one with DraftKings.) A combined company might prove a less attractive partner. It also might be seen as more of a target for regulators, including those at the antitrust-focused Federal Trade Commission.
Finally, there is the question of practicability. DraftKings' Robins has said in the past that he would consider a merger, but recently added: "Even if we were really in favor of it, [FanDuel] would need to want to do it too." FanDuel's Eccles has said he isn't interested in such a deal.
He ought to reconsider.