5 Things to Know About the Failed FanDuel-DraftKings Merger

Jul 14, 2017

This article first appeared in Term Sheet, Fortune’s newsletter on deals and dealmakers. Sign up here.

Fantasy sports betting startups FanDuel and DraftKings have called off their planned merger, a certain disappointment for everyone involved. Some notes:

Plans: While no formal integration had happened, the companies were, of course, drawing up plans for the 2017 football season: How to integrate their tech stacks, expansion offerings into new sports and more casual fans, how to keep both brands alive while burning slightly less gigantic piles of cash on advertising now that they aren’t directly competing with each other, etc.

Back in the C-suite: DraftKings CEO Jason Robbins was set to become CEO of the combined entity; FanDuel head Nigel Eccles was set to become chairman and would no longer be involved in day-to-day operations. Now, Eccles will stay on as FanDuel’s CEO, the company tells Term Sheet.

Formal statements: Robbins said terminating the merger was in the best interests of DraftKings’ customers, employees, and investors, as it will allow the company to “singularly focus on our mission.” The company cites 8 million users with 30% annual revenue growth.

FanDuel’s Eccles’ statement said FanDuel still believes the merger would have “increased investment in growth and product development thereby benefiting consumers and the greater sports entertainment industry,” but echoed Robbins’ sentiment that ending the merger was in the best interest for all parties. “There is still enormous, untapped market opportunity for FanDuel,” he said.

What happened? This deal was supposed to be a slam dunk, to shamelessly use a metaphor from a different sport.

Then the FTC stepped in. In June, the FTC said it would try to stop the deal on antitrust concerns, noting that a combined DraftKings and FanDuel would own 90% of the U.S. daily fantasy market.

I asked sources close to both companies if there was anything more to this beyond the regulatory challenges, and they all said the same thing: Nobody wanted another drawn-out, distracting, expensive legal battle that they could easily wind up losing.

This deal was supposed to reduce the amount of resources the companies were spending on regulatory issues. (Remember, each company was fined $6 million for false advertising from the New York attorney general last October.) The companies argued that, separately, they were doubling the resources spent on legal battles -- and yes, on advertising against one another – and that ultimately increases cost, which get passed onto consumers. So the only winner here is the T.V. networks, on which those ads will run.

Why, though? The antitrust scrutiny feels unusual to me. Who didn’t expect these two companies to eventually merge? That’s just what happens with new, novel markets. They start out with dozens of competitors but eventually consolidate down to two, and then, after an intense rivalry, they merge. Groupon bought LivingSocial. ELance merged with ODesk. Sirius merged with XM. Rover bought DogVacay. DraftKings and FanDuel was, I thought, just the latest example.

But daily fantasy sports betting has been a target of regulators for years based on its characterization that fantasy football is a “game of skill.” The companies had hoped to argue that the merger does not create a monopoly because the market for fantasy sports is huge. And it is! But most providers of fantasy software don’t offer betting.

I highly doubt Lyft and Uber would ever merge, but if they wanted to, this deal should be a warning: The FTC apparently only likes mergers between tech startup competitors when they’re tiny, when one or both companies is failing, or preferably, both.

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