Disney’s $250 million investment in the Daily Fantasy Sports (DFS) company DraftKings has turned many heads. The deal wasn’t unexpected, having been rumored for a couple of weeks, but it’s still a stark policy shift by Disney, a longtime opponent of any form of gambling.
Disney has opposed corporate land-based gambling expansion in Florida, which has put them at odds with Sheldon Adelson.
They cancelled the very popular Marvel slots in 2013, after acquiring Marvel in 2009, in an apparent effort to decouple their brand from gambling.
Disney also poo pooed the idea of launching their own DFS website through ESPN in the past.
Yet here they are, investing a quarter of a million dollars in DraftKings that gives Disney a 20% stake in the #2 DFS company in the world. It would seem being an investor is enough to satisfy their need to remain disconnected from gambling.
A great deal for Disney
The details of the deal certainly seem to indicate Disney got a tremendous deal.
1 / This is a phenomenal deal for Disney/ESPN, provides entrance into DFS space via equity stake & keeps ad team very happy
— Adam Krejcik (@akrejcik) April 6, 2015
As part of the deal DraftKings must purchase $500 million of ad buys across ESPN platforms over the next three years, so for all intents and purposes it seems Disney is on a complete freeroll financially.
This is highly beneficial to Disney as it keeps the very lucrative DFS ad revenue rolling in, something they would likely have to cut off if they launched their own DFS site through ESPN – exclusively promoting their own DFS site for free and excluding potential ad-buyers like FanDuel and DraftKings.
If DraftKings or DFS goes the way of the dodo after two years (which is extremely unlikely) Disney will have recouped their entire investment just through ad buys.
DraftKings owes Disney a monthly avg of $11.9mm for ads over 3.5 years. And 20% of their company. Darth Vader has done well for his Master!
— Joe Brennan Jr (@joebrennanjr) April 6, 2015
DraftKings gets exactly what they want too
The deal is good for DraftKings as well.
With the $250 million investment by Disney, DraftKings is now valued at close to $1 billion ($900 million) despite never turning a profit since the company launched in 2012.
While they’re on the hook to purchase a massive amount of ads from Disney, DraftKings brokered a pretty good deal for themselves, if, and this is a big if, DraftKings’ goal is to usurp FanDuel in the DFS market.
The deal with Disney doesn’t insure DraftKings can overtake FanDuel (FanDuel’s market share is currently in the 60-75% range, while DraftKings’ market share is about 20%) but it does give them the potential chance to do so.
ESPN, perhaps the best vehicle in existence for DFS advertising, is now the sole domain of DraftKings.
FanDuel can continue to advertise on ESPN, but DraftKings has a preferred position, which means FanDuel’s commercials will air between 2AM and 5AM on ESPN 8 – The Ocho – during reruns of UK dart leagues.
FanDuel is effectively blacklisted from advertising on the channel, and will now have to hope they can continue to appeal to new players through local and regional sports channels, radio, and internet advertising.
Deal not without its risks
So what happens if DraftKings can’t make the required ad buys from Disney, and can’t come up with Disney’s $250 million investment?
Nobody really knows. But DFS guru Adam Krejcik’s supposition is probably pretty close to the mark.
5 / Biggest risk for DK is diminishing returns on ESPN ad dollars & getting stuck in multi-yr contract with negative ROI
— Adam Krejcik (@akrejcik) April 6, 2015
The deal also seems a bit too good be true, and will likely need to be highly vetted before it receives official approval.
On DK/ESPN: AOL was hounded by DOJ for circular ad buys back in the day. This deal looks…too similar. The whole deal looks '98, Web 1.0.
— Joe Brennan Jr (@joebrennanjr) April 3, 2015
So what happens next?
For the past year DraftKings and FanDuel have engaged in a game of “anything you can do I can do better,” and while it will be extremely hard for FanDuel to trump a $250 million investment from Disney, I’m certainly not putting it past them.
The announcement also makes it far more difficult for other companies to just hop into the DFS space and expect immediate results. The way FanDuel and DraftKings are going, companies like Amaya who have announced their intentions to enter into the DFS sphere, are going to have to reevaluate the DFS market in the U.S. and how much they are willing to spend on a vertical that has yet to prove itself a profitable one.
With the Disney investment in DraftKings, and FanDuel looking to raise 10-figures of investment capital themselves, the DFS industry is not for the fainthearted. If you want to play in the DFS industry you better be ready to compete… and bring your checkbook.
So the question is, is Amaya, or any other company, willing to invest 10-figures on a DFS website in the U.S. when the legality and long-term sustainability of the industry is still being questioned?
When you have to spend over $100 million a year on advertising to keep up with the Jones’s a lot of people will just let the Jones’s do their own thing and find something else to do.