Last November, the two biggest players in the fast-growing daily fantasy sports business, DraftKings and FanDuel, announced their intention to combine into one company. They said at the time that they expected the deal to close in the second half of 2017.
Now, exactly seven months later, and halfway through 2017, the merger is in trouble.
[UPDATE, 7/13/17: DraftKings and FanDuel have called off their merger plan. Read on to see all the factors that led them to do it.]
On Monday, the Federal Trade Commission (FTC), along with the attorneys general of California and Washington, DC, took legal action to block the merger by requesting a temporary halt to the merger activities.
On Wednesday, a federal judge enforced a temporary restraining order, halting the merger.
The FTC’s argument: the proposed merger violates Section 7 of the Clayton Act and Section 5 of the FTC Act because the combined company would control “more than 90 percent of the US market for paid daily fantasy sports contests.” The FTC will seek a preliminary injunction to stop the deal.
To put that in layperson’s terms: the FTC believes the combined company would have a monopoly, and it’s suing to stop the merger. (And in fact, “more than 90%” may be conservative; other estimates have pegged the combined DraftKings and FanDuel share at more than 95%.)
“This merger would deprive customers of the substantial benefits of direct competition between DraftKings and FanDuel,” says Tad Lipsky, acting director of the FTC’s Bureau of Competition, in a press release. “The FTC is committed to the preservation of competitive markets.”
Indeed, DraftKings and FanDuel together enjoy an estimated 95% of the daily fantasy sports business. Other companies offer daily fantasy games (including Yahoo, which is much larger than either DraftKings or FanDuel) but have much smaller share in terms of user base.
Marc Edelman, a law professor at Baruch College in New York who has consulted for fantasy sports companies, predicted this trouble would come. When the companies announced their plan to merge, Edelman told Yahoo Finance the merger would likely rank high on the Herfindahl-Hirschman Index, which measures a company’s market concentration to identify a possible monopoly. “The combined share of the merging companies in their market is nearly 100%,” he said. “This is far above the level that the horizontal guidelines indicate is problematic.” Edelman compared it to Coca-Cola merging with PepsiCo (within the scope of the still-small daily fantasy sports market).
DraftKings and FanDuel have argued that the combined company wouldn’t be a monopoly because they clearly plan to operate within the much larger, broader fantasy sports market—a $15 billion business that includes giants like CBS, ESPN, and Yahoo. Their logic is that even though DraftKings and FanDuel are the biggest players in daily fantasy games, they are a small fish in the bigger pond of fantasy sports.