FanDuel and DraftKings will merge and combat regulation of Daily Fantasy Sports

The great Daily Fantasy Sports war of 2015 fizzled in 2016 as FanDuel and DraftKings became mired in regulatory battles and fading enthusiasm for their product. On Friday, the two companies announced that they will be merging, equipping the new company with more resources to fight the challenges from state legislatures that threatened their business model.

The agreement is being termed a “strategic merger of equals.” Though financial terms of the agreement have not been released, each company will have a 50 percent stake in the way the new company is run. DraftKings CEO Jason Robins will be the new CEO of the joint entity. FanDuel CE Nigel Eccles will be the new chairman.

The new company does not have a name yet, and will be co-headquartered in Boston and New York City (DraftKings’ offices are in Boston, FanDuel is in New York.) The transaction is expected to close in 2017.

In a joint press release, the companies said that they are hoping they can “accelerate work with government officials to continue to develop a standard regulatory framework.”

Outside the Lines’ lengthy story from August is the ultimate documentation of the rise and fall of Daily Fantasy Sports. You will likely remember the ads if you were anywhere near a television in 2015. The two companies sunk more than $750 million into marketing last year, and that resulted in roughly $3 billion in contest fees.

And yet, as OTL reported, the two companies failed to turn a profit, in large part because of their exorbitant attorney expenses. The amount of money flowing into Daily Fantasy Sports was sure to draw eyes on the industry. DraftKings and FanDuel took advantage of a federal gambling law that specifically did not prohibit “fantasy or simulation sports,” but that didn’t stop states from challenging them. New York was the first, and biggest, challenge to Daily Fantasy Sports, but grand juries in Boston and Tampa soon also informed the companies that they were under criminal investigation.

That the companies were challenged isn’t surprising, but neither DraftKings or FanDuel seemed to anticipate the extent of the legal battle, or properly address the ways in which their game was compromised. Via OTL:

For years, the two companies’ leaders had been warned by investors, lobbyists, consultants and even some players about a coming day of reckoning. Yet they relentlessly promoted their games as a means to get rich quick when they knew only a tiny percentage of their customers were winning more often than losing. They failed to aggressively move against big-bankrolled players who dominated newer players, sometimes with predatory behavior or technological advantages. And they allowed their own employees to play — and win millions — on their rivals’ sites, despite their having access to odds-improving proprietary data.

The companies were fighting two battlefronts — against each other, and also regulators. Given how the directly competed against each other, it’s unlikely that FanDuel and DraftKings took their decision to merge lightly. Robins and Eccles are widely known to have animosity for each other. However, the move allows them to concentrate their efforts on preserving the future of Daily Fantasy Sports in some (likely heavily regulated) form, and potentially return to profitability much more quickly.

Of course, that’s if the merger goes through. The fact that the two biggest companies offering Daily Fantasy Sports are coming together raises antitrust concerns. There may be yet another regulatory battle for FanDuel and DraftKings on the horizon amid all the other questions about how the joint company will function.