Daily Fantasy Sports – Industry Update Sep'15

Submitted by Grove

Digital & Interactive Gaming Market Research

September 24, 2015

Adam Krejcik, 714-769-9156 [email protected] Chris Grove, 312-543-9516 [email protected]

Daily Fantasy Sports – Industry Update Sep’15

Adam Krejcik, Managing Director of Digital & Interactive Gaming at Eilers Research, LLC Chris Grove, Senior Consultant, Eilers Research, LLC

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Digital & Interactive Gaming September 24, 2015

Executive Summary

This report focuses on the Daily Fantasy Sports (DFS) market, a rapidly growing segment of the broader interactive gaming industry. For an in-depth overview of the DFS market we highly recommend clients read our white-paper published on October 16th, 2014 titled: “Daily Fantasy Sports: The Future of US Sports Wagering” and a keynote presentation we gave at the Daily Fantasy Sports Expo conference titled “State of the Daily Fantasy Sports Market - 2015”. Finally, click here for a recent podcast (9/16/15) with Adam Krejcik of Eilers Research, being interviewed by Eric Jackson of Iron Fire Capital on the State of the Daily Fantasy Sports Market.

Key highlights:

 Daily Fantasy Sports has seemingly exploded over the past few months’ thanks in large part to unprecedented marketing campaigns from DraftKings and FanDuel. Notably, DraftKings has been the #1 or #2 spender on TV commercials in North America for the better part of the past month, while FanDuel has also risen to the top-10, according to iSpot.tv. The marketing blitz combined with existing team sponsorship deals and other marketing channels, has made it nearly impossible for consumers to have not at least heard of “DraftKings” or “FanDuel”.

 The underlying premise for this massive marketing campaign is fairly simple – acquire as many new DFS users as possible. The FSTA estimates there are 46.2 million season-long fantasy players (18+ in North America) and FanDuel consistently cites some 200 million plus sports fans across North America, which compares to 8mm DFS users (per FSTA) and our own estimate of 3-4mm unique active paying DFS players. Regardless of which figure you use, penetration rates appear to be very low and the potential market opportunity is sizable should DFS truly become mainstream (please see prior reports for potential market sizes and growth trajectories over the next 5-years).

 Our latest checks paint a mixed picture in terms of the current health of the DFS industry. On the one hand, both DraftKings and FanDuel appear to be well on track to exceed the estimates we laid out at the beginning of the year; however, marketing spend has also been much higher than we anticipated (2-3x greater) making it difficult to extrapolate organic growth rates. Moreover, the marketing war between both FanDuel and DraftKings appears to be driving up implied user acquisition costs. This is a troubling sign for an industry that is already being scrutinized for a widening skill- gap margin (this could eventually lead to major churn/attrition problems, which would be disastrous in the case of rising CAC). Finally, almost all of the major tier-2 DFS operators (Yahoo, StarsDraft, Fantasy Aces, and Fantasy Feud) have been experiencing considerable overlay (i.e. negative net revenues) during the first 2-weeks of NFL ’15 season, which signals the market is not yet mature enough to handle more than two operators.

 The legal landscape outlook appears to be very complex and while our underlying thesis remains that the DFS industry will prevail thanks to some very powerful allies (i.e. Sports Associations, major media conglomerates, etc.) it’s a dynamic situation and almost impossible to predict with a 100% degree of certainty. Key things to watch for in the near future include: Nevada Gaming Control Board decision on how to classify DFS, review of DraftKings by Massachusetts AG, potential hearing on DFS at request of NJ congressman Pallone, and official commentary from the American Gaming Association (AGA) with regards to how they view DFS.

 The major positives we see for the DFS industry are as follows: very attractive demographic for advertisers, early player cohorts love the product / service (our proprietary player surveys & those conducted by DK & FD all indicate very healthy “Net Promoter Scores”), paying player penetration rates relative to the number of season-long fantasy players is still very low, minimal attrition among early player cohorts and y/y growth in average spend per player, potential greenfield opportunity in international markets, growing popularity & acceptance of eSports, support from major Sports Associations. Finally, while many in the media have been quick to point out that FD & DK may already be alienating users due to such aggressive marketing campaigns, we believe the counter argument is that they have created tremendous buzz, which in today’s world of endless news cycles and daily celebrities is not an easy feat (even with a very large budget). The ability to leverage this new brand equity and figure out additional ways to monetize their user base (beyond a basic rake based model) may be the key factor determining whether FanDuel & DraftKings can become viable, long-term, scalable businesses.

Market Share Trends & Developments

According to data compiled by Legal Sports Report (LSR), which covers the legal U.S. sports wagering industry, including daily fantasy sports and state-regulated sports betting, DraftKings is the largest DFS operator. FanDuel is the 2nd largest operator, while Yahoo! appears to have a relatively firm hold on the #3 position. The rankings are based on data collected (details below) over a trailing seven day period; we note DK / FD have held the #1 and #2 respective position since LSR began collecting data in July’15.

Site Standings are based on an average of data collected across the trailing seven days including:

•GPP Players (20%): Total number of entries for tournaments with guaranteed prize pools

•GPP Prizepool Excluding Empty (35%): Value of all guaranteed prize pools in tournaments with at least 1 registered player.

•GPP Prizepool (10%): Value of all GPP regardless of whether anyone has registered.

•Total Prizepool Excluding Empty (10%): Total of all prize pools listed in lobby with at least 1 reg player.

•Total Paid Players (20%): Total number of entries in lobby for contests with real-money entry.

•Total Prize Pool (2.5%): Total of all prize pools listed in lobby regardless of whether anyone has registered

•Total Players (2.5%): Total entries across lobby, including all paid and free entries.

Source: LegalsSportsReport.com

Third party web tracking sites such as Alexa and SimilarWeb also corroborate LSR data and show DraftKings with a slight edge over FanDuel. Finally, Google Trends also indicate a greater number of key word searches for DraftKings” vs. “FanDuel” over the past 90-days.

Source: Google Trends

DraftKings overtaking FanDuel is notable given what appeared to be a formidable lead for FanDuel. Notably, FanDuel reported entry fees of $622 million in CY14 versus a reported $304 million in entry fees for DraftKings. Moreover, FanDuel had indicated that it will pay out over “$2bln in prizes” in CY15, while DraftKings has indicated it will pay “over $1bln”; however, reviewing the latest data sets would suggest FD/DK will likely pay out a similar amount in CY15.

Looking at data from the first two weeks of the NFL ’15 Season also shows DraftKings with a lead in terms of total entry fees & prizes paid out, albeit relatively similar in terms of net revenues.

NFL'15 - Week1 GPPs Cash Games Total Entry Fees Prizes Entry Fees Prizes Entry Fees Prizes Net Revenue % hold DraftKings $24,938,052 $21,925,928 $39,584,210 $35,625,789 $64,522,262 $57,551,717 $6,970,545 12.1% FanDuel $14,200,094 $14,419,762 $37,368,668 $33,631,802 $51,568,762 $48,051,564 $3,517,199 7.3%

NFL'15 - Week2 GPPs Cash Games Total Entry Fees Prizes Entry Fees Prizes Entry Fees Prizes Net Revenue % hold DraftKings $21,667,133 $21,809,237 $40,881,383 $36,793,245 $62,548,516 $58,602,482 $3,946,034 6.7% FanDuel $17,289,657 $15,042,160 $38,421,460 $34,579,314 $55,711,117 $49,621,474 $6,089,643 12.3% Source: www.superlobby.com, Eilers Research, LLC

Calculations:

 GPP entry fee/prize data is based on data from www.superlobby.com  Cash game entry fee/prizes is based on Eilers Research, LLC estimates  Net revenue = total entry fees – total prizes  % hold = net revenue / total prizes

Our research suggests a majority of all entry fees (and profits) are actually generated from “Cash Games” versus “Guaranteed Prize Pools / GPPs” and while it’s very difficult to extrapolate since no DFS companies have reported this metric our discussions with industry insiders suggest Cash Games typically account for 50-75% of an operator’s total entry fees. We would also note that in our recent “DFS Player Survey”, 47% of users said they allocate “10% or less” of their bankroll to GPPs, while 23% allocate “10% to 30%” of their bankroll to GPPs.

What the data means? Reverting back to market share we believe DraftKings does currently have an edge over FanDuel when one measures it on total entry fees and prizes; however, they appear to be pretty even based on net revenues. Finally, on a combined basis FanDuel and DraftKings look to be generating an average of $110M+ in entry fees per week during the start of NFL ’15 Season, which compares to Nevada that generated an estimated $90 million per week in handle from Football (includes NFL & NCAA) or $40-$50 million from NFL only.

User Levels

Arguably the most important metric to watch for the DFS industry right now is user levels. The FSTA / IPSOS estimates there are now 8 million DFS players; however, we believe active unique paying DFS users is likely much less (we est. closer to 4mm). Last year, FanDuel reported just over 1 million paid active users in 4Q14, and assuming 3x growth (per recent comments from management) would imply a potential active paying user base around 3 million by the end of NFL’15 season. DraftKings CEO, Jason Robbins, was also recently quoted in the Wall Street Journal saying they now have over 4.5 million users. While FanDuel and DraftKings are undoubtedly adding hundreds of thousands of new users each week it’s important to understand the term ‘”user” is very broad (different meanings across different companies) and there is likely considerable overlap among the two companies in terms of user bases.

Online Consumer Entertainment User Base* (in millions) Online Consumer Entertainment PayingUsers* (in millions) 120.0 50.0

45.0 44.0 100.0 41.4 100.0 40.0

35.0 80.0 30.0

25.0 60.0 55.0 20.0 46.2

40.0 15.0

10.0

20.0 5.4 20.0 5.0 3.9 4.0 12.0 2.0 2.5 8.9 10.0 1.0 1.1 0.0 DFS (unique Zynga Active Paying NFL Sunday DFS (unique Pandora (paid Candy Crush Netflix subs Amazon 0.0 paid actives (Monthly Online Poker Ticket paid actives subs) Saga (US only) prime DFS players in Yahoo! Fantasy ESPN Fantasy Zynga Poker Total Season-long Aggregated NFL Twitch (Monthly 4Q14) Unique Players (US (DirecTV) 4Q15e) (Monthly members (US CY15 (per FSTA) Players Players (Monthly Active Fantasy Players "Likes" on Active Users) Payers) only, CY10) Unique only) Users) (per FSTA) Facebook Payers) Source: company reports, ESPN, Zynga, FSTA/IPSOS, Facebook, Twitch, ER Source: company reports, Zynga, pokerscout, Pandora, King, Netflix, ER, LLC

If we look at DraftKings NFL Millionaire Maker (for week 1 and week 2) we calculate it had an average of 285k unique users. This implies just 6% of its registered user base (using 4.5mm estimate provided by management) is participating in the company’s marquee tournament.

DraftKings Millionaire Maker – NFL 2015 Week 1 Week 2 % chg w/w Total Entries ($20/ea) 520,448 426,090 -18%

Total Entry Fees $10,408,960 $8,521,800 -18% Total Prizes Awarded $10,000,000 $10,000,000 0% Profit/(Loss) $ 408,960 $ (1,478,200) NA effective rake % 4.1% -14.8% NA

Users with single entry 243,743 179,786 -26% Users with multiple entries 92,466 54,669 -41% Total Unique Users 336,209 234,455 -30% Source: DraftKings, Eilers Research, LLC

In our opinion, it’s far more likely that 10-20% of DraftKings active user base is participating in its Millionaire Maker, which would imply an “active paying user base” of 1.5 to 2.5 million. Looking at it another way this would mean DraftKings is converting roughly 30% of its registered user to paying players, which we believe is a fair proxy.

Customer Acquisition Costs

In the tables below we provide an updated customer acquisition cost analysis. Based on total marketing spend to date, we believe implied customer acquisition costs (CAC) are currently around ~$190 per paid active user at DraftKings and ~$110 per paid active user at FanDuel. This compares to our estimates for CAC of ~$100 for DK last year and $70-$80 for FanDuel last year.

Key assumptions:  New registered users and ratio to paying players is based on Eilers Research, LLC estimates  TV ad spend is based on data collected from iSpot.tv, while “Other” acquisition spend is based on Eilers Research, LLC estimates. As a rule of thumb, we estimate TV ad spend typically accounts for 50% of DK/FD total marketing expenses.

DraftKings FanDuel New registered users (YTD'15) 4,000,000 3,000,000 Est conversion rate to paid user 30% 30% New paid actives (YTD'15) 1,200,000 900,000

TV ad spend (YTD'15) $134,000,000 $49,000,000 Other (sponsorships, web, print, radio, social) $90,000,000 $48,000,000 Total user acquisition spend $224,000,000 $97,000,000 Implied cost per registered user $56 $32

Implied cost per paid active $187 $108 Source: iSpot.tv, Eilers Research, LLC

We estimate revenue for a new paid active player is typically between $100 - $125 in year-1, which implies a breakeven period of roughly 12-months for FanDuel and roughly 18-months for DraftKings at the current customer acquisition rate.

A closer look at TV ad spend. The most prevalent (and costly) form of advertising for DraftKings and FanDuel has been its TV commercials. According to data collected from iSpot.tv, DraftKings had spent $82 million from Jan1-Sep1, 2015 of TV:

Source: iSpot.tv

In the most recent listing of top-10 TV ad spenders (for trailing 7-day period ending September 23, 2015) DraftKings was listed as #2 spender and FanDuel was #5. Perhaps what is most startling about this ranking is the other companies on this list will generate on average $105bln in revenues for CY15 versus at most $200 million for DK & FD and have an average market capitalization of $164bln versus $1bln+ valuations for FD/DK (based on most recent fundraising rounds).

In other words, FanDuel and DraftKings TV ad spending over the past few weeks has been on par with companies who will generate 500x more in revenues. Clearly FD and DK are is still in the early growth stage (i.e. 300%+ y/y growth in CY15) versus these other companies that are mostly mature; however, if we consider that our total industry wide revenue estimate for the DFS industry is $1.8bln in CY20 it presents an interesting question – would this type of TV ad spend be justifiable even if FD & DK were generating $1bln in annual revenues?

Company Est. TV Spend Revenues CY15e Market Cap Warner Bros (Time Warner) $17.6 $28,600 $54,780 DraftKings $16.6 ~$100-$200 $1,200 AT&T $15.4 $153,100 $197,290 Geico (Berkshire Hathaway) $13.9 $210,500 $316,780 FanDuel $13.7 ~$200 $1,000 Verizon $11.6 $131,200 $178,670 Universal Pictures (Comcast) $11.1 $73,100 $143,620 Microsoft $9.8 $93,600 $350,630 Audi $9.8 $53,571 $28,670 Nissan $9.2 $95,798 $42,026 Average (ex-DK & FD) $12.3 $104,934 $164,058 Source: iSPot.tv, Thomson One, Wall Street Journal

In our opinion, this level of TV ad spend is unsustainable; however we do believe that each company has created significant brand value/awareness. To the extent that both FanDuel and DraftKings can leverage this new found brand-equity and monetize users beyond just the current rake based business model will be the key factor in determining the longevity of these business and supportive of higher valuations.

Latest DFS Industry Projections

In the chart below we highlight our latest DFS industry projections (baseline assumptions), which reflect latest our expectations and incorporate updated figures for FanDuel & DraftKings, and entrance of Yahoo!.

Daily Fantasy Sports Market Size- Entry Fees* ($ in millions) Source: Eilers Research, LLC $20,000

$18,000

Entry fees (baseline forecast): $16,000 New CY15e = $3.7bln vs. old estimate of $2.4bln New CY20e = $17.7bln vs. old estimate of $14.5bln

$14,000

$12,000

$10,000

$8,000

$6,000

$4,000

$2,000

$- CY11 CY12 CY13 CY14 CY15E CY16E CY17E CY18E CY19E CY20E New DFS Forecast (Baseline) Old DFS Forecast (Baseline) * Note: entry fess do not equal revenues. Market size by revenues can be calculated by multiplying entry fees by 9-10% (i.e. expected hold rate for industry) Source: Eilers Research, LLC

Legislative and Regulatory Update

The past months have witnessed an unprecedented amount of legislative and regulatory activity surrounding daily fantasy sports.

State-level Developments

There have been material developments in six states:

Michigan: Michigan offers an interesting microcosm of the broader debate over DFS. On one hand, SB 459, introduced on September 9, seeks to exempt DFS from state gambling law. On the other, the head of the state's gaming control board said on Sept 1 that DFS is "illegal under current Michigan law" - arguably the most aggressive statement to date by a regulator from a state where FanDuel and DraftKings operate. Most operators, including FanDuel and DraftKings, elected to stay in Michigan following the comments, but StarsDraft, Star Fantasy Leagues, and Draft Ops all moved to suspend operations in the state.

Interestingly, the introduction of SB 459 triggered remarks from MGM CEO Jim Murren that appeared to temper his earlier remarks regarding DFS. Murren, who in April 2015 said that those whole consider DFS to be something other than gambling are “absolutely, utterly wrong,” issued a statement on Sept 8 that read in part: "The daily fantasy industry is clearly enormously popular, and MGM believes that there is no reason to prohibit customers from participating in skill-based daily fantasy contests. We fully support clarifying any legal confusion so that the companies delivering these services and their customers have clarity and certainty.”

Nevada: Nevada regulators are currently undertaking an analysis of DFS with an eye towards articulating where the product stands vis a vis Nevada gaming law. There have been no clear indications as to which way regulators are leaning, but Nevada GCB Chairman A.G. Burnett did remark in July that casino operators "need to understand the legal issues if they step into" DFS. Nevada regulators have four choices: 1) say nothing; 2) conclude DFS (or, more specifically products that conform to certain guidelines) is gambling; 3) conclude it isn't; 4) conclude DFS is a product that isn't quite gambling, but one that still requires some level of regulatory oversight.

The review comes in the context of a growing chorus of aggressive commentary on the legal / regulatory status of DFS from the commercial casino industry, a chorus that includes MGM's Murren, Joe Asher of William Hill US, and Boyd CEO Keith Smith.

Massachusetts: State AG Maura Healey commented to reporters on Sept 17 that her office was "reviewing" DraftKings - a review that was subsequently reported to be at the request of DraftKings. Healey is characterized by some in the media as "anti- gambling," but the tone of her brief comments to date have been non-confrontational. Still, we note that a review carries with it inherent uncertainty for DFS operators. We further note that MGM has a significant presence in Massachusetts, Nevada, and Michigan.

California: On the last day of California's legislative session, Assembly Adam Gray repurposed an existing bill via a wholesale amendment that transformed AB 1437 into a vehicle for regulating daily fantasy sports. Gray also advanced the primary bill for regulating online poker in California in the 2015 session, a bill that ultimately stalled in the Assembly. AB 1437 would regulate DFS in a manner similar to how gambling products are handled in California. A focus on consumer protection measures could provide Gray's attempt with some political traction, but overall the legislative path forward for the bill is questionable at best. We won't see anything further on this front until December.

Florida: In Florida, local media reported in September that FanDuel and DraftKings retained high-powered lobbyists in an attempt to secure the status quo for DFS in the state. House Majority Leader Dana Young told WPTV that she considers fantasy sports "not gambling" and supports changing state law. State AG Pam Bondi's office indicated to media that there is no open investigation into DFS operators, but also noted that the office would not rescind a 1991 opinion that many interpret as a blow to the presumed legality of DFS in Florida. The recent controversy surrounding so-called "Internet sweepstakes cafes" in the state may complicate efforts to secure a carve-out for DFS.

Louisiana: A bill that sought to exempt DFS from state gambling law - HB 475 - was pulled by its sponsor in early June. According to source commentary to LegalSportsReport.com, commercial gambling interests and morality-based opposition combined to stall the bill's progress.

Additional Developments

Congressional hearing requested: Asserting that "the legal landscape governing [DFS] remains murky and should be reviewed," New Jersey Rep. Frank Pallone sent a letter on September 14 to the chairs of the House Committee on Energy and Commerce requesting a hearing regarding that landscape. Source commentary on the actual likelihood of the hearing taking place is mixed. Rep. Fred Upton of Michigan, who chairs the committee, subsequently told The Hill that "There’s a lot of things on our front burner right now, but I think this is an issue that we ought to take a look at."

On the Senate side, Sen. Cory Booker of NJ told reporters on September 22 that "I’m now investigating [DFS]. I just want to look at it to see, is it gambling, is it not?… So I haven’t looked at it enough to give you any conclusions. But obviously I think it’s something that everyone should take a look at. And do we want – does it in any way violate some of the parameters we have with gambling and entertainment and skill endeavors?" Booker hinted that a Senate hearing wasn't beyond the realm of possibility, noting that "there are some of my colleagues who are looking at it even more. Obviously the commerce committee, which I’m on, is the right place to do it.”

Collegiate concerns: In comments on September, NCAA officials clarified that DFS was among the activities student-athletes could not participate in under the organization's policies regarding gambling on college sports. The policy is not new and we are unaware of any enforcement cases involving DFS.

Meanwhile, major conferences sent mixed messages on DFS. Big 12 Commissioner Bob Bowlsby had harsh words for the product in comments on September 20, asserting that DFS "is gambling. You’re wagering money and taking your chance on winning. And – oh, by the way -- just like they didn’t build all the big buildings in Las Vegas on the backs of winners, they’re not giving away million-dollar checks on the backs of winners, either. They are a lot of people losing significant amounts of money in these games."

The five "power conferences" reportedly sent a letter to some DFS operators asking them to discontinue DFS contests based on college football, but the Pac-12 clarified that it will continue to accept DFS advertising on the Pac-12 Network.

AGA analysis continues: The American Gaming Association, the primary trade group for the commercial casino industry, continues to progress toward an official position on DFS. The timing of the group's report is not set in stone, but observers expect clarity on that point in the fall. In response to the news of Massachusetts' review of DFS, AGA head Geoff Freeman echoed the group's desire for legal clarity (which, to many, implies regulation), saying: "[...] the current lack of legal clarity is an obstacle. The casino gaming industry — one of the most regulated in Massachusetts — agrees this is an issue that must be addressed"

DraftKings UK: DraftKings successfully acquired a remote wagering license from the UKGC in August and in September announced plans to launch in the UK - with a shared player pool that will include US players - by 4Q15.

FanDuel, DraftKings Enter Fantasy eSports

DraftKings

On September 18, DraftKings announced plans to add eSports to its roster as of October 1, 2015. The launch plans were paired with an announcement of partnerships between DraftKings and six significant eSports entities (complexity Gaming, SK Gaming, Cloud9, Counter Logic Gaming, Team SoloMid, and Mousesports).

In a recent Eilers Research report - "eSports Betting: It's Real, and Bigger Than You Think" - we analyzed the global marketplace for eSports betting, including daily fantasy eSports. We concluded that 2015 will see some 600,000 unique customers pay nearly $20mm in entry fees on DFeS, a market currently cornered by Vulcun and AlphaDraft. Our projections through 2020 have both of those numbers accelerating at a clip not dissimilar from the growth witnessed by DFS over the last three years.

Our observations regarding DraftKings' expansion into eSports:

DraftKings will face some barriers to eSports entry. The existing cultural and brand identity of the operator may not mesh naturally with the typical eSports fan. Vulcun and AlphaDraft have a meaningful lead in terms of brand awareness within the eSports community, product maturity, and marketing gameplan.

But DraftKings will also enjoy unique advantages. The partnerships detailed above should mitigate some of the cultural barriers to entry. Vulcun and AlphaDraft have a head start, but it's a brief one (both launched in January 2015) that can likely be overcome with DraftKings' significant resources. There will be some cross-sell to the existing user base at DraftKings - potentially only a small percentage, but every player counts in a liquidity-driven environment.

Some unique characteristics of DFeS influence the contours of the opportunity. eSports is growing rapidly, but remains a highly fragmented industry at the operator, league, event, and team levels. Betting is not as endemic to eSports as it is to traditional sports. There are legitimate, multifaceted concerns about eSports match integrity. The perceived acquisition cost of a DFeS customer is far lower than the cost of acquiring a DFS customer, but our assessment is that the ARPU is also quite lower for DFeS as opposed to DFS.

Ultimately, the move is a clear win for DraftKings. Launching eSports will not move the near-term revenue needle at the site. But it will allow DraftKings to tap a new customer base at an attractive acquisition cost, allowing rapid overall user growth to continue. Adding eSports will provide an additional set of games in the lobby, increasing the total wagerable events available to players, and another point of differentiation from FanDuel.

Finally, eSports may prove a useful tip of the spear for DraftKings should they pursue international expansion beyond the UK. eSports will serve as a valuable point of entry in markets where American sports lack popularity. And the international market for eSports wagering is nowhere near as saturated as the market for traditional sports betting, offering DraftKings an interesting opportunity to define the eSports wagering space in markets where a standard way to bet has yet to be set.

FanDuel

FanDuel is taking a slightly different path into daily fantasy eSports. Credible reports indicate that the company has purchased AlphaDraft, currently the number two daily fantasy eSports site behind Vulcun (we estimate roughly 55% / 45% market share Vulcun vs AlphaDraft) .

Our observations regarding the acquisition:

The price. Terms have not been disclosed, but we'd expect the purchase price in the $40-$60 million range, although the headline number could be inflated by the specifics of the deal structure. AlphaDraft raised one public round of $5mm in May 2015 and did not announce a valuation attached to that round, but we believe a $20mm-$25mm post-money valuation is reasonable. AlphaDraft has experienced significant user growth in the months following the first funding round and investors likely commanded a 2-3x return.

Acquiring vs building. FanDuel will face many of the same challenges, and enjoy many of the same advantages, as DraftKings upon entering eSports. But the buy versus build approach yields a slightly different dynamic for FanDuel. The bolt-on acquisition of AlphaDraft will likely make for a smoother transition into the space, allowing FanDuel to hit the ground running. FanDuel may continue to operate AlphaDraft as a standalone brand (perhaps with a shared lobby), potentially sidestepping some of the cultural barriers to eSports entry described above (although AlphaDraft is not exactly a household name in the eSports community, at least not to the level of a Vulcun or Cloud9).

What about Vulcun? This rush of activity puts DFeS category leader Vulcun in an interesting position. With the major DFS sites having already charted their eSports path, will Vulcun continue to go it alone as a DFeS site, look to expand into a broader eSports betting suite, or seek to pair up with a deep-pocketed, but low-liquidity DFS operator?

For more information regarding the eSports betting space, contact us for details about our recent report "eSports Betting - It's Real, and Bigger Than You Think."

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