If allowing people to degenerately gamble every day on every sport is creating value, then DraftKings is creating a ton of value. Before the advent of daily fantasy sports sites such as DraftKings and FanDuel, the only way to play fantasy sports was to draft a team at the beginning of a season and commit to monitoring that team you drafted throughout the entire season. Not only was this a bigger commitment than a lot of people wanted to make, but this led the bottom teams not caring about the rest of the season – quickly decreasing the quality of the overall league. There were only so many incentives a league could put in place for not coming in last (paying extra money, having to sit for the SATs and publicly post your score, wearing some ridiculous outfit in public, etc.) that would keep people interested for the duration of the season regardless of their record. While this may not seem like a dire problem, according to the Fantasy Sports Trade Association back in 2014, there were 33 million people playing fantasy football alone.
Enter DraftKings – solving both the commitment problem as well as the season-long problem (for all sports). All of a sudden, sports that people never associated with fantasy sports (i.e. golf) were now interesting to bet on for just one tournament. The user experience was radically revamped as well. People could easily draft teams from their teams in seconds from their phones. You no longer had to coordinate with members of the league to find a draft day and time that worked for everyone. Instead, anybody could draft a team from anywhere at any time. In fact, you no longer have to coordinate with friends at all – just join leagues that are created by DraftKings.
The value capture for the DraftKings platform could not be simpler. They simply take ten percent of all the money being gambled on their website. Gamblers are not only used to, but they are comfortable with this concept of a “vig”. DraftKings has attempted to use some of this ten percent to give back to the users in the form of retention bonuses (i.e. by betting X dollars or winning Y contests people can get rewards such as incremental dollars, clothing, etc.). Given their first mover advantage, and focus on UX/UI, it has been hard for competition to come in and charge a lower “vig” to grab users away. In fact, the biggest competition battle for DraftKings was settled a few months back when DraftKings and FanDuel announced they would merge.
Network Effects & Multihoming
There are both direct and indirect network effects at play in DraftKings’ business. Without a critical mass of players on the DraftKings platform, the platform would have no use. Thus, there are huge direct network effects for the first large number of users, however once the user base is sufficiently large, players do not gain incremental utility from each new player that joins. However, that is when indirect network effects take over – with more people you know on the platform you are able to compare notes and talk about your DraftKings teams, or better yet create a league within DraftKings so you can play against people you know
Multihoming on the user side is fairly prevalent. However, DraftKings has done a great job of increasing the number of sports it covers, making it the only platform where gamblers can bet on NASCAR, MMA, and eSports. DraftKings also has the highest betting cap – allowing people to put more money on the line than most other sites. Because there is no exclusivity to one site – these platforms will have to continuously invest to enter new sports (and potentially verticals) as well as continue to enhance the user experience. Combined, DraftKings and FanDuel have raised over $1B. Let’s see how much more they will need to raise to ensure they continue to be the dominant player once they are combined.