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Game On!

While the concept of Fantasy Sport may sound an awful lot like make-believe for adults, the potential USD 2bn merger of two daily fantasy sport companies is certainly no child’s play.

Last year, the net worth of the gaming industry surpassed that of the music industry, attracting big sponsors like Red Bull and Coca-Cola.  The Californian company, Riot Games (owner of a game called League of Legends), turned over USD 1bn last year.

Electronic sports or eSports, is a form of sports where the primary aspects of the sport are facilitated by electronic systems mediated by human-computer interfaces and broadcast live across the world. In 2013, approximately 71.5 million people watched eSports competitions through online streaming media –  that number has more than tripled to over 226 million in 2015.  There are now approximately 67 million people playing online each month, and physical tournaments attract spectators from around the world, 40% of which do not even play the game.

The prize money also reflects the global force that eSports has become – the DotA 2 International 2015 had a prize pool of USD 18.4m with the winners taking home USD 6.6m. By contrast, the Cricket World Cup had a total prize pool of USD 10m.DraftKings

Hockey-stick growth has also been seen in other parts of the eSports community in the form of daily fantasy. While traditional fantasy league play is centred around drafting a team only once, prior to the start of the season, daily fantasy offers daily drafts with the added benefits of immediate cash prizes that are available the same day. The industry is less than five years old, yet market leaders FanDuel and DraftKings are expecting to pay out over a billion dollars each in prizes to fantasy-obsessed players this year. The CEO of Eilers Research, Todd Eilers, states that daily game will generate “USD 2.6bn in entry fees this year and grow 41% annually, reaching USD 14.4bn in 2020”.

During the last round of public equity offerings, both DraftKings and FanDuel were valued at upwards of USD 1bn. Together, the rival companies control about 95% of the daily fantasy sports marketplace in North America and have struck functionally similar endorsement deals with professional sports leagues and other key stakeholders in professional sports.

Bernstein research estimated that 59% of total US TV advertising revenue growth in the third quarter of last year was from spending on daily fantasy football ads.  Currently, DraftKings and FanDuel battle each other for market share and for advertising expenditure.  This potential merger has attracted significant antitrust scrutiny from regulators from within the US as there is concern that their consolidation will reduce that competition – accordingly there are significant doubts that the merger will be approved.

The potential for eSports is overwhelming and will continue to grow considerably across the next decade. Teams are being set up and acquired all around the world, there are large requirements for funds and the upside is perceived to be astronomical.

This segment is a hot space and is attracting significant investor interest. This segment is an example of technology creating brand new markets – by integrating media, sports, gaming and gambling both DraftKings and FanDuel have created a powerful force that has attracted strong investment backing and is generating real revenue.  Long live the unicorn!