Speculating On The Value Of An Independent Yahoo Fantasy Sports

(cross posted at: http://sportology.us/2016/01/speculating-on-the-value-of-an-independent-yahoo-fantasy-sports/)

Two of the more interesting ongoing narratives are the ongoing saga of how to separate Yahoo’s Asian assets from the core business and the inevitable but winding march towards a legal and regulated environment for fantasy sports. At the intersection of these two issues lies an interesting subject worth pondering.

Supposing that either other companies or private equity firms were valuing Yahoo’s core business today…

How valuable is Yahoo’s Fantasy Sports Business Unit?

Today, the public markets value Yahoo’s core business at essentially zero. And if a company or private equity firm were looking, Yahoo Sports and Finance would certainly be in the spotlight, but what about Yahoo Fantasy Sports by itself?

Yahoo Fantasy’s Metrics Relative To Peers

These days when anyone mentions “Fantasy Sports” attention quickly goes to the Daily Fantasy Sports (DFS) sector. And in DFS, Yahoo is considered the clear #3 behind DraftKings and Fanduel.

Per data provided by leading DFS analytics provider SuperLobby.com, in week 17 of the NFL season Yahoo collected just about double the gross revenue of every other DFS provider outside of DraftKings and Fanduel. So it’s quite clear that Yahoo has no competition for the 3rd largest DFS provider behind DraftKings and Fanduel. With customer acquisition costs being prohibitive, it’s unlikely that any of the smaller competitors have any chance to close that kind of gap.

* Figures cover GPPs and Cash Games, as opposed to GPPs only

But more interesting is the continued and shocking lack of understanding of the broader composition and size of the fantasy sports market, of which DFS is only one sector. While all the pundits and AGs continue to talk about the daily fantasy and season long fantasy markets as if they were wholly separate, there’s actually no difference at all. And season long fantasy sports remains a significant majority of the Fantasy Sports market. (I’ve written about this misunderstanding previously).

I’d wager few would have realized that, according to June 2015 IPSOS market research, 63% of Fantasy Sports players played exclusively in season long fantasy leagues and another 21% played both season long and DFS. Further, only 17.2% of DFS players did not also play season long fantasy. So while Yahoo is #3 in the DFS market as measured by revenue, that’s really more of a reflection of their inability to monetize than their existing size or potential.

Absent more detailed user metrics like MAU/DAU or paid users vs non-paid users, Google Trends clearly illustrates how large the Yahoo Fantasy brand is as compared to FanDuel and DraftKings (ESPN Fantasy included for context), as well as puts some perspective around the size of the DFS market relative to season long fantasy.

Even with an obvious boost of attention from numerous front-page stories around the alleged “insider trading” scandal and subsequent legal challenges, Yahoo Fantasy (as well as ESPN Fantasy) still dwarfs DraftKings and Fanduel.

And yet some significant portion of those Google searches that resulted from the recent publicity was more about rubbernecking and thus far less likely to end up as active or paid users, which is to say nothing about any boost resulting from an unsustainable $200M in ad spend.

Needless to say, Yahoo Fantasy’s existing user base is very large and there is very substantial room for revenue growth without having to acquire a single user.

Yahoo Fantasy’s Product Portfolio & Positioning

The NY Times latest hit piece on Fantasy Sports focused on the “Sharks vs Minnows” problem:

Instead, I came across a different sort of problem: a rapacious ecosystem in which high-volume gamblers, often aided by computer scripts and optimization software that allow players to submit hundreds or even thousands of lineups at a time, repeatedly take advantage of new players, who, after watching an ad, deposit some money on DraftKings and FanDuel and start betting.

And while this is both true and a highly valid critique of issues plaguing the current daily fantasy sports landscape, it’s actually not true of Yahoo’s daily fantasy product.

That’s right. Not only does Yahoo’s DFS product not support scripting, but it only allows a small subset of it’s daily fantasy contests to be exported to. This means that a professional DFS player would have to work substantially harder to diversify their weekly lineup portfolio, factors that keeps those rapacious-types away. Whether via a conscious product decision or by a fortuitous accident, Yahoo’s DFS product is far more friendly to the retail or mainstream player than the professional using scripts.

A more minor point, but noteworthy nonetheless, Yahoo smartly decided to structure their product’s player salary cap values to mirror values from season long fantasy auction drafts. So in a DFS contest on Yahoo, the weekly value for Tom Brady would be akin to $40, whereas on Fanduel and DraftKings, Brady’s weekly value would be something like $6500.

This is relevant because anyone who has ever participated in a auction-style fantasy draft, but never played DFS, will immediately understand the context for Tom Brady’s value at $40 but have no idea how to put the $6500 value into context. Given that the DFS format has still only penetrated a minority of the total fantasy sports market, much less gone mainstream, and that a great many of those yet-to-play-daily users have participated in auction drafts before, this seems awfully relevant.

All this goes without saying that Yahoo is the only relevant company in the market that offers both a seasonal and daily fantasy product, which is no small point.

The Short and Medium Term Future For DFS Incumbents

Since we’re speculating here, what does the future hold for current daily fantasy market leaders DraftKings and Fanduel? The companies engaged in a venture funded war for marketshare to the tune of $200M just prior getting hit with a true industry black swan event. A subsequent cascading sequence of events has left the companies fighting legal battles on more fronts than one can count.

These companies are well capitalized by deep-pocketed and (thus far) supportive investors and are generating real cash flow, but it’s fair to speculate if they are at risk of death by a thousand legal cuts. Or perhaps by some unfavorable ruling, such as the case in New York which is seeking an order requiring all the money DraftKings and Fanduel made in New York to be returned, as well as a preposterous $3B in fines. Such a legal defeat would surely kill both companies.

Regarding ongoing Federal investigations, gaming attorney and consultant Vincent Oliver noted:

When the feds indict, they generally have the goods. A state prosecution historically is less reliable as to result than a federal one.
So, there’s a very real possibility that the future of DFS will not involve either of the two biggest names.

While outsiders can’t know what the balance sheets at DraftKings and Fanduel currently look like or how various legal issues will shake out, it does appear increasingly clear that fantasy sports will emerge as a legal and regulated market. Eilers & Krejcik Gaming has previously projected daily fantasy sports top line revenues to reach $16B by 2020.

Could Yahoo Fantasy end up the clear largest player in a $16B market by simple attrition? The chance is definitely non-zero and perhaps much higher.

Bottom Line

Even if Yahoo had the culture or mandate to optimize their fantasy sports products, it’s not clear that they have the leadership to make it happen. Yahoo’s well documented brain drain has affected the Sports and Fantasy particularly hard, with all key decision makers having left in the past year (and all before the industry black swan events occurred).

If Yahoo Fantasy were to be somehow independent and properly capitalized with properly incentivized leadership, the resulting property would immediately have the best balance sheet, the best product portfolio and the largest user base in a large, multi-billion dollar market.

That seems like a fairly attractive asset that the market currently values at something less than zero.