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ESPN agrees to buy stake in DraftKings
Deal includes major advertising commitment
April 3, 2015 03:46 PM
DraftKings is close to getting significant financial backing from arguably the most powerful brand in sports: ESPN.
Industry sources said ESPN has agreed to invest hundreds of millions of dollars for up to a 20 percent stake in DraftKings. The major investment will be part of the daily fantasy sports operator’s next round of venture capital financing in May.
As part of the deal, DraftKings will sign a three-year advertising commitment that will, in turn, pay hundreds of millions back to ESPN, sources said. The ad commitment will give DraftKings exclusive status on much of ESPN’s fantasy content across all of the company’s media platforms, including fantasy sports analyst Matthew Berry’s columns and podcasts.
ESPN and DraftKings declined to comment. Last month, DraftKings Chief Executive Jason Robins said he was actively developing a Series D venture round that would value the company at $1 billion. ESPN’s investment could increase that, and 10-figure valuations are generally reserved for only the hottest of startups.
Robins spoke to SportsBusiness Journal last month about the developing investment talks, saying, “We’re spending a lot of time thinking about what’s next … this space presents a huge amount of opportunities. We’re not only changing how fantasy is played, but more fundamentally, how fans engage with sports.”
Neither DraftKings nor its chief rival FanDuel have turned a profit. Armed with capital, a battle for official team and league affiliations has raged over the past year, and each now holds dozens of such relationships. The NHL and MLB Advanced Media each are aligned with DraftKings, and the NBA last fall took an equity position and a board seat with FanDuel.
In that scrum for partnerships, ESPN remained a holdout, though it is one of the largest and most prominent players in traditional fantasy sports. Given ESPN’s expansive reach, a formal alignment represents a major win for Boston-based DraftKings.
“An affiliation with ESPN is industry redefining,” said Geoff Reiss, a former ESPN executive who was in a similar position two decades ago when ESPN parent Disney bought Starwave, which became ESPN.com. “ESPN represents the largest and most consistent promotional platform in sports for daily fantasy. The only other kingmaker as far as this industry goes is the NFL.”
Industry sources said ESPN elected to buy into DraftKings after a “bake-off” in which executives for both DraftKings and FanDuel pitched their companies and their business prospects to senior ESPN executives, including President John Skipper.
Among the key factors elevating Draft-Kings in the minds of ESPN executives was its less cluttered and conflicting ownership structure. DraftKings’ last round of financing, a $41 million Series C last summer, was led by venture capital groups such as The Raine Group and prior investors such as Atlas Venture and Redpoint Ventures. FanDuel, by comparison, already has media partners among its investor group as Comcast Ventures and NBC Sports Ventures participated in its $70 million Series D that closed in September, and Rick Cordella, NBC Sports Group senior vice president of digital media, is a board observer for the company.
Earlier this year, an ESPN group led by John Kosner, executive vice president of digital and print media, was charged with figuring out how ESPN could participate in daily fantasy, which has seen meteoric growth over the past year. Kosner’s team considered multiple options, including launching its own rival daily fantasy operation and an equity investment. That study reached the highest levels of ESPN parent Walt Disney Co., which presented some issues given Disney’s long-standing opposition to gambling.
But daily fantasy operators, and the fantasy sports industry at large, have sought to create clear distinctions between gambling and daily fantasy, including the discouragement of marketing through overt gambling-style terms such as “rake.” And the runaway growth of daily fantasy — DraftKings alone is projecting to increase its revenue fivefold this year to $150 million — has proved too much to ignore.