Sports and the Law: Could Yahoo Sale Kill Free Fantasy Sports?

Sports and the Law Above the Law blog.jpgReading documents as part of the Hart-Scott-Rodino Second Request Process is often as boring as watching paint dry while listening to the soundtrack from Waterworld: the Musical. However, for junior associates tasked with reviewing HSR documents, there may finally be a Second Request worthy of a second chance—one involving fantasy sports.
On Friday, February 1, Microsoft Corporation made a $44.6 billion hostile takeover offer to Yahoo Inc., which according to the American Antitrust Institute (“AAI”), “would effectively reduce the number of significant competitors from three to two in the paid search advertising market.” As a result, the proposed merger would likely lead to careful antitrust review.
If Microsoft’s proposed takeover bid fails, according to a February 4 article in the New York Times, Yahoo Inc. might then consider selling its company in piecemeal, with Yahoo Sports “sold to a company like ESPN.” This possibility would produce far less antitrust concern in advertising markets. However, it might still lead to competitive problems in the rapidly expanding markets for fantasy gaming.
Based on a down-and-dirty review of the fantasy sports marketplace, if either ESPN or CBS Sports were to attempt to purchase Yahoo Sports, the number of traditional websites that host fantasy sports games would fall from three to two—a general red flag in terms of competition law. In addition, if the market’s low price provider, Yahoo, were gobbled up by a website more likely to charge customer fees, another red flag would be triggered.
Read more, after the jump.

The market for fantasy sports is bigger than one may think. According to a recent Fantasy Sports Association study, over 12 million Americans compete in fantasy sports games each year. Those that play fantasy sports devote on average more than five hours per week to monitoring their fantasy teams. Many fantasy sports players even hire outside parties, such as one of my businesses — — to help resolve internal gaming disputes.
Web hosts play the most important role in fantasy sports competitions. Web hosts store and process player data, as well as transform player data into daily team statistics. Web hosts also provide a forum for fantasy sports contestants to conduct league drafts, process lineup changes, and “trash talk” with their opponents. Most fantasy sports contestants log on to their web host’s site several times per week to change their lineup and review their team’s performance. Some especially hardcore fantasy sports players even log onto their team page multiple times per day.
Currently, nearly all fantasy sports contestants use one of the three well-established web hosts—Yahoo Sports, CBS Sports (formerly, or ESPN. Yahoo Sports and CBS Sports are generally perceived as the market leaders in terms of customer volume. ESPN is not far behind, and may actually lead in total revenue according to one informal estimate.
In terms of pricing strategy, each of these three web hosts implements a different approach. Yahoo Sports has always offered free hosting as a way to attract more viewers to their revenue-generating advertisements. CBS Sports, by contrast, charges a small fee, which is now up to $129.95 per league, or approximately $13 per customer. ESPN, meanwhile, has varied its pricing strategy over the years. Initially ESPN used its strong brand recognition to justify the industry’s highest fees of $25 per customer. However, more recently, ESPN has attempted to compete on price point more directly against Yahoo.
Based on these three disparate pricing strategies, Yahoo Sports plays a very important role in limiting price increases in the fantasy-sports hosting market. Presumably, if Yahoo were to leave the market, not only might free fantasy hosting disappear, but ESPN and CBS Sports might feel less constrained against increasing their own customer fees.
At this moment, it is too soon to predict what strategy Yahoo will adopt with respect to potentially selling some, if not all, of its businesses. But as long as the possibility of either ESPN or CBS Sports acquiring Yahoo Sports remains viable, it is worth careful attention.
No doubt, either an ESPN or CBS Sports acquisition of Yahoo Sports would be a huge disappointment to fantasy sports contestants, as it would call into doubt the future of free fantasy gaming. However, if it is any consolation (and probably it is not), just imagine the fun that junior associates will have reading documents about fantasy sports.
Google Works to Torpedo Microsoft Bid for Yahoo [New York Times]
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Marc Edelman is an attorney, business consultant, published author and professor, whose focus is on the fields of sports business and law. You can read his full bio by clicking here, and you can reach him by email by clicking here.

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