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Fox Investing in Fantasy Sports Site DraftKings

Twenty-First Century Fox (NASDAQ: FOXA) has increased its investment in one of the leading daily play fantasy sports sites, DraftKings.

The deal, which was first reported by Re/Code, calls for the sports site to take in $300 million from a group led by Fox. There is a bit of a catch, however, as DraftKings will agree to spend around $250 million in ads on the various Fox channels over the next three years, the technology news site reported.

That is a sweet deal for Fox, which gets about 11% of the company for its roughly $150 million commitment, but will receive $250 million back in exchange for ads. Essentially, that makes this an equity for marketing deal, though neither DraftKings CEO Jason Robins nor Fox Sports President and COO Eric Shanks would confirm the particulars of the ad commitment, according to Re/Code.

This is a double win for Fox and its fledgling FS1 and FS2 sports networks, as it won the deal after Disney, which owns ESPN, backed out of a similar deal due to concerns over whether DraftKings' product fit its family-friendly image (the two companies did make an ad-only deal for ESPN, which does not include Disney getting an equity investment).

What is DraftKings?
The company, along with rival FanDuel, offers a form of fantasy sports that is an awful lot like betting, though legal. People pay money to play in one-day competitions that use many of the rules from more traditional season-long fantasy offerings.

Both DraftKings and FanDuel have been growing exponentially, but they are in an expensive competition with each other that requires huge marketing spends.

Will this work?
Essentially, DraftKings leaders have decided they have a short-term need for cash, but they can grow fast enough to cover future shortfalls. That explains why the company has made around $500 million in ad commitments over the next three years while only taking in $300 million in funding.

That is a big bet that spending huge on marketing can create sustainable growth of its user base, but it is one based on how quickly DraftKings has gained market share. This is a no-risk deal for Fox, because even if the fantasy sports site collapses under the weight of its obligations, the company will likely have returned much of the investment in ad spend.

With this deal, Fox gets a stake in a fast-growing business for potentially nothing, and those offers do not come along very often.

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Daniel Kline has no position in any stocks mentioned.

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