Daily fantasy sports websites face an uphill battle when it comes to winning over regulators and consistently making money

October 21, 2015

By Matthew E. Milliken
MEMwrites.wordpress.com
Oct. 21, 2015

FanDuel and DraftKings are the two most popular daily fantasy sports websites; they’re also the sponsors of an immense, seemingly inescapable advertising blitz that has been inundated consumers of American media ever since the late summer. (CNN Money reported that the two companies spent more money on TV ads than the entire beer industry over the four-week period that began on Aug. 14.)

But these businesses have been going through a rocky patch ever since revelations surfaced that their workers have access to vital aggregate data about player patterns and were allowed to participate in competitions on rival sites — although not their employers’. Both companies recently changed their policies and have now banned employees from entering contests on any daily fantasy sports websites, albeit reluctantly. As The New York Times reported in September:

[A] DraftKings founder, Paul Liberman, said barring employees from playing could make it difficult to retain talent.

“We have some people who make significantly more money off of our competitors’ sites than they do working for DraftKings,” he said.

Surely it’s coincidence that DraftKings workers who might have access to privileged insider information about betting patterns on DraftKings were able to win millions of dollars on FanDuel… or maybe it isn’t?

The revelations have triggered multiple investigations of the two companies, and Congress is likely to begin scrutinizing the industry. Despite all this, both sites had a booming weekend immediately after hints of scandal began to emerge.

As Josh Brustein reported for BloombergBusiness on Oct. 12:

Allegations of cheating within the two biggest fantasy sports companies, DraftKings and FanDuel, haven’t scared off their customers. A record number of people entered tournaments for Sunday’s NFL’s games, according to an analysis from SuperLobby, an industry research firm based in the UK. Together, the top two sites received 7.1 million entries to their guaranteed prize pool tournaments, generating a whopping $43.6 million in entry fees.

Regular fans still seemed to believe that they have a shot at winning prizes on daily fantasy sports, even though Sports Business Journal report in July found that “91 percent of DFS player profits were won by just 1.3 percent of players.” Perhaps the players felt reassured that they would no longer be competing against insiders.

But participation dropped somewhat over the most recent weekend, with entry fees for DraftKings’s guaranteed prize pool contests dropping 12 percent compared to the week before. This, mind you, was the same week that Nevada’s Gaming Control Board blocked daily fantasy sports websites from conducting business in the state without applying for licenses to operate gambling concerns.

Nevada’s attorney general agrees that the sites are gambling, notwithstanding the official protestations of DraftKings and FanDuel that they operate games of skill, not games of chance. A prominent footnote near the start of a 17-page memorandum from the attorney general’s office asserts that its conclusion

is consistent with how operators of certain daily fantasy sports describe themselves. For example, Jason Robins (the owner, co-founder, and CEO of DraftKings) stated that the concept for DraftKings.com was “almost identical to a casino.” …. Similarly, [DraftKings] has applied for and received licenses to operate in the United Kingdom. … Although there is no question that the gambling laws of the United Kingdom and Nevada are fundamentally different, it is still noteworthy that the licenses in question are for “pool betting” and “gambling software,” and that DraftKings does not include either of those terms in its press release. Instead, DraftKings simply states that “the company has been granted a license to operate in the United Kingdom,” without identifying the licenses at issue. It appears that DraftKings recognizes the appearance of inconsistency between its position that it should be unregulated in the United States and its decision to submit to gaming regulation in the United Kingdom.

The distinction between games of skill and games of chance matters to more than just the state of Nevada. Games of chance are highly regulated, which is why, say, movie theaters and professional sports franchises are far easier to find in most small (and even large!) American towns than casinos. In writing that such games are “highly regulated,” I mean, of course, that they’re outright banned in a number of states. Nevada’s recent ruling means that at least two or more daily fantasy sports websites are blocked from operating in at least 13 different states, according to LegalSportsReport.com.

Staying on the right side of the law is going to be important because, as Reuters reported in September:

Neither of the companies are yet profitable and the CEOs said they are in no immediate hurry to change that, instead spending money on attracting more customers and growing revenue. [Nigel] Eccles, at FanDuel, said the company could become profitable “tomorrow” if it decided to cut its advertising budget, which is its biggest expense.

I’ll have more thoughts about where things might go — and where they should go — in a piece later today.

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