Daily Fantasy Sports’ Losing Strategy

DraftKings and FanDuel are in trouble, and here’s why: they created a regulatory void that every possible U.S. regulator or legislator is looking to fill.

After raising more than $700 million in capital and spending over $200 million in advertising over just ten months, DraftKings and FanDuel are facing a federal investigation after firms failed to put in place self-regulation measures. Employees with access to valuable information were allowed to bet on competing platforms, creating potential conflicts of interest. Right now, it doesn’t appear as if anyone broke the law. But it’s not the specter of corruption that threatens DraftKings & FanDuel, it’s the spotlight.

Previously, daily fantasy sports (“DFS”) firms have focused on using the fantasy sports carve-out in the 2006 Unlawful Internet Gambling Enforcement Act as their bulwark against any prohibitive regulation. This exception labelled was written before daily fantasy existed – it mainly protected websites such as ESPN, Yahoo, and CBS by allowing them to run “traditional” fantasy sports leagues.

Fast-forward to today – and DraftKings and FanDuel are fighting fires on so many fronts. In the wake of failing to regulate themselves, regulators and legislators across the nation are stepping in. Put aside the federal stakeholders – the Department of Justice, US Congress, the FBI, the federal courts – and the DFS firms still face tremendous threats from new state stakeholders including Gaming Boards, Attorney Generals, and legislative bodies.

Gaming Boards / State Attorney Generals: Gaming boards are typically composed of appointed officials, many of whom have “traditional” gaming/gambling industry backgrounds. They typically rely on State Attorney Generals for counsel. The Nevada Gaming Control Board recently ruled that DFS qualified as gambling, requiring firms to obtain a license. More importantly, the ruling is viewed as a bellwether – many states have adopted Nevada’s gambling framework, and will most likely follow suit.  Just recently, the Illinois Gaming Board & Massachusetts Gaming Commission have announced they’re also reviewing DFS’ legality.

State Legislatures: Each state has its own legislative framework – and some, such as Maryland and Kansas, have passed explicit laws stating that fantasy sports are legal. But in more cases than not, the laws are unclear. In states such as Florida, which bar gambling on games of skill (which daily fantasy sports argue they are) in addition to games of chance, DFS faces potential criminal investigation for operating unlawfully. Some states have looked to clarify the rules.

So what can DFS firms do? Some have speculated they’ll take the “Uber” approach by organizing grassroots campaigns and petitions. It won’t have much of an impact. In each city, Uber had a contingent of drivers who relied on the service for their livelihood, and thousands of riders who used the service daily. It was a solid pillar to an overall strategy that included heavy lobbying activities. Here? Other than a handful of sharks who might miss the easy pickings, very few will complain. A petition with no passion or action to back it up will fall on deaf ears. In fact, we can already see that usage of DraftKings & FanDuel is declining

There’s little that DFS firms can do now except come up with a state regulatory framework ASAP that can be used as a model and be scaled out to other states.

In fact, DFS firms should have been doing this all along – it should have developed a transparent set of self-regulatory practices that was so strong, that it became part of their brand. Not allowing employees to bet on other platforms, instituting strict data controls, monitoring or capping the number of bets per players – all potential policies that would have allowed DFS firms to avoid the spotlight. Instead of playing defense on regulations, they should have been proactive from the beginning.

 

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