Four Things Daily Fantasy Sports Can Learn From Online Poker

November 30, 2015
Four Things Daily Fantasy Sports Can Learn From Online Poker

A while back, right around the time the daily fantasy sports industry was first thrust into turmoil, I penned a column called four things online poker can learn from DFS. Now, with the DFS industry in full crisis containment mode, it’s time to return the favor: Here are four things the DFS can learn from online poker.

Keep an eye on the long term

The online poker industry is currently dealing with a number of fundamental problems, many of which are more or less self-inflicted wounds. From broken affiliate models and VIP reward programs, to rampant use of third-party software by pros, to liquidity issues in small regulated markets, online poker is learning the hard way that getting solid, long-term growth policies in place is extremely important. And the sooner you get them implemented the better.

DFS operators seem to be falling into the same trap that plagued online poker for many years; focusing on the low hanging fruit. Whether it’s allowing the very best players to enter contests hundreds of times (according to evidence introduced in the New York DFS case, the top 1% of players account for over 60% of all entries), or not finding ways to keep the sharks away from the minnows in low buy-in contests, the DFS industry is taking a short-term approach. Even if they get through the current kerfuffle, it could cost them down the road.

Once casual players become frustrated or disillusioned they’re likely to move on to some other form of entertainment, and these short-term strategies (keeping the sharks happy) are likely creating a lot of dissatisfied customers.

Ask poker operators about their biggest regrets, and I would bet one of the most common answers was the decision to go all-in on the notion that high-volume players are the best customers. Once the influx of new players died down, this proved to be the industry’s Achilles heel.

Beware unbridled growth

At the start of the NFL season, FanDuel and DraftKings ran so many ads I almost expect their ads to have ads — This FanDuel ad was brought to you by DraftKings. And this non-stop ad blitz appeared to pay dividends, as entries and revenue grew exponentially. However, it might have also been one of the main causes of the industries current situation. Not only did it cause lawmakers and regulators to take notice of the nascent industry, but the unbridled growth these companies experienced may have been a case of too much growth too fast. Were these companies ready to go from small startup to unicorn?

These are the types of ad campaigns companies can undertake when they raise hundreds of millions of dollars of capital, but, their current situation is also a prime example of what happens when a company puts most of their money into marketing and growth above all else — particularly when the legality of that business is called into question early and often.

For online poker, it was wildly overspending on sponsored players and trying to vacuum up every available customer. In the end, online poker sites would have been much better off using some of that money to lobby for legality.

DFS ad spending is a bit different. Online poker sites were fighting one another for players who were lining up to play, whereas DFS sites are trying to attract potential customers who are currently unaware of the DFS industry. Still, I wonder where the DFS industry would be if they reduced their marketing spend and focused more money on lobbying and other efforts that would have brought about more legal clarity. Despite their protestations, when it comes to legality, the status quo is far from clear, and could change at the drop of a hat — as we are now seeing in Nevada and New York, where the DFS status quo has been turned on its head.

If more states prohibit DFS, it will severely cut into their revenue potential.

Instead of slow sustained growth, because of their choices, the DFS industry could very well end up looking like a mountain, with a sharp ascent and a precipitous fall.  It may not be as sexy, but long-term, slow, sustained and secure growth is usually the better option.

I would have preferred fewer commercials from the outset (even if that meant smaller guaranteed prize pools and slower growth) while the industry focused a lot of their resources towards securing long-term legal stability, instead of arguing that the status quo was all they needed.

Apparently I’m not the only one.

Scrap the ‘we’re not gambling’ argument

As poker advocates have already learned, irrefutable evidence that the outcome of your games (in the long run) is predominantly based on a player’s skill doesn’t mean you’ll be able to shed the gambling label. Nor should it, as skill and gambling aren’t mutually exclusive terms. One is definitive and provable, the other is a generalized label with different, arbitrary meanings to different people.

The skill game argument didn’t sway Mike McDermott’s girlfriend in Rounders, and it hasn’t panned out for the poker community when they’ve gone before legislators. DFS needs to learn this lesson, as there are far too many DFS supporters sticking their fingers in their ears and chanting “skill game… lalalalala… not gambling… skill… lalalala.”

Citing the skillfulness of DFS is for all intents and purposes a fool’s errand. Despite mountains of growing research (here, here, and here), expert commentary, court rulings around the globe (Holland, France, US, and Sweden), and of course an unbeatable poker playing computer, there are only a few locales where poker is separated from other forms of casino gambling, and I don’t know of any locale where poker is completely separated from the word “gambling.”

Poker players have learned to live with being called gamblers, and DFS players and companies should do the same. Simply embrace the fact that most people view your activity as gambling and move on. Instead they have fought/are fighting this designation, which has led to skepticism and ridicule, because when you adamantly tell people that something they consider gambling is not gambling, they can feel that you’re insulting their intelligence.

For instance, there was the Scott Van Pelt monologue on ESPN where he took the industry to task for claiming it’s not gambling. The “are you kidding me” eye roll was even more severe when DraftKings sent a letter to comedian Bill Burr in July, asking him to stop calling their product gambling during his podcasts; DraftKings was one of the podcast’s sponsors. In a case of situational irony, Burr ended up taking DraftKings and DFS behind the woodshed for over five minutes [start at the 26 minute mark].

Now they are taking the same approach with lawmakers, and in New York, with the state’s attorney general, Eric Schneiderman. Telling the AG of New York he doesn’t know what he’s talking about is generally bad for business, as it’s a case of, even when you’re right, you’re still wrong.

Gaming laws don’t have to make sense

The reason DFS can be right, but still wrong is simple: Gambling laws don’t have to make sense. They never have.

Following the New York attorney general’s decision, daily fantasy sports supporters have been pointing out a glaring inconsistency in the state’s gambling laws, noting that some games of chance with huge house edges and no skill (lottery and casinos) are legal, while DFS, a peer-to-peer skill game, is now considered illegal gambling.

If you think DFS being illegal and lottery being legal makes zero sense, chew on this for a minute: When New Jersey legalized casino gambling in 1976, the state didn’t legalize poker. It was illegal for an Atlantic City casino to spread a poker game until 1992.

Nevada, the gambling capital of the world, is one of only six states that doesn’t have a state lottery; it’s illegal in Nevada.

The one thing you will notice about legal gambling in the U.S. is the industries and games that are widely legal are often very old. Lottery, horse racing and casino gambling have already gone through their trials and tribulations, and their histories include periods where they’ve bounced between being legal and illegal, particularly in western states.

Generally what happens is these activities are sort of legal and then deemed illegal and go underground until the state needs to step in, or the state realizes there is money to be made and legalizes them fairly early on. If the DFS industry were smart, they’d do whatever it takes to land in the latter category.

Poker has come to grips with this, and now pushed for legalization, instead of trying to find loopholes or gray areas.

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