The Honeymoon Is Officially Over For The Daily Fantasy Sports Industry

Steve Ruddock October 8, 2015
DraftKings Honeymoon

Last year saw a new term land on most people’s radar — daily fantasy sports, or DFS. If 2014 put DFS on the map, 2015 saw the industry explode, with the two DFS giants, FanDuel and DraftKings becoming nearly as well known as Geico and Verizon, as the companies spent tens of millions per week on TV advertising, and collectively award over $100 million in prize-money every week.

Make no mistake about it, these DFS startups have morphed into big businesses, with billion dollar valuations, and this has happened virtually overnight.

But this explosive growth has also exposed some of the fundamental issues with the industry. With controversy erupting over the past week, DFS companies have found themselves under intense scrutiny, and some of their policies and procedures (e.g. letting high-level employees participate in DFS contests on rival sites) have raised alarms in the DFS community. As LegalSportsReport.com’s Chris Grove put it, the ongoing crisis is a “clarion call for regulation.” That is something most of the DFS industry has fiercely fought against, but now seems unavoidable.

Anyone who says they didn’t see this coming simply wasn’t paying very close attention. There’s been plenty of smoke swirling around DFS, and plenty of questions about the industry’s consumer protections, or lack thereof:

  • Unikrn CEO Rahul Sood talked about his 13-year old son opening a DraftKings account during his keynote speech at G2E.
  • At least three sites, FantasyUp, Ballr, and WarDraft have had issues paying players.
  • Player verification checks are almost nonexistent — at least up front — industrywide; I’ve personally signed up at several DFS sites and funded them with someone else’s PayPal account, no questions asked.

The latest controversies

But it was the recent, seemingly inconsequential, controversy that proved to be the straw that broke the camel’s back, and grabbed everyone’s attention. The reason they went from minor to scandalous has a lot to do with DraftKings’ and FanDuel’s reaction to the accusations. Their eventual responses only fanned the flames and turned what would have been an industry story into national headlines.

The two companies were painfully slow to react, and when they did respond (via a slow trickle of Internet posts, official statements, and second-hand statements to friendly affiliate sites), their answers were found unsatisfactory and lacking in details. Based on their statements, it felt as if DFS sites simply wanted everyone to trust them. To take them at their word. That’s hard to do when there is no way to verify what they’re saying, and no way to hold them accountable.

As Grove notes, the recent issues — which are far closer to sloppy internal controls than the “insider trading” and “scandal” buzzwords being bandied — are prime examples of why the industry needs to be regulated. Hopefully it’s not too late, as the narrative has spun so wildly out of control at this point, calls for regulation could turn into calls for prohibition.

Instead of getting out front of these allegations, the DFS industry is essentially in crisis control mode, trying to limit the damage. DraftKings CEO Jason Robins has done some interviews in recent days, but it’s done little to satiate the media frenzy.

And the damage done is already pronounced:

Regulation should have been a goal from the start

Unfortunately, DFS operators decided they would rather keep beating the drum for the tenuous status quo, instead of lobbying for legalization and regulation, and ushering in a period of long-term security and stability for the industry.

Two weeks ago, the DFS industry would have likely found a friendly ear in most state legislatures, but almost all of their bargaining power has gone out the window, and instead of working with lawmakers to craft friendly regulations, the DFS industry will likely have less industry-friendly regulations imposed upon them.

This is a shame, as, regulations would solve virtually every problem listed above and many others not listed:

  • Regulations would require sites to implement strict player verification protocols to identify underage players and prevent someone from funding their account with another person’s financial information.
  • Regulations would require DFS sites to contribute to and promote problem gambling initiatives.
  • Regulations would require sites to put cybersecurity measures in place.
  • Regulations would require DFS sites to segregate player funds.
  • Regulations would insure that sensitive data was encrypted and not able to be used.
  • Regulations would impose a fine and/or penalties on a site that mistakenly listed a contest as a single entry, creating an environment where the site cannot afford to be sloppy.

William Hill CEO Joe Asher is one person who has called for regulation of the DFS industry, and he emphatically made his case at a panel discussion at G2E:

“Why is regulation such a bad thing? The airlines are regulated. I’m glad they are because I don’t want them crashing into each other in the sky. A fire code exists so you don’t have too many people in a room. That’s a good thing… Regulation, in many respects, is actually OK… So, why are you guys so afraid of it?”

The reluctance of many, but not all, in the DFS industry to advocate for regulations likely has a lot to do with the increased cost these regulations would impress upon operators.

But what is the cost of a scandal? A scandal that would have been prevented with a bit of oversight. Given the option to continue to deal with the current situation, or go back in time and impose government regulations on the company, I wonder which of the two DraftKings would select?

Fighting regulation was a short-term gamble by the industry, which is surprising since it claims to not be in the gambling industry. This gamble didn’t pay off. It failed to learn from an industry that was on a similar trajectory to its own, online poker.

The online poker connection

Daily fantasy sports has a lot of commonalities with online poker. Both games are quite skillful and tend to appeal to the same demographics. Furthermore, after several years of being a cottage industry (1998-2003 for online poker, and 2007-2013 for DFS) both industries experienced a period of rapid, explosive growth, becoming overnight success stories.

This growth is certainly good for business, but this unbridled growth can also lead to some serious issues, as an industry can grow too big too fast with no one to rein them in. The controls that work for a small startup company with a dozen or so employees are no longer adequate when the business is growing at such an accelerated rate. It’s also hard to pinpoint your weaknesses, as everything you do seems to be working, so why fix it?

This is an unfortunate link the two industries are starting to share.

During its boom period, the online poker industry had a well-known and widespread underage player problem [second to last paragraph]; saw a plethora of sites abscond with money; dealt with the insider cheating “super-user” scandals at Ultimate Bet and Absolute Poker; and most recently, Full Tilt Poker famously used player deposits to cover operational expenses, creating a $300 million shortfall.

As noted above, some of these issues (underage players and potential for sites to abscond with player funds) could rear their head in the DFS industry. And most, if not all, can be traced to the lack of regulation and operating in a legal gray area based on disputed legal opinions crafted by expensive lawyers.

Problems from the start

DFS’ problems started the moment the industry was conceived, and the chosen narrative these companies decided to unflinchingly cling to: “DFS is not gambling… skill game… UIGEA carveout,” and so on and so forth. This narrative didn’t do the industry any favors, as many legal experts, analysts, and commentators see it as insulting to their intelligence considering gambling and skill game are not mutually exclusive, and the UIGEA carveout doesn’t make DFS legal.

Furthermore it would appear what constitutes “legal” is even debatable within the DFS community. Some DFS sites are willing to offer golf and NASCAR contests and others are not, and some sites operate in up to 45 states while at least one, Star Fantasy Leagues, accepts players from fewer. If it’s so obviously legal, why the discrepancy?  

In a recent column, Aaron Stanley eloquently summed up the industry’s core issue, “[DFS companies] have lost sight of the fact that their entire existence is rooted on a very questionable legal grounding.”

Essentially, the DFS industry was built on a debatable fantasy sports exemption in the 2006 Unlawful Internet Gambling Enforcement Act, and relies on mostly unclear gaming laws at the state level. In the U.S., DFS companies operate in what amounts to 45 individual unregulated markets, each with a varying amount of legal uncertainty.  

Yet they portray themselves as 100% legal enterprises (always pointing to UIGEA but never to the states where they dare not operate), and quickly admonish anyone who associates DFS with the dreaded G-word (gambling), quite often by making the false comparison between DFS and chess, as “games of skill.” They do this amid a backdrop of nonstop ads that bear a striking similarity to what a sports-betting TV spot would look like. These ads were necessary to grow, but they also brought about the attention of government officials these companies have fought to avoid. And it’s somewhat sad, as none of this had to happen.

Robins has called the industry’s critics “jealous,” among other things, but the reality is, most of the industry’s critics want DFS and DraftKings to succeed; they just understood to realize that success would require regulation. Much like a homeowner who learns to live with a drafty window or a creaking stair, DFS’ critics were able to look at the industry from the outside, and see these flaws and areas of concern that those living in the house overlook.

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