The initial fear of the Daily Fantasy Sports (DFS) industry, that players would stay away in the wake of last week’s major scandal, has subsided. If anything, the free publicity gained by sensational allegations of employees using “insider” information to gain an edge in contests increased DFS’s visibility and enticed more people to play.
Now, the real concern for DFS is the looming specter of regulation. Just last week, Nevada became the first state to declare unregulated DFS is illegal sports betting. Several other states are currently considering similar regulation as well.
This is far from the “Black Friday” the poker world experienced – for now. But the parallels are obvious. I think examining certain milestones that occurred in the lead-up to poker getting the federal ban-hammer offers a case study for predicting where DFS is headed from a regulatory standpoint.
The Similarities to Black Friday
For starters, there is an ongoing debate about whether or not DFS is an activity of skill or luck. Just like poker before it, the implication is that an industry based around a skill game should not be subject to gambling laws and regulations. Operators seeking profit now are using that argument to forge ahead with their heads in the sand about its possible long-term consequences.
Another thing we are seeing is that the national media is now involved. DFS is an activity where large sums of money are exchanged all over the country. It’s a story with similar mass appeal to that of the “offshore poker sites” that came before it. Publications are eager to take advantage of the shocking headlines these narratives make possible. It’s no surprise that the nation’s largest news sources such as the New York Times and NPR are now paying attention.
Which inevitably leads to the most important similarity. The government has realized it’s not getting a cut of the huge sums of money changing hands thanks to dubious legal reasoning. Once that happens, it is only a matter of time until it either gets in on the action or shuts the activity down.
Bigger Profile; Bigger Problems – Nevada Fires a Shot Across the Bow
The memorandum released by the Attorney General of Nevada (“AG”) asked the following question:
“Do daily fantasy sports constitute gambling games sports pools, and/or lotteries under the Nevada Gaming Control Act and Gaming Commission Regulations?”
In determining that they in fact do, the AG readily dismissed two of the key arguments DFS had used to remain outside the scope of gambling regulations. Both of these arguments are strikingly similar to the ones poker operators used in the wake of Black Friday.
Defining the meaning of “betting on sports”
One argument being used by the DFS industry is that no money is changing hands based on the outcomes of matches. The implication is that basing contests on the aggregation of statistics from sports matches cannot be considered betting on “sports.”
This is an attempt to evade regulation by defining an activity in a way that runs against its common characterization. It’s the same thing PokerStars did in 2006 when it argued that the UIGEA didn’t apply because poker is a game of skill and not chance.
And, just like PokerStars before it, DFS is finding that the government quickly dispatches any unorthodox legal reasoning that doesn’t lead to the government’s desired outcome.
This time, the AG concludes that contests based around statistics generated by sports contests are sports “prop bets,” defined as “a wager on the occurrence or non- occurrence of some event during the course of a sporting event,” and expressly regulated.
The AG also foresaw the “degrees of separation” argument, and made sure to add that a “combination of prop bets” is also regulated.
Section II., Sub-Section B: “UIGEA Did Not Legalize Fantasy Sports”
After UIGEA, both PokerStars and Full Tilt sought to skirt by on a technicality. Because the legislation only banned using American banks to handle online gambling transactions, they adopted a strategy of funneling money through shell corporations instead. That scheme ultimately failed.
By arguing that UIGEA made explicitly legalized fantasy sports, DFS is following in poker’s footsteps and attempting to find a loophole in the obvious intent of the legislation.
And just like with poker before it, a hostile government declared itself resoundingly unimpressed. The AG quotes this part of the UIGEA:
“No provision of this subchapter shall be construed as altering, limiting, or extending any Federal or State law or Tribal-State compact prohibiting, permitting, or regulating gambling within the United States.”
The message is clear. Just because something isn’t banned at the federal level, it doesn’t mean it cannot be banned at the state level. Poker enthusiasts will certainly appreciate the irony of the “states’ rights” doctrine – the thread by which US legal online poker now hangs – being used to ban DFS.
Where There is Money, There are Politicians
But perhaps the most obvious parallel between poker’s Black Friday and the AG’s DFS decision is the most cynical one.
Is it really a surprise to anyone that it was only after the “insider” information scandal brought the amount of money DFS operators are making fully onto the public radar that the government got involved?
It shouldn’t be, because it’s the same thing that happened to poker. It wasn’t until national media attention picked up the story of how much unregulated operators were raking in by 2006 that the government finally took notice.
If you think it’s just a coincidence that the government’s benevolent interventions in the name of consumer protections always seem to come with a large tax bill attached, please get in contact with me about a bridge I’d like to sell you.
Can the NFL Save DFS?
The bottom line is that DFS has a lot of reasons to worry right now. There is a lot of money changing hands in a quasi-legal gambling activity, and the government is getting no cut. All the elements that combined to get poker federally banned in 2006 are present.
The only thing that may save the industry from total decimation is that unlike poker, it has powerful friends in DC to advocate it. It’s the worst kept secret in sports that the big four leagues (NFL/MLB/NBA/NHL) love the increased fan engagement fantasy sports brings.
But will it be enough? Will DFS take advantage of this in time? The question at this point appears to be not if DFS will be regulated, but how. If operators such as DraftKings and FanDuel want to soften the blow, they better be working with the major sports leagues on a comprehensive strategy to get the industry favorable regulation at the federal level.
That may sound like conceding the argument. In reality, it’s just smart because the writing is on the wall. DFS is on notice that the government is coming for their cut. The industry must learn from poker’s mistakes and cut its losses while it still can.
If it doesn’t, the end result could be a second coming of the non-sensical patchwork of state legislation and political infighting that has plagued the poker industry since 2006.