One Perception Problem For Daily Fantasy Sports Is Kind Of The Industry’s Own Fault

Posted on November 3, 2016

[toc]There are several incorrect assertions that I commonly see in media reports and coming from lawmakers about the daily fantasy sports industry.

One of those mistakes that commonly makes its way into reporting and then is regurgitated elsewhere was largely advanced by the industry itself over the course of the past year.

It all adds up to a potential perception problem and a starting point for DFS that is difficult to roll back.

Conflation of season-long fantasy and daily fantasy

Almost a week doesn’t go by that I don’t see a story about DFS citing some variation on the statistic that 57 million people play fantasy sports in the US and Canada. While there’s not much reason to doubt that figure, it’s almost always used in lieu of how many people are regularly playing paid-entry daily fantasy sports, which is likely something on the order of a tenth of that figure.

That number has been used by the overall fantasy sports industry to point out how popular fantasy sports are, which is certainly good for optics when working with states on DFS legality. (i.e. “Look how many people play fantasy sports, you don’t want to shut that down, do you?”) Most times that fantasy sports representatives testified in front of state legislatures in late 2015 and through 2016, this number was trotted out.

The use of that number increased the impetus behind the need to give legal clarity to the industry and regulate it. At the same time, if gives people with a passing understanding of the DFS industry (read: your average lawmaker) a vastly inflated sense of the DFS industry as currently situated.

It’s also dragged the season-long fantasy sports industry along with it, kicking and screaming; some of the laws have enveloped them, as well.

In reality, the number of people playing at paid-entry season-long fantasy sports sites (where the site takes a cut of entry fees) is relatively small. A wide swath of the “57 million” fantasy players are simply using free-to-play sites like Yahoo and ESPN; entry fees, if they exist at all, are then handled privately.

This conflation of season-long and daily fantasy metrics leads to a bigger perception problem.

‘DFS is a good way for states to make money’

This column was prompted by a short item I saw from the National Law Review, submitted by Greenberg Traurig. (Coincidentally this is the same firm that conducted a third-party review clearing a DraftKings employee of any wrongdoing.)

From that item (emphasis added):

However, this year, several states have passed laws to legalize, regulate, and tax DFS sites, recognizing that these sites are popular and represent a method to raise state revenues.

Yes, DFS creates a non-zero impact in terms of revenue for the states that have passed regulations including licensing fees and taxes on revenue. However, the claim that DFS is creating revenue that is in any way meaningful to states is ludicrous. And that narrative is based at least somewhat on the inflated perception of how many people are playing DFS.

(Some of the onus is also on DraftKings and FanDuel advertising in 2015, as well, when both boasted of paying out billions of dollars to players. In retrospect, that was a sure way to attract attention from some states looking to make a buck, even though only a percentage of those billions are going back into the sites’ coffers.)

In states without taxes, and just licensing fees, it’s not even clear that their governments will be a net winner in terms of revenue once man-hours are added up for the regulatory oversight prescribed by new laws (see Indiana, Virginia).

A case study: New York

On the other end of the spectrum, let’s take one of the most aggressive states on fantasy sports taxes: New York. There, the impact on sites signing up for licensing and regulation in the state is in excess of 15 percent of gross revenue (generated by NY users).

How much money is that really? The economic impact of DFS being legal for the state ledger in New York in 2017 is probably going to be seven figures; according to Gov. Andrew Cuomo’s office, about $4 million.

New York state’s budget annually runs past $150 billion, so anyone who thinks that the amount of money coming in from the DFS industry moves the needle for the bottom line of the state is sadly mistaken.

The problem moving forward

The fantasy sports industry has helped spur the narrative that a lot of people play DFS, and that it can, or will, help state’s bottom lines. Some states have moved forward on regulation with laws regardless of the economic impact, as almost solely consumer protection measures (see Colorado, Massachusetts).

But others are looking for money. For instance, Missouri Gov. Jay Nixon, even after enacting a law, believes the impact of DFS taxation in his state will be far greater than it actually is.

The idea that DFS is bigger than it is will continue to generate legislative interest, and in many ways that’s what the industry wants. But, in my mind, the inflated sense of the DFS industry also creates a couple of potential problems:

  • The idea that DFS can make states money will continue to encourage states to tax them and eat away at revenue in an industry that hasn’t found a way to be profitable long-term, yet.
  • Lawmakers in some states thought they were voting for legislation that created a meaningful revenue impact that won’t manifest itself. They may not be happy when they figure that out.

On the flipside, DraftKings and FanDuel appear to be on the verge of a merger; even pre-merger, the benefits of gaining legal clarity are often worth the cost to the bottom line to them in the short term.

We’ll see a new round of fantasy sports bills introduced and laws enacted in 2017. And the underlying narrative that DFS can make money for states will still be there, whether it’s true or not.

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Dustin Gouker

Dustin Gouker has been a sports journalist for more than 15 years, working as a reporter, editor and designer -- including stops at The Washington Post and the D.C. Examiner.

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