[toc]How much money is flowing through the daily fantasy sports industry is not really a secret.
But you wouldn’t know that based on some of the highly inflated figures we still see regarding DFS from time to time in the media, and from state governments.
The most ridiculous of these was the idea that Missouri would somehow realize $10 million in fantasy sports revenue from its new law, which was so far from reality that it was laughable.
But even with state legislatures taking up the issue of DFS consistently for the past two years, the problem of out-of-touch estimates on DFS revenue still crops up.
New Jersey and DFS
New Jersey is one of more than two dozen states considering fantasy sports bills this year.
Generally, revenue isn’t a major part of the picture as state legislatures consider the industry. Legislation is usually advanced as a way to clarify the law and to implement consumer protection measures.
But it has become a part of the conversation in New Jersey, as the fiscal estimate attached to legislation has turned some heads. An NJ.com story had this headline: “N.J. hopes to hit budget home run with daily fantasy sports games.”
That optimistic headline arose from the New Jersey Office of Legislative Services analysis. That analysis, however, uses some faulty assumptions.
The NJOLS analysis
Here’s the relevant part:
Given the United States Census Bureau estimate that about 6.9 million residents aged 18 and above lived in New Jersey on July 1, 2014, if 18 percent thereof play fantasy sports, then about 1.25 million New Jersey residents participate in fantasy sports.
If each New Jersey player spends the FSTA-reported $502 national average on fantasy sports, then New Jersey players cumulatively spend $625.8 million on fantasy sports.
The bill applies the 10.5 percent tax rate to a fantasy sports operator’s gross revenue, or a permit holder’s total fantasy sports activity receipts less total prize payouts multiplied by the percentage of total entry fees collected from New Jersey resident players divided by total entry fees collected from all players.
According to news reports, fantasy sports operators collect a “rake” of about 10 percent of entry fees with specific rates varying by activities. If operators receive 10 percent of the estimated $625.8 million in annual fantasy sports expenditures of New Jersey residents as taxable gross revenue, then about $62.6 million will become taxable.
At the 10.5 percent tax rate annual State revenue collections will therefore approximate $6.6 million.
Where the New Jersey DFS analysis goes sideways
John Brennan at NorthJersey.com touched on a far more likely revenue picture in New Jersey, which is about a third of that.
We actually have data about the full universe of DFS play because of figures out of New York daily fantasy sports. We also know that New York — a far larger state with a higher tax rate — is likely to bring in about $6 million in tax revenue annually. Most of that is generated by DraftKings and FanDuel.
But why is the New Jersey legislature’s estimate off? Some of it stems from the conflation of season-long fantasy sports and DFS. (The industry itself is responsible for some of this, as it often did not parse DFS and season-long fantasy sports in the past.)
The OLS is using data that has to do with the whole universe of fantasy sports players and revenue.
- The $500/person figure is one used by the fantasy sports industry to capture all spending on fantasy. That includes entry fees in friendly social season-long leagues (not captured by New Jersey or any other state), and purchases related to content (draft kits or subscriptions to fantasy websites.) Each person in the fantasy sports universe is not spending $500+ at fantasy sites that take a cut of entry fees.
- Eighteen percent of people in New Jersey — or more than 1 million — are not playing at fantasy sites that feature rake. That number is far lower. That many people might be playing fantasy sports, but a lot of them will be taking part in leagues at sites like Yahoo and ESPN, where money doesn’t change any via the platform.
The major confusion comes from the assumption that all fantasy sports revenue is going to be captured by a new NJ law. That is never going to be the case.
DFS bills are not revenue producers
States wanting to regulate fantasy sports should start here: DFS is not going to make any state rich.
If you’re a state passing a bill, you’re at best going to realize minimal revenue. (For instance, the amount of tax revenue in New York is barely worth mentioning in a state budget that surpasses $150 billion.) At worst, regulation will cost the state money, if fees and taxes stay at very low thresholds.
The aim of DFS regulation should be about making sure users don’t get ripped off and bringing laws into the 21st century. Anything beyond that is gravy.