Debunking A Pair Of Myths About Daily Fantasy Sports Regulation

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The next few months are some of the most crucial in the history of the daily fantasy sports industry.

Legislation that would legalize and regulate daily fantasy sports is active in a variety of states, and for the most part, legislatures close up shop this summer before the November elections. Two states have already passed legislation — Indiana and Virginia — and in Massachusetts, the attorney general has enacted regulations.

But the stakes are higher in a lot of other states — New York, for instance, where a settlement of DraftKings’ and FanDuel’s ongoing court case hinges on the statehouse coming up with a legislative solution this spring.

As the bills make their way toward being enacted, there are a few myths surrounding the legislative efforts that some people believe to be true, but don’t have much grounding in reality.

Here are two ideas that are being promulgated that are based more in myth than in practice:

‘Casinos want to ban daily fantasy sports’

Truth-o-meter: Commercial casinos, not so much; tribal casinos, maybe.

Here’s the basis of the myth: A lot of people believe that land-based casinos see a threat from the daily fantasy sports industry. And they want to see threat eliminated by banning it or creating laws making it nearly impossible for any current DFS company to stay in ‘x’ state.

If the casino industry really had it in for the DFS industry, we’d be seeing a vastly different arc to the push for regulation across the industry. Here’s an example of what we would be seeing:

Indiana for instance, has commercial land-based casinos, but they did not rise up and try to quash the legislation.

More on commercial casinos

Some commercial casino executives have loudly and infamously called out daily fantasy sports as a form of gambling. And while it’s certainly possible to doubt their motivations, it seems relatively clear at this point that the land-based casino industry would like to be involved in the DFS industry in some way.

However, the casino industry holds concerns about DFS legality, and without legal clarity, it’s not worth casinos risking their gambling licenses to enter the DFS market.

For instance, the most recent example we have is from a Nevada meeting regarding DFS; AGA CEO Geoff Freeman had this to say:

“We want regulators across the U.S. to take DFS out of that legal gray zone and make it either black or white,” said Freeman. “We believe legal clarity can accomplish two important public policy goals: ensure that the highly-regulated gaming industry isn’t prevented from entering into new and innovative opportunities and encourage new entrants and fresh innovations. Further, greater consumer protections will safeguard customers from unscrupulous operators and unfair games.”

That doesn’t sound like an industry hell-bent on the death of DFS. It sounds more like what the industry itself is saying about legal clarity:

“We’ve been operating in this gray area for a long time, and, up until now, it hasn’t really been a problem,” says Peter Schoenke, chairman of the Fantasy Sports Trade Association… . “What we want to do in all of these states is to clarify that it is legal.”

Of course, the casino industry isn’t necessarily a united front. Legal Sports Report understands commercial casinos in at least one state are pushing back against a regulatory bill; we’ve also seen pushback in the past in Louisiana. But this is far from an organized effort by land-based casinos to stop DFS in its tracks.

Schneiderman, NY and casinos

Additionally, we have the New York example. A popular storyline regarding Attorney General Eric Schneiderman’s actions against DraftKings and FanDuel was that he was in the pocket of casino interests who wanted to shut down DFS.

If that were the case, why would Schneiderman agree to a settlement that opens an “expedited path” to resolve litigation “in the event of a change in the law,” to use Schneiderman’s own wordsPerhaps the staunchest DFS proponents would say this is a sign he is going to lose in court, although there’s not much evidence of that being a concern.

Simply put, if casino interests were pulling Schneiderman’s strings and wanted to kill DFS in New York they probably would be doing the following:

Neither of those things is happening.

More on tribal casinos

Things get a bit trickier when it comes to tribal gaming interests, however, as they’ve positioned themselves as a foil to DFS regulation in a number of states — most notably Arizona and Oklahoma.

Tribal casinos certainly do not present a united front: Look no further than years of consternation trying to legalize online poker in California.

However, while tribes are actively trying or have shut down DFS regulatory efforts in some states, it mostly comes with the context that tribes have gaming compacts with states that provide specific language about the authorization of new forms of gambling.

Tribal opposition is likely less about DFS in specific, and more about protecting tribal interests. In some cases, tribes see authorization of DFS outside of the context of their compacts as a slippery slope towards even more forms of gaming being authorized without their consent.

Whether tribes want 1. legal clarity for DFS or 2. nothing to do with it at all is a question that tribes are still grappling with. What is clear is that in states with tribal gaming compacts, tribes want a voice in the discussion. What that voice ends up saying is an open question in nearly every state where tribal gaming and DFS intersect.

‘States see DFS as a way to fill the coffers’

Truth-o-meter: Nope, although some lawmakers have an inflated sense of DFS revenue.

This is a common myth as regulation has picked up steam in recent months: “States are being greedy by taxing DFS companies and charging them fees.” 

Let’s be clear about this: The daily fantasy sports industry, as currently situated, is not creating meaningful revenue for any state. And while at least some state lawmakers may believe that regulating DFS will generate tens of millions of new revenue for their states in the short term, they’re simply wrong.

Take this scenario:

The industry, in 2015, generated about $250 million in revenue. If every state were to tax DFS gross revenue at a rate of 10 percent, that would be a total of $25 million. And that’s not $25 million going to each state; each state would only tax revenue based on players in that state. So we’re talking about six figures of tax revenue in medium-sized states, and seven figures in the very largest states.

That’s not even to mention that legislation is most states currently does not include a tax, just an up-front fee.

States, if they choose to regulate DFS, are doing so because of lobbying efforts from the fantasy sports industry and/or because they are attempting to serve the public good by providing consumer protections and regulation for the industry.

Indiana and Virginia

Take the two states that have already passed legislation, Indiana and Virginia: Both have $50,000 up-front licensing fees. While this is creating a barrier to entry for small DFS sites, this will generate $100,000 for the state if only DraftKings and FanDuel agree to pay it. That figure could rise if Yahoo and a few other smaller operators agree to pay the fee.

The fees in these states are not some nefarious cash grab; it’s just money that they see as necessary to provide oversight of an industry. After all, regulation, even in its most basic form, requires work, time and money, and isn’t a matter of a few pieces of paper being shuffled.

Indiana is creating a new “fantasy sports division” in the government, while Virginia is creating new duties for the Department of Agriculture and Consumer Services.

And Indiana and Virginia may not be huge states, but a few hundred thousand dollars is not much money to either.

New York again

New York has perhaps the most aggressive piece of legislation around, from a money standpoint. The main bill being considered would charge a $500,000 registration fee and tax gross revenue generated from New Yorkers at a rate of 15%. The former can be paid as an offset of taxes paid over a 36-month period.

If we assume DraftKings and FanDuel pay the “toll” in New York, that’s a million dollars right off the bat. Last year, New York generated about $22 million in revenue for the industry, so the state would be making perhaps $5 million in total from DFS in Year One, in a best-case scenario.

The New York state budget for the new fiscal year, due in April, is in excess of $150 billion. That’s billion, with a ‘b.’ Anyone who thinks Albany wants to pass DFS legislation because it moves the needle in terms of revenue is sorely mistaken.

While it may not necessarily cost New York $5 million to oversee the DFS industry — or at least the operators that opt in — states are not in the business of providing regulation for free, or at a loss. More likely, New York sees the money being generated as a good baseline for providing oversight, with plenty of wiggle room built in.