Is Daily Fantasy Sports Headed Toward A State-Regulated DraftKings-FanDuel Duopoly?

Is Daily Fantasy Sports Headed Toward A State-Regulated DraftKings-FanDuel Duopoly?

The following article can be found in its original form at this link from the Legal Sports Report:

Legal Sports Report: Dustin Gouker, March 23, 2016

The two bills farthest along — a law on the books in Virginia and a bill on the governor’s desk in Indiana — are not good harbingers for the DFS industry.

Both states include initial licensing fees of $50,000. That might not seem like much, and in reality it’s pocket change to DraftKings and FanDuel in exchange for legal clarity and access to ‘x’ market.

For everyone else? Paying out $50,000 up front is a big ask for access to a pair of mid-size markets that likely won’t generate that much in revenue for small operators in the short-term.

The following article can be found in its original form at this link from the Legal Sports Report:

Legal Sports Report: Dustin Gouker, March 23, 2016

The legislative process on daily fantasy sports is, in many ways, still in its infancy — after all, most of the current bills have been introduced in the opening months of 2016, and a lot of them won’t reach the finish line this year.

 

But the early returns on DFS regulation indicate that the legislative process is tilted toward the two largest providers: DraftKings and FanDuel.

Those two operators already account for more than 90% of the DFS market, and that lead will only be extended in states where regulation serves to exclude smaller operators.

Why are states moving towards legislation that could further exacerbate the market dominanceexerted by the “Big Two”? And can the tide be turned?

So far, not so good for the small DFS operators

The two bills farthest along — a law on the books in Virginia and a bill on the governor’s desk in Indiana — are not good harbingers for the DFS industry.

Both states include initial licensing fees of $50,000. That might not seem like much, and in reality it’s pocket change to DraftKings and FanDuel in exchange for legal clarity and access to ‘x’ market.

For everyone else? Paying out $50,000 up front is a big ask for access to a pair of mid-size markets that likely won’t generate that much in revenue for small operators in the short-term.

While we aren’t to the point where DFS operators have to pull the trigger on applying for a license in Virginia, at least a few have indicated that they will be leaving the state. Indiana, if the bill becomes law, will be the same story.

DraftKings and FanDuel are okay with the scheme in Virginia and Indiana. But anyone without investment or other capital to pay up-front fees is in a tough spot: Pay money for a loss-leader in Year One, or leave the market. Yahoo could be in play in both states, but the list beyond that is unknown.

The Fantasy Sports Trade Association expressed concerns on fees that would be onerous for much of its membership, but at this point the boat has already sailed in both Virginia and Indiana.

Fees in play in other states

The Fantasy Contests Act is the model bill being floated and introduced in a lot of states. The initial legislation from the industry doesn’t always include a suggestion of what an initial registration fee should be.

But in Indiana, an initial fee of $5,000 per operator was suggested, and we see what happened with that. In Virginia, Legal Sports Report understands lawmakers set the discussion of the $50,000 fee, which never changed from introduction to passage.

Other states where initial fees were fairly small were a tabled effort in Oklahoma ($2,500) and another in Rhode Island ($10,000), although the latter is also probably too much for operators to pay to be in a very small state. Failed efforts in Florida and Wisconsin also had exemptions to initial fees that would have made it possible for smaller operators to enter the market.

Some examples of other states with bills that have initial fees that are likely too high for sites not named DraftKings and FanDuel (and maybe Yahoo):

  • New York ($500,000, although it can be paid as an offset of taxes over a 36-month period)
  • Georgia ($50,000); the bill there is dead for now.
  • Mississippi (the greater of 1) $30,000 or 2) 5% of entry fees collected in a state).

To think that states were going to provide a service to daily fantasy sports sites — in the form of state regulation — at relatively little cost was never a likely endgame. But the discussion in states could still pivot in a way that would be good for the industry.

A better approach, and a different industry approach?

At least one state has a bill that, as written, is far better for the industry as a whole, at least in terms of fees that are visible, so far.

new effort in New Jersey requires sites to pay a tax of 9.25% on play in the state. Such an approach would allow pretty much everyone to enter a state, as it’s tied solely to revenue generated. (There is a permit fee that is to be determined, in the bill as written. It’s possible amount of the “permit fee” could prevent sites from entering New Jersey.) The industry opposes the current effort in New Jersey because it doesn’t call DFS a “game of skill.”

The FSTA told Legal Sports Report it does support current legislation in Iowa, which is similar to New Jersey in that it imposes a 7.5% tax.

While the FSTA’s push initially was for legality at any cost, communication to the FSTA’s member companies promised a new cornerstone of lobbying efforts: “Fee structures that allow small operators to remain viable in the state.”

How this new focus will manifest itself in industry lobbying — and how effective that lobbying will be — remains to be seen. But a tiered structure for fees based on revenue — or a tax tied to revenue — would be the best option to allow the most operators into ‘x’ state.

How much do DraftKings and FanDuel care about allowing the rest of the market in?

This is perhaps biggest question confronting the industry as it pertains to state legislation.

The lobbying is paid for by…

While the FSTA is involved in lobbying, make no mistake about it: DraftKings and FanDuel are driving the train and footing most of the bill.

FanDuel CEO Nigel Eccles, for his part, has said on multiple occasions that he is not for regulation that would shut out smaller operators and discourage innovation.

While there’s no reason to doubt him on that point, when push comes to shove, will the Big Two actually push back against legislation that would be bad for other operators but good for FanDuel and DraftKings? Will they spend time, money and effort on shifting the discussion or amending legislation to help the rest of the industry?

The New York example

Take, for example, New York, where the stakes are high after a settlement with the attorney general.

The best- and worst-case possibilities range from:

  1. A legislative effort that would make DraftKings and FanDuel clearly legal, with fees and taxes that are high, but not out of bounds, at least for them.
  2. Being declared illegal gambling by the courts.

With No. 2 being at least in the realm of possibility, is it realistic to think DraftKings and FanDuel will do much of anything to upset the apple cart?

They certainly could try to lobby for fees that are better for everyone, and we may see that happen. But, in the end, FanDuel and DraftKings have to be looking out for the best interests of themselves. And that means getting a bill passed in New York that they can live with, as quickly as possible.

Also in the mix: Some states may not have much interest in regulating DFS companies that can’t afford the costs that they are setting. Regulation, after all, takes manpower and resources, and states generally are not in the business of working for free or at a loss.

Regardless, the early legislative arc is clearly on the side of DraftKings and FanDuel, and not great for nearly everyone else — even if it’s not by design. Whether the script can be flippedbefore more states pass regulation is a central question for the industry at large.

Clarification: An earlier version of this story did not mention that Wisconsin legislation had an exception to fees for smaller operators.

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