Daily fantasy's small businesses fight for survival
The following article can be found in its original form at this link from CNBC:
CNBC: Jacob Pramuk, May 16, 2016
As daily fantasy sports face more scrutiny in the United States, the industry's small businesses are increasingly concerned about getting shut out.
Several state attorneys general have ruled in recent months that paid daily fantasy contests are illegal gambling. The opinions set off a flurry of activity in state legislatures, where industry leaders FanDuel and DraftKings have lobbied for legalization of their games along with some regulations and consumer protections.
But the heightened scrutiny has smaller operators worried about their survival. In legalizing daily fantasy, some states will require flat licensing fees that those companies will have a harder time paying than the well-capitalized FanDuel and DraftKings will.
Daily fantasy's small businesses have launched their own lobbying efforts and have sought possible federal action to prevent costly efforts at the state level. But after a congressional hearing last week yielded little progress, most legislative action will continue to take place in states, where small operators face an uphill battle.
"We're so small and don't have the resources to compete dollar for dollar with DraftKings and FanDuel," said Steve Brubaker, executive director of The Small Businesses of Fantasy Sports, a trade association that represents more than 100 companies.
In paid daily fantasy sports, users cover an entry fee and can win cash based on the real-life performance of athletes they choose. Unlike traditional season-long games, the contests take place within a few days.
The industry, which until recently faced almost no regulation, generated an estimated $3 billion or more in entry fees last year, according to Legal Sports Report. FanDuel and DraftKings, which have each raised more than $350 million from investors, made more than 90 percent of the estimated $250 million in 2015 daily fantasy revenue.
The companies have had the resources to launch lobbying efforts in multiple states and at the federal level once legal questions arose. FanDuel said it has worked with lawmakers to enact consumer protections and "ensure that providers of all sizes" comply with industrywide best practices.
DraftKings said in a statement that it believes "diversity and competition foster innovation."
"While we recognize that each state may take a different approach, we remain committed to working closely with the entire fantasy sports industry to ensure that the steps taken are inclusive and enable growth and innovation," said Griffin Finan, DraftKings director of public affairs.
FanDuel and DraftKings certainly do not want to pay licensing fees after previously operating without them. States hope to generate additional revenue, and the companies are willing to accept the fees to continue operating.
Getting express legalization on the state level also helps FanDuel and DraftKings avoid what could become more heavy-handed federal regulations, said Daniel Wallach, a sports and gaming attorney at Becker & Poliakoff.
"State-by-state movement for DraftKings and FanDuel would be much more favorable in terms of the type of regulation," he said.
Last week's congressional hearing left small businesses doubtful that laws will pass at the federal level soon. Brubaker, who gave testimony at the House subcommittee hearing, said he did not see "any desire" to pass a bill.
In the meantime, legislative action will continue to come at the state level. Five states, most recently Mississippi, have passed bills legalizing and regulating daily fantasy sports. No licensing fee will be required in Mississippi, but Indiana and Virginia will require $50,000 licensing fees, which could effectively lock out most smaller operators.
Proposed legislation in certain other states has favored licensing fees. But some could eventually pass laws that make fees a percentage of the revenue generated in the state, Wallach said, which is a more feasible option for small companies.
With limited resources to lobby, the small-business trade association will focus instead on key strategic states, Brubaker said. Those include California, Pennsylvania and Florida, among others.
Disclosure: Comcast and NBC are investors in FanDuel.