The headline stories in the run up to this year’s NFL season are sensational if not familiar by this point: Tom Brady and the Deflategate scandal, the New York Jets’ starting quarterback’s jaw being punched out by a third stringer and a barrage of eye-popping injuries suffered by key players in the irrelevant preseason.
But a much more intriguing storyline is developing behind the scenes. The battle lines are quickly converging in what will be an inevitable fight between upstart daily fantasy sports (DFS) websites and the commercial casino industry, which is watching those websites undercut the casinos’ market, especially among the ever-coveted younger demographics.
The two leading DFS companies, FanDuel and DraftKings, are exploding in popularity this year, and are currently locked in an arms race to acquire new customers ahead of football season – which has long been the big money maker in fantasy sports. They have been buying up seemingly every available ad slot on ESPN while offering ever-growing prize pools: FanDuel, for one, says it will pay out $2 billion in winnings this year.
These companies are flying under the regulatory radar thanks to the 2006 fantasy sports carve-out in the Unlawful Internet Gambling Enforcement Act. They have also won the support of the major sports leagues, who have traditionally opposed sports wagering, and of major media companies such as Yahoo!, Disney, and Fox.
But the commercial casino industry, one of the most heavily regulated industries in the United States, sees the DFS sites as running amuck with no regulation, licensure, or oversight. Having rested on its laurels for too long, and having written off the next big thing as just a fringe phenomenon, the industry is now mounting a pushback.
“You’re seeing a classic business battle between the old casino giants and what has essentially become a media product,” said one gaming industry attorney. “I think the casino industry should have killed this a long time ago. They’ve allowed this to reach a point where people who are not in their sector are undertaking their business.”
The American Gaming Association has convened a task force to determine the industry’s formal position regarding DFS games by November – smack in the middle of the NFL season. The DFS companies assert with confidence that federal law distinguishes fantasy sports from traditional forms of gambling. However, given the strong comments this year from key gaming leaders such as Jim Murren of MGM, Joe Asher of William Hill, and Keith Smith of Boyd Gaming, comments that oppose that position and leave little room for ambiguity, it is unlikely that the AGA task force will find the status quo to be perfectly acceptable.
Depending on how venomous the report’s recommendations are, there are three plausible routes the gaming industry could take. The first would be to call a genuine truce with DFS operators and find a way to common ground through partnerships or other arrangements. The second would be to wage an all-out war to eradicate DFS through a regulatory or legislative crackdown. The third would be to issue a generic statement of mutual trust and goodwill while working behind the scenes to harass the DFS sites through regulatory pressures.
The casinos would need to offer the DFS companies some extremely enticing incentives to convince them to go with option one. The very existence of DFS is predicated on the claim that it is not gambling; associating with casinos in any way is thus probably a non-starter. Option two could work for the casinos, but there would be a costly battle royale between lawyers and lobbyists from the casino industry and those from the sports leagues and media companies propping up DFS, not to mention the DFS companies themselves.
So at this point in time, the third option would likely be the most effective response. The DFS company financial situations remain somewhat dodgy. They are not profitable and it remains unclear what their exit strategies are. Being forced to apply for licensure across multiple states, with the associated regulatory and compliance complexities, could cause considerable cost pressures. The argument that DFS is gambling and should be subject to the same rules as other forms of gambling could likely pass muster with many regulators.
Indeed, we are already seeing option three in its nascent stage. The Nevada Gaming Compliance Board is undertaking an inquiry into the legality of DFS games under Nevada law, and there are rumblings that their findings will drop sooner rather than later. Presumably this inquiry has come in response to complaints from the commercial casino industry. Challenging the legality of DFS on their home turf of Nevada certainly makes sense, as other states may see the NGCB as the people who know, and may be more inclined to follow the direction it takes.
