Gambling over the Internet Part II
As we noted in Part I while the two largest companies, Draft Kings and Fan Duels, received over $3 billion in “entry fees” in 2015, they did not make a profit. They were plagued by employees playing on the other site with inside information that gave them an edge. One employee won over $6 million with as much as $350,000 at a time. The large prizes were dominated by less than 1% of the players who posted hundreds of entries using sophisticated “scripts.” Then they were faced by millions in legal fees and lobbying costs as they sought approvals from state legislatures. In addition, when revenues declined during the second half of the 2015 Football season, valuations of the big two were halved and investors lost money.
The legal issue remained whether DFS was a game of skill or a game of chance. The only skill seemed to be deep pockets and excellent computerized scripts. The 250 members of the Fantasy Sports Trade Association rejected the formation of a Board to field complaints and police integrity, fairness and transparency. This was self-defeating in the long run as it became apparent that anyone playing fewer than 90 entries in a given game would be a loser. The decline of DFS began in July of 2015 when a US Attorney in Florida informed both companies that they were under criminal investigation.
This was followed by a report that only 1.3% of the players were consistent winners. The report predicted that the winners would soon eliminate most of the casual players. The next blow came when ESPN decided to remove all Draft King elements from its shows. The big two then decided to apply for licenses in England as gambling entities, which undermined their claim to not be gambling. On November 10, 2015 the New York Attorney General issued his cease and desist order. The DFS companies responded by pushing for legal status for the games in state legislatures, including New York.
The next problem came in the form of over 40 lawsuits filed by customers who believed that unfair advantages were granted by the companies to big players using scripts. They compared the DFS companies with the casinos who spread perks around to all levels of players, even though large losers got larger perks. In DFS large winners got the perks. The suits were consolidated into a class action suit. Two dozen state AGs opened investigations. By the end of 2015 38 states were considering legislation to legalize DFS games. Illinois casinos managed to kill legislation there. In CA, FL, CT, OK and AZ Indian casinos marshalled enough clout to kill the legislation. At the end of this round eleven states did not allow the sale of “entry fees” in those states.
By March 2016 Virginia became the first state to legalize DFS followed by IN, TN, MS, CO, MO and MA. New York settled with the big two DFS companies, with the result that they closed out baseball, basketball and hockey while being allowed to offer football games.
For several months the big two have talked about merging. To reduce costs they have renegotiated contracts, reduced the number of large prizes, reduced advertising dramatically. To improve relations with smaller players, they have been offering more information to all players, limited entries to 150 in any given game, and introduced “beginners” area where successful players are not allowed. They are identifying the successful players by tags no matter what games they play. They are preventing third party scripting, and have prevented employees from playing on rival sites.
New taxes are also an issue with New York having the highest rate at 15%. These appear to be passed on to the customer in either a larger hold or higher entry fees. New investors are scarce and the old ones are impatient with the leadership of the companies.
It remains to be seen if the changes are sufficient to enhance the culture of DFS, and the target date for turning a profit is still future and unknown. So far, the biggest sports gamble is a dud.
Data from Don Van Natta, Jr., “ Welcome to the Big Time” Outside the Lines and ESPN the Magazine,
August 24, 2016.