It is time for a reality check. The stark truth is that not a single Daily Fantasy Sports operator is profitable, as yet. FanDuel and DraftKings – valued in the upper-hundreds-of-millions – are spending so much on acquisition and marketing that they need to bank on the DFS player pool continuing to increase.
This strategy is understandable. DFS is a young pursuit, and the uptake in the US has been so swift and impressive that it is hard to believe that it could be anywhere near its peak. DFS is booming. The biggest threat to its popularity is unlikely to stem from the format itself, or from a lack of public interest.
A change in the law, and the negative PR associated with a high-profile operator meltdown are the two most probable causes of a Black Friday-esque decimation of the DFS player pool.
The global financial crisis of 2008 taught us that in bounteous times, predictions get ever-more bullish. Organizations budget aggressively, convinced that the current upswing is the norm. Groupthink takes over. Nobody wants to be the voice of caution when things are going so well. After all, they’re printing money!
When that is the case, it is hard to see how it could possibly end. Until it does.
Online Poker is now a shadow of its former self, thanks to the high-profile legal challenges and scandals that obliterated the poker landscape. Poker was a victim of its own hubris. Players carried enormous balances (six- and seven-figures, at times) in their accounts, and unregulated operators assured them that their funds were safe. Spoiler alert: they weren’t.
To assume that DFS will never face similar such ordeals is optimistic at best, and naive at worst. Let’s consider these two scenarios:
This is the classic example of a Black Swan event. Externally, poker was thriving. However, unbeknownst to the poker world, a behind-closed-doors act was drawn up that effectively turned online poker into a legally-suspect pursuit overnight.
The problem with Black Swan events is every day that goes by without incident increases the individual’s confidence that everything is rosy. To, ahem, butcher Nassim Taleb’s famous parable:
“every day, the turkey grows to trust the farmer who is fattening it up that little bit more – until Thanksgiving arrives, and the turkey is in for the shock of its life.”
In DFS terms, FanDuel and DraftKings executives have every reason to feel confident. Their product is improving. The public is engaging. The market is growing. However, their exposure to the behind-closed-doors machinations of law-makers is negligible.
The UIGEA was unforeseeable to anybody that was not involved in the legal decision-making. A DFS equivalent is NOT unforeseeable; lessons must have been learned between 2006 and today. Governments get booted out of office. New policies are implemented. Laws change. The question is: how well prepared are the DFS operators to roll with the legal punches, should they need to?
At the moment, it seems that DFS is not on the agenda for the US lawmakers. An article by Legal Sports Report suggests that the ill-fated RAWA bill (that sought to extend on the US’s ban of sports betting by also outlawing other forms of online gambling) has not identified DFS as a target. However, the article ends on a cautionary note:
‘DFS continues to enjoy its status as a “skill game” under federal law. And so far, it has avoided being lumped in with sports betting or other forms of gambling outside of a proposed bill in Texas. Could something as seemingly innocuous as a request for comment from a senator’s spokesman on the subject of fantasy sports change that?’
Bear in mind that the UIGEA did not grant DFS an exemption. DFS was created afterwards, built around the UIGEA’s stipulations. In other words, while DFS is currently on the right side of the law, it must brace itself for a day when this comes under challenge. And in the notoriously murky world of US online gaming, that day will probably come as a bolt from the blue. It is vital for the public image of DFS that such a day is handled with clarity, compliance, and professionalism.
If an operator goes bust, are the player funds safe?
It is not uncommon for smaller businesses in any sector to flounder and drop out of business. In Daily Fantasy Sports, the highly-tipped operator ScoreStreak suspended operations a month ago while it seeks fresh investment. Whether or not ScoreStreak will return to the space remains to be seen, and there is no suggestion that player account balances are under threat. It seems that ScoreStreak made a smart decision to put things on pause at a quieter time of the DFS calendar, before NFL and NBA return towards the end of the year. Their handling of an unfortunate situation has been impressive, and communication has been clear.
Nevertheless, it is concerning that an industry where players can keep large account balances online is unregulated.
A recent blog post by poker operator America’s Cardroom CEO Phil Nagy attracted attention, when it claimed that DFS – publicly viewed as legal –is just as unregulated as online poker – publicly viewed as illegal. (Full disclosure: this writer coaches poker strategy for a site owned by ACR, although he has never had any dealings with Mr Nagy and most likely never will.)
In other words, although most DFS players assume that their money is locked up safely in a segregated account, the sites are not obligated to do so.
By any reasonable standard, segregated accounts should be mandatory. Player account balances should not be allowed to co-mingle with the day-to-day operating costs of any site. Without regulation, there is nothing to stop operators from covering cash-flow shortfalls with the money in their DFS players’ accounts.
It sounds far-fetched, but that is exactly what happened with Full Tilt Poker. Despite telling their users that account balances were stored in a separate account from operating costs, the world’s number two poker site at the time was using player funds to keep the business afloat. At the same time, enormous (7-figure) bonuses were being awarded to Full Tilt executives several times a year.
When Black Friday hit and Online Poker got shut down, Full Tilt didn’t have the money to return all the funds owed to their users. Four years later, and not everyone has been made whole. The cautionary tale of Full Tilt Poker has not been heeded. Daily Fantasy Sports needs regulation to ensure that its users’ funds are safeguarded. If a site goes down in a Full Tilt-esque manner, then the damage to DFS’s public image could be fatal.
In big-money industries, big-money risks get taken by big-status organizations. Without regulation, DFS is susceptible to the whims of hubristic executives. This is not scare-mongering; this is an attempt to ensure that the disastrous meltdown of mismanaged poker sites is learned from. Until DFS operators are REQUIRED to segregate player funds from operating costs, then there is more risk involved than the DFS public should be comfortable with. I, for one, welcome the suggestion that Texas may license DFS sites. It is a step in the right direction – but many more steps are needed.
This is a Guest Post Authored by Christy Keenan