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Fantasy Gambling

By Michael AlterPublished April 15, 2016

Michael Alter looks at the recent developments in the daily fantasy sports controversy and what makes this new form of gambling different from previous vices.

    Last month, NY Attorney General Eric Schneiderman announced that he had reached a deal with the two largest daily fantasy sports (DFS) companies, DraftKings and FanDuel. DFS companies are the newest addition to the world of sports-based electronic gaming; whereas older forms of such games might be played out over an entire season, DFS games are usually no longer than a week, often a day. Players pick teams of athletes and are awarded based on how those athletes perform in the real world. The two companies, one of whom, DraftKings, is based in New York City (FanDduel is based out of Boston), agreed to suspend their activities in the state in return for dropping numerous charges the AG's office had leveled against them, related primarily to the charge of running an illegal gambling operation. Some charges related to advertising remain, but the substance of the agreement was an ease of tensions which both the companies and the AG acknowledged.

    The NYS Legislature is currently considering bills to make provisions for DFS to once again become active in the state, which is why the companies agreed to the temporary moratorium. While some said measures to legalize and regulate this form of what many consider gambling could appear in the state budget be finalized on April 1, most believe a bill will be debated and perhaps enacted before the legislature breaks at the end of June. New York has had an uptick in gambling related measures in recent years; in 2013, a ballot measure was passed as part of a larger plan to stimulate the upstate economy with as many as seven new casinos. Two years after it was approved, the plan has yet to be fully implemented, but the message seemed to be clear that voters thought gambling was a useful way to spread investment across economically depressed regions of the state.

    Gambling has always been a controversial subject in the U.S. and a topic of frequent debate. While Nevada might be the most famous state for gambling in the country, it is by no means alone; states routinely use different forms of gambling, like the state lottery, various national lotteries, casinos, raceways, and others to raise money. DFS are only the latest genre of gambling to come under public scrutiny; numerous states besides NY are considering laws on how to regulate them. What seems to be different about DFS are a few things: for one, the industry is currently dominated by only two companies, and though they sometime like to refer to themselves as start-ups, that label is a bit disingenuous; like Uber, PayPal, and many others before them, they passed the start-up phase well before they started earning multibillion dollar profits.

    Another difference between them and more traditional forms of gambling states take interest in is that they are the first to seriously exploit the internet. When you think of gambling, you might imagine a casino on the Vegas strip or along the Jersey shore, a racetrack on the outskirts of a major city, even a lottery ticket you bought at your local convenience store. All of these forms of gambling require a point of distribution, a physical place to take that bet. DFS never needs that; all you need is a computer or a smartphone and your credit card. It's a new business model, one for the information age, and states need to catch-up in this category like they have to in so many others related to technological advancement.

    The most important difference, though, is probably how the revenue the companies receive is allocated. Gambling revenues from such products like the lottery typically go either into the state's general coffers or are earmarked for specific programs. Casinos and racetracks take in revenue to improve their facilities, advertise, offer more games, and other expenditures, not to mention paying taxes to the state. DFS companies do not have that level of overhead; they pay their business taxes to the state, pay their relatively small number of employees for a multinational, multibillion dollar operation (FanDuel employs over 400 people, DraftKings more than 350), and allocate the rest to improving their products and take-home profit. While much might still be left to do to improve various company offerings, the average fan probably doesn't care about their innovations too much, just as long as they get to keep playing. Revenues from state-sponsored or state-controlled gambling at least ostensibly go back to the public, and revenues from casino gambling at least provide customers with a whirl-wind vacation weekend in an amazing hotel they will remember for a long time. DFS revenue has much less societal benefit.

    As lawmakers across the country take closer looks at DFS regulations, there is a strong incentive for them to rush this through. After all, who wouldn't want to capture some of that very lucrative industry's profits through tax revenue as quickly as possible? But they should be cautious. This is a new kind of gambling, materially different from earlier forms of one of humanity's oldest forms of entertainment — and oldest vices. At the very least, the regulations should attempt to structure this new, exciting industry in a way that enhances more societal goals than it has in the past, like improvements to specific state funds from these businesses, while still letting the average user enjoy their fantasy team. This can be a win-win, but the odds are quite long that this scenario will end without one side coming out on top.