Daily Fantasy and the Government. A Story of Overreaching.
By now anyone with a pulse and an Internet connection has read that New York’s attorney general, Eric Schneiderman, has ordered DFS operators Fan Duel & DraftKings to cease operations in the city.
Another week, another Startup versus government story.
Schneiderman’s basic argument is that Daily Fantasy operators are enabling gambling in their applications, and are not ‘games of skill’ as the companies claim under the 2006 Unlawful Internet Gambling Enforcement Act. New York’s AG asserts both companies are in violation of state law because users “are clearly placing bets on events outside of their control or influence.”
Fan Duel and DraftKings have defended their businesses and have vowed to fight this ruling in court. Both have already engaged in grassroots campaigns to evangelize their 500,000+ combined users in New York alone.
We’re witnessing a classic case of startup and government overreaching.
Daily Fantasy operators have pushed the limits of the 2006 ruling by introducing sports where the skill factor is harder to defend, such as Nascar, UFC and Golf. Also, the gluttony of million dollar weekly prizes, blitz ad campaigns and employee’s winning six figure prizes have all but asked for government investigation. While none of these actions were illegal (at least, they weren’t illegal before 11/10), the overreaching without considering backlash is on Fan Duel and DraftKings. They both should have been more measured in their expansion tactics.
The New York government also overreached by grouping everything the companies do into one blanket cease and desist order. Saying ‘shut down’ is vastly different than ‘let’s investigate each supported game,’ and results in a more evangelized and angrier DFS user base. Nothing opens the door for regulatory ridicule like a brash and heavy handed ruling.
This situation is far from without precedence. Every day the government and operators of new business models struggle with how far tech driven disruption can go before beckoning a regulatory response. In September, New York attempted a blanket ban of Uber which was overruled just one month later. San Francisco by a slim margin voted down a ballot to make AirBnB all but illegal.
These battles are a game of marketing, and in the vast majority of these cases the tech company comes out on top. But for now, petitions will circulate, people will Tweet, lobbyists will drink champagne, regulators will be regulators and Daily Fantasy fans will wait as we see as the courts analyze whether or not DFS are indeed games of skill.
So, who will win?
Full disclosure before I put my flag in the ground: I’m the founder of Gamer Duel, an app that enables real money competitions on console games. We’re enabled by the same 2006 ruling that allows DFS businesses to operate.
Despite the gluttony, as I call it, of the DFS space, the AG of New York overstepped his bounds in the blanket ban, and will be proven wrong in court for the majority of what DFS businesses offer their users.
The AG’s statements make it clear that he doesn’t understand the fundamentals of what determines a game of skill and what does not. Before I start, I’m going to ignore the rhetoric that this is all a money grab (not saying it isn’t) for the sake of clarity and just focus on the fundamentals of the decision instead.
To quote Schneiderman “[DFS users] are clearly placing bets on events outside of their control or influence.”
While he’s right, his statement has no bearing on whether or not that makes DFS in general a game of skill or not, and this leads me to question the overall logic behind the ban.
Replace DFS with ‘Investment Banks’ or ‘Stock Analysts’ for starters — are we arguing that investing is gambling now as well? Isn’t the concept of skill in stock trading the fact that given limited resources and information the most skilled traders use their knowledge, research, intelligence, ingenuity and risk tolerance to compete with other traders? That sounds exactly like drafting a lineup in DFS.
Also, look at the data from a variety of sources who have analyzed players and winnings across the DFS landscape. The general analysis shows that 90% of winnings are owned by less than 10% of players. If this was gambling, the data should trend toward 50/50 as you would see in blackjack or roulette over time.
Another factor in Schneiderman’s order is that it does not apply to season-long fantasy sports contests.
Doesn’t the ability to predict the outcome of a fantasy draft become harder over an entire season and make events more ‘outside of their [your] control or influence”? Shouldn’t that be the area the government targets instead of supports?
The two points above make it pretty obvious the AG doesn’t really understand what he is attempting to outlaw. While I’m not against an investigation into DFS operations, this seems like a very Uberesque case of a hasty, strong-handed ban that really just hurts the credibility of the regulators when they later try to actually prevent public harm. I’m extremely confident the vast majority of DFS games will return to NY when push comes to shove.
I’d put my money on it.