The Potential Downfall of Daily Fantasy Sports

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Why I am writing this:

Before I get into it, I want to be clear that I am writing this article as one man’s opinion.  I have no inside information about the daily fantasy sports industry and these are just my own observations as someone who has been in the online gambling business for the past 10 years. I wanted to share my perspective for the following reasons:

  1. I would hate to see another black eye on the gambling market
  2. The daily fantasy sports industry effects a lot of players in the online poker industry
  3. I personally have several friends and acquaintances that are starting to accrue big balances on daily fantasy sports sites.

With that being said….here it is:

I’ve been following with close attention the recent boom in popularity of the daily fantasy sports industry and I’m starting to see some red flags.  So much so, in fact, that I believe that without some sort of third party regulation we could very well be on our way to another catastrophe, rivalling that of the Full Tilt Poker and Ultimate Bet scandals of 2012.

For those of you who are unfamiliar with what daily fantasy sports is, here’s the quick rundown.  Much like traditional fantasy drafts, players create teams by selecting professional athletes that are playing in various sports. They then enter their team in a tournament versus other players’ drafted teams and the player or players who earn the most amount of points win or share the prize pool with other top finishers.

Rather than wait an entire season, players can draft a fantasy team and be pitted against one another in a daily tournament and then play again the next day. 

One can see the similarities between the daily fantasy sports industry and the online poker tournament industry.  Operators who host these competitions such as Fanduel and Draftkings take a percentage of every entrance fee, just as ACR does when we host poker tournaments.

I see two big problems with the industry as a whole…earning potential and transparency.  If ACR was to just survive on tournament fees with no other revenue streams such as cash game rake, we would be out of business in a hurry.  The revenue generated from tournament fees just isn’t enough to support our business overhead alone. 

A recent Bloomberg article quotes Nigel Eccles, the chief executive officer and co-founder of FanDuel, as saying the company isn’t profitable, “but we’re building a multibillion-dollar business.”

That quote isn’t too comforting and leads me to wonder how daily fantasy sports websites can expect to maintain profitability considering their No. 1 resource of revenue is the fees on these fantasy tournaments.  The amount of advertising dollars alone that some of these daily fantasy sports websites are spending is incredible.  

This of course leads me to the second problem….transparency.  The daily fantasy sports industry operators are exempted by the Unlawful Internet Gambling Enforcement Act of 2006 as it’s considered a game of skill.  This is a loophole that may not always be open, so there are legal risks.

“There is zero evidence anyone contemplated fantasy of the daily variety when they passed this loophole,” said Florida State assistant professor of sport law Ryan Rodenberg in a Fantasy Sports Trade Association article

As they are not considered a gambling institution, they are not beholden to the rules that regulate casinos and other gambling institutions.  They are also not a bank where they must produce balances as public record. 

Also, there are only two daily fantasy sports sites that are publicly traded and presumably under stricter financial oversight. Fanduel and Draftkings are not public even though they are easily the two biggest in the space (this has not been confirmed).

This is where players could be left holding the bag.  In order to deal with the daily demand of cash out requests, I’m assuming that the majority of these companies could get away comfortably with having about 20% of players balances at their disposal. This leaves an awful lot of money that is just sitting there “not being used” for daily operational costs.

What’s to stop a start-up daily fantasy sports website from using the other 80% to pay their employees or start an aggressive advertising campaign?  If the business does take off and they pay back their “loan” from player balances – then great….if not, it’s as simple as filing bankruptcy and players are once again wondering if they’ll ever get their money back, much as they were when Full Tilt Poker announced they didn’t have the cash to pay player balances.

Some daily fantasy sports sites have already announced they will go into bankruptcy, and it is expected that many more will as the industry consolidates.

I have friends and know players who carry significant balances on some of the daily fantasy sports websites and I always advise them to proceed on the side of caution and be very thorough with knowing who is holding the money and what it is being used for.

I’d advise you to do the same.  Ask your daily fantasy sports provider if your balances are indemnified and whether their day-to-day operational costs versus revenue is public record.  I’d suggest following the industry closely and keeping smaller balances online.

When the money is all gone it’s much easier to ask for forgiveness instead of permission.

CEO – Phil Nagy

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