DFS Action Hot & Heavy in U.S. States

As legislative sessions across the country begin to wind down, action on the legalization/regulation of daily fantasy sports begins to get serious. Alabama, Iowa, Maine, Massachusetts and Mississippi were hard at work last week. Iowa’s Rep. Matt Windschitl (l.), the sponsor of the DFS bill, is fearful that opponents will consider it an expansion of gaming in the state.

Daily fantasy sports, once thought to be the next online gambling bonanza, continues to hit rough spots across the U.S. as legalization bills in various state legislatures are considered.

After hours of debate, the Alabama House of Representatives recently voted 43-38 on a bill to allow fantasy sports betting. Last year state Attorney General Luther Strange issued cease-and-desist orders to DFS companies FanDuel and DraftKings, claiming DFS betting was illegal gambling since it was based on luck, not skill. But supporters of the measure said DFS contests are based on skill and knowledge of sports players.

The bill, which now moves to the Senate, would regulate fantasy sports contests and tax a portion of the operator’s profits.

 

DFS betting, however, is a no-go in Iowa this session, despite the early optimism of the bill’s sponsor, state Rep. Matt Windschitl. He said opponents determined DFS to be an expansion of gambling in the state. The bill would have authorized the state Racing and Gaming Commission to license and regulate DFS operators, which would pay a 7.5 percent revenue tax directed toward state infrastructure needs. A similar DFS bill failed in Iowa last year.

The Mississippi legislature this year updated a 2016 law and making DFS permanent and Arkansas also approved the online betting sites. Currently 11 states have passed laws legalizing fantasy sports–nine since the start of 2016. Florida, Texas and Illinois still are considering measures legalizing DFS.

Meanwhile, in the year interim since the Massachusetts legislature temporarily legalized daily fantasy sports and created an ad hoc commission to study it and other internet gaming and propose legislation this summer, the DFS industry has experienced a dramatic contraction.

About two-thirds of the existing companies at that time have ceased to exist, or gone in different directions or merged with the competition. That was reported recently by the Fantasy Sports Trade Association.

The biggest example is the proposed merger between DraftKings and FanDuel, the largest DFS companies. The FTC is reviewing the proposal. Fantasy Aces, FantasyHub and FantasyUp closed up shop, leaving many players owed money.

Of the 118 companies that existed in 2016, 81 no longer offer the contests. Some companies were challenged in court, and such chaos made investors shy away. New companies are still starting up, however.

Companies that didn’t have a distinct brand tended to fade away, according to Daniel Barbarisi, author of Dueling With Kings, a study of the industry.

He wrote: “Everyone thought DFS was the next gold rush. It couldn’t sustain that level of speculative growth, especially from small operators. Now that the barrier to entry is higher, I’m not surprised at all to see many of them falling by the wayside.”

Besides Massachusetts, 10 other states have addressed DFS in one way or the other.

A spokesman for DraftKings and FanDuel argues that the more states that pass laws regulating DFS, the more examples states will have to show how the industry functions under a regulatory umbrella.

New York state, which legalized DFS last year and taxes the activity, collected nearly $3 million in the first months after the law was enacted. DraftKings and FanDuel have spent hundreds of thousands of dollars in lobbying efforts in lobbying and campaigning efforts in other states that haven’t passed laws.

States that pass bills requiring large licensing fees could further cause consolidation among the companies remaining. Fees in Virginia caused Ryan Huss, co-founder of Syde Fantasy Sports to go into a different line.

The research firm of Eilers & Krejcik reports that from 2015-2016 the fees played by players grew 4 percent to $3.3 billion and net revenues increased 15 percent to $350 million.

One new company, Starting 11, based in Minnesota, says it hopes to profit by being more innovative and by using the fact that its founder, Teague Orgeman, is an attorney, to be able to deal with the evolving regulatory landscape.

Over the last two years, more than 30 states have considered regulations for DFS sites. Most of the bills that have been passed in respective states require licensing fees and separation of players accounts from general revenue. A few states have imposed taxes on revenue.

In Maine, the legislature is mulling a fantasy sports regulatory bill that critics claim was largely written by the industry itself.

Although fantasy sports generally operate under the radar for most people, it is a big business, and would mean substantial profits, even in a small state like Maine.

In fantasy sports, players draft “real” sports figures and form team and earn prizes depending on how their teams perform. It is not regulated by the federal government, and only recently have state governments started to put them under the microscope.

In Maine, say critics, the industry is trying to rewrite regulations to given them an unfair advantage. The bill under consideration, L.D. 1320, “An Act to Regulate and Tax Sports Fantasy League Activities in Maine,” would advantage existing companies by limiting their fees to a $5,000 cap, while requiring 10 percent of a company’s gross, which would make it harder for small companies to start up.

It would also penalize individuals who, rather than play on an established website, decide to start their own, even if they aren’t making any money.

According to conservative activist Jim Fossel, “This prevents consumers from exercising their right to create their own product, essentially forcing anyone who plays fantasy sports to use a large corporate site. It’s the fantasy sports equivalent of a fast-food chain pushing for legislation requiring anyone in the state to register their backyard grill with the government.”

Other provisions do provide consumer protections by forbidding operators from profiting from contests they run—or sharing insider information. Such activities have happened in other states and prosecutions have resulted.

The proposed legislation, however, limits civil penalties to no more than $5,000.

Fossel concludes, “This bill seems to be an example of what happens when industry lobbyists sit down with legislators to write their own regulations: they focus on their clients’ bottom line, with a few nominal consumer protections tossed in.”

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