Fantasy Sports Catches a Wave

In the waning days of June, Delaware, New Jersey and Maine passed fantasy sports legislation and Indiana approved regulations.  Those states have joined Arkansas, Colorado, Indiana, Kansas, Maryland, Massachusetts, Mississippi, Missouri, Michigan, New York, Rhode Island, Tennessee, Virginia and Vermont in permitting it in some form, bringing the total to seventeen states that permit fantasy sports.  Another eighteen states have bills in the legislature.  The tide appears to have turned again, this time in favor of fantasy sports.

It has been almost exactly two years since daily fantasy sports entered the national consciousness in a big way.  In September 2015, wagering on imaginary teams online wasn’t new, but it was still in a kind of legal closet.  Suddenly and with a burst of advertising energy, DraftKings and FanDuel announced their presence to the world.  The two came out on national television during a Monday night National Football League game.  To attract the attention of would-be gamblers and in an attempt to out-do each other, they spent millions on television advertising.  DraftKings alone spend $21.8 million on 5,800 ads in the first week of the football season.

Like most people, I was caught completely off guard by the FanDuel and DraftKing advertising and its implication for legal sports wagering in the United States.  I have written two previous columns on fantasy sports.  The first described my shock upon encountering the phenomenon while watching a football game with my sister.  It was stunning to see how much money the two companies were spending on television advertising. During the first week of the 2015 NFL season, DraftKing spent more on television advertising than any company, including car manufacturers and drug companies.  I was certain the CEOs of the two companies would either end up owning the world or in prison.  In the second column I opined that the two major fantasy sports companies had bet everything on one season, their first season operating in full view of public. It seemed to me that it had been a fool’s wager.  At the time, both DraftKing and FanDuel appeared to be headed for bankruptcy.

The sheer number of the advertisements shocked television audiences and caught the attention of law enforcement agencies nationally.  Almost immediately, AGs across the country weighed in with opinions on the legality of daily fantasy sports; most found the activity to be a form of gambling and therefore illegal.  New York reacted immediately insisting that DraftKing, FanDuel and all other providers cease accepting wagers from New Yorkers.  New York is the fourth most populous state and its loss hit both companies hard.  Other states followed closely on New York’s heels.  At that moment things did not look good for the future of fantasy sports.

For at least a year, the tide went against fantasy sports. According to the Wall Street Journal, FanDuel burned through $225 million in 11 months and struggled to keep its head above water.  Only a handful of states had found the activity to be legal and by the end of a year, neither company had enough money to keep up the advertising blitz.  The Journal estimated that every new customer had cost each company $150 as a result of the advertising.  It was too much to sustain and left nothing for operating.  The WSJ and others thought both companies would simply bleed to death; without the advertising they could not recruit new customers nor attract investors. The investors who had been rushing to invest became reluctant to invest in a questionable enterprise.

But as the anniversary of that pivotal Monday night game approached, things began to change.  In August 2016; New York passed legislation to permit fantasy sports.  The law defined the online contests as “games of skill.”  Once again other states followed New York’s lead. It started as a trickle, but the trend to legalize fantasy sports is becoming more of a wave.

That wave is threatening to engulf the entire country, excepting of course the traditional gambling holdouts of Utah, Alaska and Hawaii.  The keys to becoming a true national industry are California, Texas, Florida, New York, Pennsylvania and Ohio because these states represent 45 percent of the national population.  New York has already signed on and the others are in the cue, except for Texas.  There are no guarantees as the process is always very political and each state has separate issues to resolve.  However, once again the future is looking bright for daily fantasy sports.  The Fantasy Sports Trade Association reported a record 59.3 million players in June.  The organization estimates fantasy sports has become a $7.2 billion a year industry.

For the two giants, DraftKings and FanDuel, there are still some major challenges.  First, they have to stay the course and hope the trend toward legalization continues.  However, the most pressing issue at the moment is their merger.  After the initial battle to death, both companies realized there would be no profit for the victor.   Under the circumstances, the most logical course of action was merger.  It would allow a newly formed company to drastically reduce its expenses by reducing duplication of effort thereby achieving the same results at half the cost.

But the Federal Trade Commission issued an unfavorable opinion, stating: “This merger would deprive customers of the substantial benefits of direct competition between DraftKings and FanDuel,” As one might suspect, the companies disagree.  They claim that the FTC’s attempt to block the deal “reflects an unnecessarily rigid and uninformed application of the antitrust laws to an underdeveloped, nascent industry, and largely ignores rigorous economic analysis that has demonstrated unequivocally that prices are not likely to increase as a result of the transaction.”   Just days short of the completion of the merger, a federal court issued a stay, postponing it.  And thus the battle lines are drawn.  Beating the FTC in court is never easy, but it can be done.  It is expensive and it is time consuming.  Still, two years after they first entered onto the public stage, those two giants of daily fantasy sports are in the strongest position yet.

In November a court will hear an appeal to the stay. Coincidentally, the U. S. Supreme Court will be looking at the constitutionality of a New Jersey sports betting law at the same time.  Should the Supreme Court find the law constitutional and DraftKings and FanDuel get final approval to merge, the country could be entering a new era of sports wagering.  The odds seem better now than ever before that it will no longer be illegal to place a bet on sporting events, real or imaginary.


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