By Christopher Calnan
Moves by state lawmakers, professional sports and major media companies are setting the stage for massive consolidation of the daily fantasy sports (DFS) business, a national legal expert in the area says.
Marc Edelman, a law professor at Baruch College’s Zicklin School of Business, said at the Sports and Recreation Law Association’s annual conference in Las Vegas earlier this month that several factors are limiting and will continue to limit the amount of competition among fantasy sports operators.
The business’ two dominant companies can easily afford to pay state licensing fees that can reach $50,000, while such fees undermine smaller operators. New York-based FanDuel Inc. and Boston-based DraftKings Inc. have captured a combined 95 percent of the DFS market, Edelman said.
Some states are creating and, in some cases, escalating licensing fees for DFS operators, raising the barrier to entry for smaller operators. All the while, sports leagues and media companies are investing in fantasy sports. MLB and the NBA, for example, are shareholders in DraftKings and FanDuel respectively and it’s not unusual to see advertisements for DFS contests at professional sports stadiums and arenas.
“There is now an alignment of the media, these leagues and these games,” he said, “which would make it very easy for someone going to the ballpark to have a shared experience.”
The prospect of future consolidation fuels concerns about the rising integration of the sports and the gaming business.
“If you look at this from a competition standpoint, each sports league is already a shared monopoly,” Edelman said. “Because of that, these teams are becoming incredibly wealthy and powerful. …What they have done by becoming shareholders of FanDuel and DraftKings … is we now have a shift where these very powerful sports leagues that had a shared monopoly over their sports now have a shared monopoly over gaming as well.”
Don’t be surprised if DFS contest results are one day listed on game scoreboards or scrolled along the bottom of sport programming screens.
The commercialization of fantasy sports began in the mid-1990s when ESPN Inc. became the first major company to provide fantasy sports games to consumers on the Internet. Many of ESPN’s contests charged users an operating fee for management of team data, although ESPN’s fantasy sports contests never paid cash prizes to their winners, according to Edelman.
In 2015, fantasy sports paid out more than $3 billion in contest winnings. The top 1.3 percent of the players took home 91 percent of the total. Also, consumers spent $450 million on DFS research and third-party data in 2015, according to LegalSportsReport.com.
An estimated 50 million Americans now participate in fantasy sports contests. The business has grown so quickly it has attracted the attention of regulators that question whether it’s a form of illegal gambling. Lobbyists have gotten involved and states are adopting a “bi-furcated system” of regulation and creating special laws for DFS, Edelman said.
“There’s so much uncertainty as to how you draw the line about whether a daily fantasy sports game is 51 percent skill or 49 percent skill,” he said. “And these are really issues of facts involving experts. So, people are operating these games and telling the states ‘Come after us and try to challenge us.’ What we’re seeing now is some states moving away from this general system.”
States have also been setting DFS contestant age requirements that range from 18-21.
The States Get Involved
The pace of state legislation is expected to ramp up this year. Mississippi has become the 12th and latest state to enact daily fantasy sports legislation as scores more are expected to introduce such bills during 2017.
The new regulation, approved in mid-March, is just the latest in a line of changes expected to come this year as 22 states seek to resolve legal and regulatory issues surrounding the online DFS games.
In 2016, eight states enacted DFS-related legislation. If the activity is deemed a game of chance, then states are effectively faced with endorsing legalized gambling.
In Mississippi, Gov. Phil Bryant signed into law legislation that authorizes the state’s Gaming Commission to issue operators $5,000, three-year daily fantasy sports licenses. The arrangement is expected to generate $5 million in annual revenue for the state through an eight percent tax.
The new law also mandates that DFS operators undergo background checks and submit to annual audits of their operating funds, player funds, and past contests. The Mississippi Gaming Commission also prohibits operator employees and anyone under 18 from participating in DFS.
In early 2016, Texas Attorney General Ken Paxton questioned the legality of DFS because the outcome of games “depends partially on chance; an individual’s payment of a fee to participate in such activities is a bet.”
In Ohio, Arkansas and Pennsylvania, states in which fantasy sports is very popular, DFS regulatory legislation is also being considered.
If enacted, Ohio’s DFS bill would provide regulatory oversight to the Ohio Casino Control Commission. It also proposes an initial licensing fee of $30,000 for operators instead of a tax percentage.
Arkansas plans to require DFS companies to register with the state and pay an annual tax of eight percent. Pennsylvania is proposing legislation to give fantasy sports oversight to the state’s Gaming Control Board.
In Minnesota, the House Public Safety Committee approved in March legislation that recognized fantasy sports as a legal pastime. Yet, the legislation has more hurdles to overcome before winning state approval.
Here are the 22 states scheduled to introduce DFS legislation during 2017: