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Oct 7th

Premature calls for DFS regulation

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When I began covering Daily Fantasy Sports two months ago, I effectively joined a choir criticizing key decisions made by and operational principles adopted by the two major providers of DFS, DraftKings and FanDuel. In the light of the ongoing media storm that both those companies now face, it may come as a surprise that I will spend a couple of hundred word arguing against the need for DFS regulation. Or at least against the need to rush regulation.
Not because I’m principally against the idea of regulation, but because the chain of events that lead to where we are could and should have been avoided without regulation. And had regulation been in place, I doubt it would have done that much good.
Also, regulation tend to favor market incumbents. How is that fair given that they are the ones guilty of possibly forcing regulation?
Lastly it has to be noted that I am naturally contrarian. I always find it interesting and constructive to explore unpopular opinions.

I perceive FanDuel and DraftKings (the latter more than the former) as reckless companies keen on taking shortcuts in an industry that regardless of whether it is technically labelled as a gambling or not should stick to baby steps. Watching the nukes drop after one incident too many gave the skeptics what they needed to broadside the entire DFS industry on front pages is upsetting. Definitely not because the media are being unfair to DraftKings and FanDuel (although I do understand that argument) – they’ve asked for this. They’ve handled the questions regarding the strange UIGEA carveout that provides their legal cover arrogantly and anti-intellectually. They’ve opted for a lax stance on scripts and external aid tools. They decided to go on an advertising bonanza when clearly they and their platforms were not ready for it. And the two’s reckless prize pool arms race  – made possible only due to highly questionable policies – threatens their longterm operational sustainability. At worst, it threatens the operational sustainability of the entire DFS gaming vertical.
No, it’s upsetting because all other DFS companies are being dragged down with them. The calls for regulation heard from all corners of the industry may end up raising the barrier of entry and effectively shut competition out.

Neither FanDuel or DraftKings had to make the decisions they made. Among those calls for regulation I sense a lot of apologism. As if they had no other choices. Sure, American corporate culture idolizes growth to a point where full speed ahead may be the only strategy investors will listen to. But they still had choices.
They should have learned the lessons from the past and realized the risk of severe backlash if they took the route they took.
Again, whether or not some law classifies DFS as gambling doesn’t matter. In the eye of the public it will be considered gambling. And gambling is not like all other products.

What has erupted is not a DFS scandal. It is a DraftKings / FanDuel scandal.
Their actions are not automatically representative of all companies involved with DFS.
DraftKings and FanDuel dodged warnings every step of the way. None of it has been happening behind closed doors. Employees playing is no secret. The availability of valuable data is no secret. Their stance on scripts is in their T&Cs. The longterm liquidity effects of allowing pro players to submit hundreds of lineups are known.

They knew. And they ignored it. We knew. And most of us ignored it.
Most. But not all.
Some companies have chosen differently. Yet they now risk having to cope with regulation. They risk having their innovations thwarted because regulatory frameworks tend to be hostile towards innovation and be based on current practices. And they risk having to operate in an environment that is rigid, inflexible and still not very good at catching these sort of issues.
Take the somewhat similar issue of HUD usage in online poker. It is now finally recognized as the threat to the industry that it always was (mainly due to a lack of transparency). Despite online poker being regulated in several countries in Europe and three states in the US I think it is only the Nevada (could be New Jersey, I forget) regulations that contain anything that even addresses HUD usage.

1. DFS contest are protected from being compromised due to the high standards of the sports upon which it is based. If you can’t rig the NFL, you can’t rig DFS.

2. Despite the fact that the UIEGA fantasy sports carveout is a strange anomaly, it does provide a market far whiter than the one in which companies Full Tilt Poker and Cereus collapsed.

3. All the main issues that lead to this media backlash are preventable without regulation. The concerns over data can be solved by technology. Contest rules can be changed and enforced by software. Scripts are tricky but their effect can be severely limited by the altering contest rules. Weak leadership can be replaced. Bad actors can be discarded. Proper media oversight and vigilant customers willing to use their consumer power would suffice.

I realize that regulation is almost inevitable now. And it’s obviously better than status quo. But I do hope that when it happes it happens on terms dictated by the innocent who’ve acted responsibly instead of the guilty. Otherwise I’m afraid all that will eventually happen is that the people that caused this controversy are the ones that will leave it with 1st prize.
That would be the dirtiest play of all.




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