Analysis: The beginning of the end for DFS?

Martyn Hannah looks at what impact New York’s ruling that DFS is illegal gambling will have on the wider industry 

The ruling by New York attorney general Eric Schneiderman that daily fantasy sports (DFS) operators FanDuel and DraftKings are engaging in illegal gambling under state law has the potential to change the outlook of the entire industry. [private]

With more than half a million players, New York is probably the most important state for DFS operators, and the big two can’t afford not to lose the revenue stream it presents.

However, when looking at the detail, the ruling doesn’t offer too much cause for immediate concern. While Schneiderman issued cease-and-desist letters to both FanDuel and DraftKings demanding they close their operations in the state, in reality the pair will likely remain live in New York for some time.

On receipt of the letters FanDuel and DraftKings have five business days to respond to Schneiderman and contest his decision, during which time they can continue to offer contests to players. The AG is expected to file lawsuits against the pair in the coming weeks, who in turn are expected to file injunctions blocking the ruling.

In short, a protracted court battle will ensue – all the while FanDuel and DraftKings will have the option continue running their businesses in the Empire State. What impact the ruling will have on the wider perception of the activity and participation rates, however, is unknown.

A long slog 

“While the New York AG issued this order, he will have to make the case that the law is on his side,” says FastFantasy CEO Joe Brennan. “FanDuel and DraftKings cannot be penalized or convicted of a crime without due process, and the AG will have to establish his position in court before a judge,” he adds.

DraftKings last night said it was working with international law firm Gibson, Dunn & Crutcher to challenge the ruling. “We intend to pursue this fight to the fullest to ensure that hundreds of thousands of New York fantasy sports fans can continue to play the games they love,” the firm said in a statement.

Their argument will be that DFS is a game of skill and not gambling. They will likely point out that winners of DFS contests are usually those who conduct thorough research, analyze data and are skilled in selecting their line-ups, not those who are just lucky.

But with Nevada’s recent ruling that DFS is gambling coming just before the decision in New York, does that argument really hold water?

Shergul Arshad, CEO of European DFS operator Mondogoal says it does and likens DFS to online poker, which is classified as a game of skill within the US.

“For us, the UK, Ireland and the Isle of Man all granted us licenses as we specifically engineered and set up a company built for that market, a market that calls DFS a form of skill gaming,” he adds.

A different beast 

But Europe and the US are very different beasts. Stateside, individual states can decipher and apply their own interpretation of the law. To that end, the concern is that Schneiderman’s ruling may hold steady when challenged in the courts.

If that is the case, FanDuel and DraftKings will be hit particularly hard, with the state accounting for 13% of total DFS players in North America according to Eilers Research – more than California (10%) Florida (6%) New Jersey (5%) and the whole of Canada (4%).

“New York has banned DFS and it may be a long time before it is reinstated,” Arshad says. “I expect years. But when that happens it will bring online poker and sports betting. It’s a sad day for the consumer as DFS is certainly fun and popular.”

Wider impact 

The ruling comes at a time when a growing number of states – including Pennsylvania, Illinois and Massachusetts – are taking a closer look at the legal status of DFS. Some, such as New Jersey, have a similar definition of what constitutes illegal gambling – the test is whether the activity has a “material” element of chance.

But so far other states have come down in favor of DFS and are simply looking to build a framework that offers greater consumer protections, while a handful are also looking to license and tax the activity to bolster state coffers.

“There may be a couple of states that take a look at New York and consider whether that is the way to go. But most people are ignoring that in the last few weeks states like Pennsylvania, California and Florida have moved to expressly legalize fantasy sports,” says Brennan.

“There is a bill being introduced in New York to legalize DFS as well. And that may lead to a bit of a conflict if the attorney general is seen as stepping on the power of the legislature to make laws,” he adds.

Whether the bill is able to gain significant traction remains to be seen, but a number of lawmakers have already spoken out against Schneiderman’s ruling. Rep. Chris Collins blasted the AG, accusing him of trying to “grab the headlines.”

“Instead of looking to score political points, the AG should be working with federal and state lawmakers to ensure laws are being followed,” he says. “Instead, he’s opting for a two-minute thrill. Let’s all take a time out from government overreach and make sure we get it right,” Collins adds.