The inaugural Daily Fantasy Sports Players Conference kicks off Thursday in New York.
That's a pretty ironic location, since that same state’s attorney general said this week that such cash games pitting daily or weekly fantasy teams against one another constitute illegal gambling and need to stop operating in the state.
The legal status of fantasy contests will undoubtedly be a major topic at the three-day summit, and with good reason. New York is the first state to actually accuse companies like FanDuel and DraftKings of breaking the law, but others are conducting similar reviews, and some members of Congress want a hearing on the subject.
Now, if New Jersey Gov. Chris Christie (R) wins the White House, the roughly 150 conference attendees who paid as much as $600 to “improve their games, socialize, network and gain insight to the industry” (oh, and the 56.8 million other people playing some kind of fantasy sports) might have nothing to worry about -- at least at the federal level.
“Let people play. Who cares?” the Republican presidential candidate said in a debate two weeks ago.
But if Christie gets his way (on the letting-people-play thing) it probably won’t be because fantasy sports are no big deal, as he suggested. More likely, it will be because they’ve become, in a short period of time, a very big deal.
Consider FanDuel’s response to Tuesday’s determination by New York Attorney General Eric Schneiderman (D). A company statement read, in part, “This is a politician telling hundreds of thousands of New Yorkers they are not allowed to play a game they love and share with friends, family, coworkers and players across the country.”
Translation: Look how big and popular we are. Are you really going to try and shut us down now?
Also consider the way FanDuel and DraftKings — expected to pay out $3 billion in combined prize money this year — have prioritized growth over profits during their brief existences (which are six years and three years, respectively). In fact, neither company is profitable yet, according to their executives. Each returns roughly 90 percent of entry-fee revenue to players in the form of prize money, and each spent tens of millions of dollars on advertising at the beginning of this year's football season.
The goal, clearly, has been to rack up tons of users through slick marketing and fat prizes. Many smaller fantasy gaming sites, vying for a piece of an expanding pie, actually pay out more money in prizes than they collect in entry fees -- deliberately losing money, according to industry tracker SuperLobby, in hopes of building a customer base that will eventually lift them out of the red.
Reaching a critical mass of users is a smart political strategy for companies with business models that are iffy on the legal front. Wired summed it up nicely last year in a headline on a story about another controversial technology company: “Uber’s brilliant strategy to make itself too big to ban.”
But, as Uber has discovered, "too big to ban" doesn’t mean too big to regulate. In the case of daily fantasy sports — which involve wagering money on your ability to “draft” an imaginary lineup of real athletes who will perform well in actual games and win you money — regulation likely means taxation.
In Nevada, where the state Gaming Control Board told FanDuel and DraftKings to get gambling licenses or get out, license-holders pay 6.75 percent of gross revenue over $134,000. The companies decided to get out, at least for now.
FanDuel and DraftKings likely didn’t want to set a bad precedent -- they have consistently rejected the "gambling" label -- but they also had to think about the damage new taxes would do to the bottom line. A Nevada-size tax would eat up about two-thirds of their take on entry fees right now, and that’s using their existing, unprofitable business models.
In a regulated environment, if it comes, daily fantasy sports companies would seem to have two options if they want to actually make a buck: increase entry fees or reduce prizes. Or both.
Conference-goers in New York might not be thinking about that yet. But they probably should be.