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This isn't the Black Friday of Daily Fantasy Sports
This has not been a good week to be a daily fantasy sports business.
With know-nothings across the galaxy sounding the fear-mongering alarm of "insider trading," people making the obvious comparison to the rise and fall of online poker, and big-government advocates banging the drum for more regulation, it's certainly understandable to be a little bit scared.
But I'd like to throw some cold water on this whole scandal, and the potential negative consequences it could have in the world of daily fantasy sports.
As I see it, there are three major aspects to this story.
The first is what might happen next. Whatever happened with Ethan Haskell, DraftKings, and FanDuel is in the past. Various legislators trying to make a name for themselves might really threaten our whole existence, but I'm actually a lot less scared than you think. In a huge section below, I'll break down how the world of DFS compares with Online Poker, and why we have less to fear than you might think.
The next is the incident itself. This has been covered ad nauseum elsewhere, but to give you my fifty word take: I think it's highly unlikely that Ethan Haskell was actually cheating using this information. In particular, the fact that he could make the mistake to send out ownership percentages early means he likely either A) didn't even have access to them when he could use them to cheat or B) it didn't occur to him to use them for that reason. If he was using this information to cheat, he'd be a colossal dummy to tweet it out early - and this just doesn't fit his profile. And even if he was using it to cheat, it's a veritable drop in the DFS bucket. I'm just not particularly scandalized, here.
The last thing, as I see it, are the very real problems that do exist in the world of daily fantasy sports. From a long term game sustainability perspective, there are some very troubling things going on here. And if we can bring to light what they are, maybe we'll be able to keep this gravy train flowing (and people having more fun) a lot longer. I'll close with those thoughts at the end.
Let's dive in.
Will daily fantasy sports go the way of online poker?
If you haven't read here for long, you may not know that I was a professional online poker player from 2003 to 2011, or that I also co-owned a continuing education platform for online poker players (much like DFSR, but for poker).
If you weren't a part of that world, you may not know that on April 15th, 2011, I and hundreds of thousands of other online poker players were put out of business when the Department of Justice finally followed through on the UIGEA (Unlawful Internet Gambling Enforcement Act of 2006). This day came to be known as Black Friday, and served as an unceremonious end to about 8 years of an online money making machine that hadn't been seen before, and hadn't been seen since - until the rise of daily fantasy sports.
In the blink of an eye, an industry that had been advertising daily on ESPN (sound familiar?), containing companies with billion dollar valuations, was dealt a crippling blow that drove it into obscurity.
Many who are making their livings (or at least having a ton of fun with) daily fantasy sports are quaking in their boots.
While there are some similarities between DFS and online poker, the respective worlds really couldn't be more different when one takes a 50,000 foot view. Let's break it down.
Why daily fantasy sports and online poker have a lot less in common than you think
There are some obvious similarities between online poker and daily fantasy sports, but there are some huge differences, as well. Yes, you are wagering money against other people online. You can lose (or win) a lot of money in a hurry. But, to the discerning eye, this is pretty much where the similarities end.
As I see it, there is one major threat to the world of daily fantasy sports: the government using its muscle to legislate it into obscurity.
In the poker world, legal types were always scrutinizing this or that aspect trying to figure out how to finagle the whole thing illegal. Eventually, they succeeded. There were a number of reasons for this that I'll dive into later.
In order to legislate poker out of business, supporters of such an approach had two major things on their side. The first (and most important, if you ask me) was the money. Online Poker was almost totally untaxed. It was offered by foreign companies who didn't get tax information from their customers, making all monies deposited into online poker sites virtually invisible to the United States Government.
The other major thing that legislators of online poker had on their side was cultural skepticism. The reactions I got from people when I told them I played online poker were totally different than those I get as a daily fantasy sports player. Fantasy sports are far more accessible than online poker. My wife has played and won at fantasy football. The are old people who love sports more than their own children. Sports feel familiar. Poker always seemed to be the territory of outlaws and brigands.
I'm going to give a more in-depth write-up of each of these differences and their nuances below, but I know people like lists, so here's the overview if you just want to skip the explanations:
1) There is legal precedent enshrining DFS as legal.
2) UIGEA exploited a loophole - it didn't make playing illegal, it made doing business with the offshore companies illegal.
3) No fear of money laundering.
4) Background checks are way better for DFS than they were for poker.
1) Companies located in foreign countries for poker, vs. domestic for DFS.
2) It was hard (mostly impossible) to tax online poker.
3) The size of the players involved.
4) Vegas didn't actually like online poker.
1) The game can almost definitely not be "rigged."
2) Openness of advertising.
Whew. A pretty long list, right? Let's dive in a little bit deeper.
If we're weighing potential threats to daily fantasy sports as we know it, we obviously have to start with the legal threats. My suspicion is that all the news coverage this week will actually drive eyeballs TO daily fantasy sports, rather than hearts and minds away from it. The market has spoken - DFS is simply too much fun to be put to rest by a very specious example of "cheating."
Don't worry, though - the government doesn't care how much fun people are having. You can bet your bottom dollar that there will be those who try to attack this industry in the same way poker was attacked. How is the situation different this time around?
1) There is legal precedent enshrining DFS as legal.
In one of the great legal ironies of our time, the very act that wound up submarining my poker career might wind up saving my DFS one. Here's a direct quote from the UIGEA, which carves out the legality of the then non-existent world of daily fantasy sports:
has an outcome that reflects the relative knowledge of the participants, or their skill at physical reaction or physical manipulation (but not chance), and, in the case of a fantasy or simulation sports game, has an outcome that is determined predominantly by accumulated statistical results of sporting events…
So, the very body that carved out space for wagering on fantasy sports (likely as a concession) in specific language would have to overturn or amend the law that outlawed online poker. This would be a huge legislative hurdle to clear - a much different situation than the fly-by-the-seat-of-their-pants legislation that killed online poker in the first place.
2) Poker was killed through the banks, not by legislating players from playing it.
One of the most common misconceptions I heard as a poker player was that playing poker online was illegal. It never was made illegal federally (though a few states attacked it directly). More language from the bill itself:
[The UIGEA] prohibits gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law.
See what they did, there? In a piece of legislative wizardry, they went straight to the source - making it illegal for financial institutions with a lot to lose to work with off-shore poker companies. Cut off the money from the source, and you've got yourself the same legislative results without having to sign your name to the messy reality of restricting people's personal freedom because you simply don't like the fact that they're playing poker online. When poker companies continued to pay out players in the US by virtue of third-party payment processors, the DOJ had its excuse, and seized tens of millions in funds under the auspices of preventing "bank fraud."
This time around, every financial transaction on these sites has been catalogued and closely monitored. You can pay with a credit card (something you couldn't do with online poker after about 2002), or wire money directly back and forth with your bank. Preventing such transactions would require completely rewriting all of these past laws - and this time, they won't have the benefit of pulling the wool over everyone's eyes in the middle of the night. They'd have to do it out in the open, and I'd imagine that will be a lot harder this time.
3) No fear of money laundering.
One of the realities of the old online poker world was the fact that you could, in actuality, use them to launder incredible amounts of money. I can remember two instances in particular where a friend of mine and I transferred back and forth $50,000 and $70,000, respectively, without the sites themselves so much as batting an eye. We never had any questions asked of us, freezes on our accounts, or anything of the sort. They just didn't care. I know of others who have alleged to transfer six figure sums as well. When the fear-mongers came a saber-rattling for online poker, money laundering and "the terrorists" was a huge asset in their corner that simply doesn't exist this time around.
4) Background checks are way better in DFS
I got money off of many sites anonymously until very late in the online poker game. There were a number of ways this could be done that I won't detail here, but this was another major aspect of the money laundering allegations. One could easily make a fake account, deposit money anonymously, and move money here, there, or anywhere. I'm not sure how much this happened, but until very late in the game, I have first hand knowledge of people who did things like this. With DFS, this is basically an impossibility. Again - this puts a serious damper on any legal justifications the would-be-legislators have against us.
This, my friends, is where the rubber meets the road. Those in the know when the poker world was crashing and burning around us thought that, ultimately, there were those in the United States Government that had gotten caught with their pants down when it came to online poker. A billion dollar industry had sprouted up around online poker, and the IRS was seeing a fraction of a fraction of all of the money changing hands. Under a cry for "regulation," online poker was shut down - and we've begun seeing what the skeptics at the time forecast come to fruition.
The most obedient company in complying with US regulations received a sweetheart deal from the Federal Government, and has already begun operating once again in the United States on a state-by-state basis. And this time around? The government is getting its cut. Let's break down some specific monetary differences, though.
1) Companies located in foreign countries, vs. domestic.
I think this is what ultimately killed online poker. Since it had been illegal to operate an online poker site within the US since before the internet was born (thanks largely to old laws regulating the transmission of sports bets via telegraph), all of the household name poker sites were off-shore companies. This led to a lot of complications, as far as the US Government was concerned. Most notably, that the off-shore companies demonstrated no real interest in passing along the behavior of their US based users to the United States government.
The foreign nature of the online poker companies also made crippling them a lot less sticky. It's one thing to shut down a billion dollar business based in Costa Rica, it's another thing entirely to shut down a billion dollar business located in Boston (like DraftKings). People will lose jobs, and this just isn't a very popular decision to make when it affects American citizens.
2) They weren't taxing it.
Once the poker cat was out of the bag, the US government just couldn't shove it back in. The foreign nature of the online poker companies meant that A) they weren't paying the US corporate taxes and B) they weren't telling the US government who was winning and losing.
Try as they might, taxing even online poker players turned out the be like grasping water. When I was withdrawing large sums of money, I was receiving it in the form of checks from innocuous looking third party payment processors, or EFT transfers from off-shore banking-esque institutions (think PayPal, but from other countries) that were used for tons of other purposes besides online poker.
So, money was flying out of the US economy at an alarming rate, and the US wasn't getting its cut? It was never built to last.
This time around FanDuel and DraftKings will freeze your account until they get confirmed tax information. They send out tax forms to both the users and the IRS. Evading taxes on FanDuel and DraftKings is harder than evading taxes from your normal employer.
3) The size of the players involved.
Another colossal and understated difference in the media coverage of this story.
The size of the companies intricately involved in the fabric of DFS is a huge deterrent to any sort of unpopular legislation.
While they are limited to one year deals, 28 NFL teams have partnerships with either FanDuel or DraftKings.
You think the people in the federal government want to take on some of the most influential members of the media and modern entertainment as we know it? Take a look at how the use of PEDs has been handled, or the NBA sports betting/corrupt refs scandal were handled, and you have your answer.
4) Rumor had it that Vegas and AC hated online poker
I can't seem to find a news source to confirm this, so this will be admittedly 2nd hand information that's now a decade old. But in those days, it was relatively common knowledge that, particularly in Vegas, the old card rooms were not psyched about the existence of online poker. They had been passed by technologically, and were very fearful that an internet based poker product would put them out of business. Rightfully so, in some ways. The federal prohibition of operating an online casino made it so that Vegas could not offer an online poker service - and as we're seeing with how cabbies are attacking Uber worldwide - "when you can't join em, beat em with the mighty hammer of the law."
There were murmurings online poker had a target on its back courtesy of old money in Vegas since its inception. Again - all rumors at this point - but this would be in direct contrast to how the existing power has approached daily fantasy sports.
I've already given my anecdotal observation - the cultural attitude toward DFS just seems totally different from the perception of online poker. But there are a few core elements that make it necessarily different, from a cultural perspective. Here we go:
The game can almost definitely not be "rigged."
The crazy thing about how much money was being put into online poker was that it was, in actuality, very possible to cheat. In fact, there were a handful of times where employees and simple users cracked some bug in the software and did just that - the most notable possibly being the Absolute Poker Cheating Scandal that made it all the way to Freakonomics.
This type of brute-force technological cheating really isn't possible in DFS because the results can be instantly audited. If a player were able to change a guy out of his line-up, you could just see it. Whereas in online poker the different players involved had access to different information (like their own hole cards), DFS operates essentially with complete transparency. Now, there are things like ownership percentages that one could theoretically glean (and that's the allegation here), but even those would be of limited utility beyond just copying the lineups of known professionals. There are other things one could do, sure, like know who good separation plays would be in a big tournament (again, that's the allegation here), but that's FAR less scary than someone being able to see your cards and just beating you senseless.
Furthermore, online poker players were always suspicious that sites weren't offering random community cards - people were afraid of "cash-out curses," "cursed accounts," and all manner of superstitious thinking that almost definitely hurt the industry in the eye of the public.
In Daily Fantasy Sports, you'd have to convince a professional athlete to modify his performance so that you could win your tournaments. And, you'd likely have to do this at scale, since he'd still only be one player out of a pool of hundreds or thousands of guys. What player would risk his career and legacy to help a DFS player? It's basically impossible to imagine.
This was a pretty bad blunder on behalf of DraftKings. They really ought to have known better than to have edge-moving information available to known players (or, really, to anyone). But this is a pretty bad bloody nose for them, and you can believe they'll do their absolute best to avoid being in the media in this way in the future.
Once this blows over, the public perception of fantasy contests is that they are generally fair.
The Openness of Advertising
Many don't remember this now, but back in the day, you weren't seeing advertisements for "Pokerstars.com." You were seeing advertisements for "pokerstars.net," a site where you could "play against the pros for free." Sure, those sites actually existed - but they were just part of a sales funnel to direct you to the sites where you could play for real money.
It was basically a shady workaround to cover the behinds of ESPN and the other major companies who were advertising online poker companies at the time - but the message was clear: we need to not say exactly what's going on here, or there could be trouble.
This time around? You've got Rob Gronkowski advertising DraftKings, and screen captures of the sites themselves inescapably playing on every commercial break wherever sports are broadcast. Everyone knows what's going on here, and the public at large is psyched about it.
It won't be easy to overcome public sentiment here in the same way it happened with poker.
So yeah, I'm not scared now, but we still have problems
This isn't a fantastic week to be a daily fantasy sports business owner, I can tell you that. But frankly, I don't think this bad week is going to do anything to hurt us in the long term.
We've still got some very serious problems, though. The fact that pros can enter limitless contests via scripting is a HUGE issue that will kill this game way faster than some guy knowing a few ownership percentages. I played 12 tables at a time (sometimes more, often less) when I played online poker - but more tables meant I'd play worse at the tables where I was playing. If my fellow pros and I could have been at every table we would have skinned the poker sheep in a few years.
In line with this issue is the house take (known as the rake in poker) for DFS sites. The DraftKings Millionaire Maker will have a $1,000,000 rake this week - which means that $1m of the money coming in to that contest will go out of the DFS economy immediately, never to be seen again (unless it's by one of their employees winning somewhere else - har har). The little-known secret in the poker world was that the rake kills far more players than the sharks do. If the DFS industry doesn't mature to the point where people are competing via smaller rakes (and this isn't looking good with the monopolistic nature of FanDuel and DraftKings), it might throttle its casual players before they ever fall in love with the game, and that would be a real shame.
I guess what I'm saying here is that this scandal actually does shine a light on a big problem in the DFS industry, but it's not a problem of deregulation. It's that the major players are treating this time like an all-you-can-eat buffet, loading up on a pile of mashed potatoes that they are highly unlikely to be able to finish.
While the massive influx of new players is casting a fog over these broader issues right now, it won't last forever. At some point this initial gold-rush will be over, and the DFS industry will find out whether or not it was a fad, or a staple of worldwide sports culture.
My hope is that one of the big players will take the responsible, long term view here. Lower rakes, stop employees from playing, and stop pros from being able to snap up any new player that comes along before they have a time to get their sea legs.
Almost ten years after the UIGEA passed, you can bet I'm hoping I don't have to write another article like this ten years from now. We've got an incredible thing going here, folks - let's not spoil it.