This week the New
York State Attorney General, Eric Schneiderman , has ordered DraftKings and
FanDuel to cease and desist their operations in New York . The reason given was that daily fantasy
sports (DFS) are in essence illegal gambling under state law.
Is it really
gambling? According to Joe Asher, the US
CEO of William Hill, one of the largest betting and gambling companies it is
gambling as players are “risking money on something of an uncertain outcome” http://www.usatoday.com/story/sports/fantasy/2015/01/11/fantasy-sports-gambling-debate-fan-duel/21612771.
Based on this
criterion, investing in stocks is
gambling too and thus should face a similar sanction by Schneiderman. Let us
see: Risking money, Check! Uncertain outcome, Check! Thus, all of the people
who read this blog should face legal action soon. As matter of fact, as I argue
below, there is more in common between DFS and
securities market than between DFS and the gambling industry.
There is no
question that the growth of DFS has threatened the gambling industry. Eilers Research estimated that “fans will
wager over a quarter of a billion dollars on the outcome of eSports events in
2015 - a number that we project will exceed $23bn by 2020”(http://eilersresearch.com/wp-content/uploads/2015/08/eSports-Press-Release.pdf
An article in the
Business Insider has estimated that”… the
number of entries at DraftKings this week increased from 3.75 million to
4.14 million, a 10.4% increase, while FanDuel's entries jumped 6.3%, from 3.18
million to 3.38 million” This growth
came after the insider trading scandal where employees of DraftKings were using
their information to make millions on FanDuel. http://www.businessinsider.com/draftkings-revenue-daily-fantasy-sports-2015-10. The growth in this industry is evident when we look at the prize pools of the two largest companies.
At the same time, the casino industry is declining. For
example, gaming revenues in Nevada fell for the third straight month in August
this year (http://www.reviewjournal.com/business/casinos-gaming/gaming-revenue-tumbles-nevada-strip-third-straight-month). The only casinos that have done well recently did
so due to their presence in Macau (e.g., LVS and Wynn). Unfortunately, it seems that even this tide
has turned. In September this year,
analysts estimated that Macau casino revenues fell 19% per day that week (http://www.bloomberg.com/news/articles/2015-09-23/macau-casinos-decline-as-analyst-says-gaming-fell-19-last-week)
Furthermore, at
the same month the same market suffered 15th straight monthly decline (http://www.reviewjournal.com/business/casinos-gaming/macau-casino-market-suffers-15th-straight-monthly-decline)
The tremendous
growth in DFS, coupled with the decline in the casinos and gambling industry,
has undoubtedly led the latter to fight DFS. To large extent, this campaign is
the result of the successful campaign that the industry led to ban internet
gambling. On the other hand, DFS has some serious backers who undoubtedly will
fight for keeping DFS legal. The NHL,
for example, is an investor in DraftKings, as is MLB, while the NBA has an
equity stake in FanDuel, as are NBC and Turner Sports.
Is DFS gambling? I
doubt that anybody would look at slot machines, card games, roulette and so on
as anything even close to DFS. The serious DFS
players, just like serious stock investors, research the sport that they are
in, looking at fundamental valuation and intrinsic value of players vs their
pricing and, based on their analysis, make decision on picking players. Just like the stock market DFS players can
see the results of their decisions at the end of any trading day. In many
respects they are a combination of value investors and day traders.
This does not mean
that DFS should not be regulated. DFS
now in my opinion should be viewed as a stock market in a pre-regulation state. The Wall Street Crash of 1929, aka Black
Tuesday, is widely viewed as the trigger to the establishment of the SEC. The
insider trading scandal that rocked the DFS industry could similarly be the trigger for
the regulation of DFS. What is sad about the DFS insider trading scandal is
that it stems from the industry’s failure to regulate itself , followed by greed,
which in turn, led to DraftKings employees
using inside information to reap huge payoffs at the expense of other players. This
is am much insider trading as any stock market insider trading. The difference, however, is that, in the absence of regulation, the DrafKings employees that traded on their
private information, did not do really any illegal thing, which is very bad for such an industry in formation. As such, there is no question in my mind that
DFS should be regulated. At the same
time, it should not be done using the same regulation that governs the gambling
industry but more similar to securities regulation as there is much more in
common with DFS and security regulation. The whole idea of security regulation
is to make the capital market more equitable to investors, as should be the aim
of any DFS regulation.
Note: I have never played DFS in my life but follow it with interest.
Note: I have never played DFS in my life but follow it with interest.
No comments:
Post a Comment