Screenshot of FanDuel DFS NBA. © Fanduel

When Attorney General Eric Schneiderman came after the DFS websites, hundreds of thousands of players from New York City were devastated. DraftKings, Yahoo and FanDuel chose to suspend their operations voluntarily until the issue is resolved. This left the players without any alternative and they are still waiting on the lawmakers to pass a bill that would regulate the industry.

There are good signs that legislators are not going to postpone this sensitive decision and a couple of lawmakers have taken the initiative. The proposed bills still need to produce a reaction from Gov. Cuomo, but there is widespread optimism that the games will return to New York by the end of the year. This is a long time to wait for DFS players, but also the websites who are losing a lot of money by being denied service within state borders.

A silver lining for DFS giants

At a first glance, these are dire times for DraftKings, Yahoo and FanDuel, since they are the biggest operators in the industry. Their representatives have complained that after working so hard to secure a dominant position, they are now denied the chance to enjoy the return on investment they deserve. On short-term, they are definitely losing money and there is a good chance that new taxes and annual fees will be levied upon them if the bills pass this year.

The most likely scenario is for new companies to pay licensing fees and all operators are expected to pay a double digit amount on the revenue generated each year. The proposed bills indicate a 15% tax, which would eat away at the profits, without causing these major operators any serious problems. However, the proposed legislation can prove to be catastrophic for new players, as well as the small websites that are currently struggling to stay afloat.

The silver lining that DraftKings and FanDuel fail to see right now is that if the licensing fees and annual taxes are high, they will kill competition. Industry leaders will be definitely annoyed by them, yet these will be nothing more than a nuisance, whereas small businesses would be downright crushed. Both federal and state legislators are more interested in generating as much revenue as possible, so when they pass the laws, they do so with the big names in mind.

The beginning of a duopoly in DFS

One of the reasons for why DraftKings and FanDuel are not so vocal and don’t criticize too much the proposed taxes, is that they might win more in the long run. They were lucky to be early to the party and have established a dominant position, but there is no guarantee that they will stay at the top of the food chain forever. Small businesses have no choice, but to come up with new concepts, innovate the industry and offer better deals to those who choose them. This leads to healthy competition that benefits players.

Those who set up a new business of this type from scratch, know that the road ahead is long and twisted, so they have a plan. The problem is that if the legislation promoted at a state and federal level passes in this format, the laws could cripple them for good. Only a fraction of DFS websites can afford to pay a six digit amount registration fee and virtually none of the startups.

New York Attorney General Eric Schneiderman. © The Hearst Corporation
New York Attorney General Eric Schneiderman. © The Hearst Corporation

The states leading the offensive when it comes to regulating DFS, are cited as examples worth following by players. Virginia is one of them, after becoming the first US states to legalize the games and new operators are required to pay $50,000 to register their business. In New York, the proposed laws indicate an amount of 10 times higher, which is simply untenable for any startup.

Lawmakers are not hell-bent on erecting a financial barrier that would prevent small operators from competing with the big names. The problem is that the former are not properly represented and their voice is not heard in the Congress, not even in state Senates. Some websites have joined forces and created Businesses of Fantasy Sports Trade Association and similar organizations. They hope that by acting in concert, they will level the playing field and help lawmakers better understand the industry.

A distinction between season-long and DFS

The players can easily make a distinction between daily fantasy sports and the games that span over the entire season. Many of the small businesses sell draft kits for the latter, which means that they generate less money and serve mostly entertainment purposes. Their players are regular people who regard fantasy sports as a pastime and are not willing to spend a lot of money on them either. These ventures are owned and operated by people who have day jobs, or work with friends to keep the DFS websites alive.

At the opposite end of the spectrum we have highrollers, who pay entry fees of at least $1000 and more to participate in high-stakes leagues. Most of them play at DraftKings and FanDuel, so their future is rather bright, since the two industry giants will be able to weather the storm. They could cope with licensing fees of half a million dollars, but for the little guy, even an amount of $50,000 can be unbearable.

DraftKings and FanDuel pursue their own agenda and couldn’t care less about the legislators’ shallow understanding of DFS. Today pretty much everyone is talking about the daily games and many are confusing season-long fantasy sports with daily fantasy sports. The former were not regarded as gambling before and small websites count on lawmakers to maintain this distinction, regardless of how they end up regulating daily fantasy sports. The best case scenario is that small businesses will get an exemption from paying the registration fee, if they have only a few hundreds or thousands customers.