Can Massachusetts Kill DraftKings?

DraftKings and the daily fantasy-sports industry players are fighting for their lives. Real protection for the players is bound to hit them hard.

01.13.16 10:27 AM ET

Representatives from DraftKings and the Fantasy Sports Trade Association attended a public hearing in Boston on Tuesday to debate proposed regulations aimed at ending “unfair and deceptive acts and practices that may arise in the gaming process.”

While the daily fantasy sports (DFS) companies have previously expressed a willingness to work with legislators and law-enforcement officials to create industry-wide regulation, Massachusetts Attorney General Maura Healey’s regulations might prove seriously damaging to their bottom line, especially if they end up being replicated in other states.

A great deal of what’s being proposed scans as fairly standard, non-threatening consumer protections. In brief, they would require that DFS operators be truthful in their advertising, promotional offers comply with the state’s laws and regulations, provide the tools for players to self-report any suspected violations, set a 21-year-old age limit, and more.

The 21-year-old age limit is a point of contention for DFS operators, who claim that it’s arbitrarily derived from the standard set by casinos. Beyond the loss of revenue from 18- to 21-year-olds, anything that suggests a connection between the DFS industry and gambling is bound to be a nonstarter in their eyes.

Employees of the industry would also be barred from entering DFS contests, and prohibited any sharing of proprietary information or data. This, of course, is a direct response to the revelation that a DraftKings employee had won $350,000 in a single day.

But Healey isn’t stopping there. The regulations also limit losses by any single player to $1,000 per month (though there is space for a carve out should users be able to demonstrate that they’re able to withstand greater losses), remove any single customer’s ability to create multiple accounts, and ban the use of scripts. That’s what’s causing the DFS industry to chafe, or as Griffin Finan, DraftKings’ legal counsel, stated in the hearing, these regulations “will have a significant effect on the industry and will be costly and complicated to implement.”

The Daily Beast spoke with Daniel Wallach, a sports and gaming lawyer who provided expert testimony at Tuesday’s hearings. He explained that the DFS companies are resisting an attempt to correct what appears to be a massive imbalance in terms of who is cashing in on DFS contests.

“The biggest consumer-protection issue in DFS is the loss rate,” he said. “Ninety-one percent of winnings go to close to 1 percent of the players, and over 70 percent of the players overall are reporting net losses. Is that just simply a matter of small percentage of players being so highly skilled that they’re crushing the field, or is in some measure, related to the number of entries and the ability to mass-enter contests and make automated last-minute lineup changes?”

“I would think that if you’re going to provide consumer protection, you’ve got to start with leveling the playing field,” he added.

It’s a playing field that seems to need some serious leveling. In The New York Times, Jay Caspian Kang described daily fantasy as a “rapacious ecosystem in which high-volume gamblers, often aided by computer scripts and optimization software that allow players to submit hundreds or even thousands of lineups at a time,” such that they can “repeatedly take advantage of new players.” In poker, this practice is referred to as “bumhunting,” according to Kang.

And when DraftKings and FanDuel realized what was happening, instead of figuring out how to protect the rubes, they instead “enacted rules that in the end are likely to protect the high-volume players rather than regulate them.”

The problem for the DFS companies is that their ability to offer million-dollar payouts is dependent on maintaining the status quo.

Cap the amount that the sharks can wrest from a never-ending pool of inexperienced minnows, many of whom were lured by the ads promising improbable, overnight riches, take away the sharks’ ability to carpet-bomb high-paying contests, and remove the software required to manage thousands of entries and make last-minute changes, and you’re going to put a serious dent in the industry’s coffers. That would be the case in Massachusetts, at least. When you actually set up rules that protect consumers, yes, the industry is going to take a hit.

Of course, that’s assuming they’re capable of solving some of the problems. A representative from FanDuel told Kang that “DFS companies cannot reliably detect [scripts] on their sites.”

During Tuesday’s hearing, Peter Schoenke, the chairman of the Fantasy Sports Trade Association, offered a slightly different rationale, saying that a broad ban on scripts would “hurt innovation in our industry.”

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For Wallach, neither explanation holds much water.

“It’s nonsense,” Wallach said of the industry’s ability to detect the use of scripts. “To throw their hands up in the air and say they’re powerless to do anything about it strains credulity. Where there’s ingenuity and resources, it can happen. These are technology companies that are innovative and are at the cutting edge of a new online gaming product. It’s difficult to believe that they’re powerless to do anything about it.”

Via email, when told of Schoenke’s statement, he was equally dubious. (Wallach was late arriving to the hearing and was not present when Schoenke spoke.)

“It’s an issue of fairness, not innovation,” he wrote. “Winners should be determined by skill in selecting the right lineup, not who has the better automation tools. Innovation will not suffer one iota through regulations restricting or limiting scripts.”

But Wallach wasn’t surprised that industry reps objected to some of the proposed regulation.

“Anything that can be seen as curtailing operators’ ability to generate revenue is certainly going to be pushed back on because it would be a drag on their revenues,” he said. “There’s a vast multitude of players who wager in excess of a thousand dollars a month. I’ve had players call me asking for representation. I know several that are in the hole for six figures... This regulation is designed to curb or limit problem gambling at its most severe.”

During the hearing, Finan questioned whether there was a need for regulatory limits on losses. Instead, he maintained that “consumers are in the best position to set their own limits.

“Of course, DraftKings will oppose any player spending limits,” Wallach emailed in response. “If they were to acquiesce on that, it could invite similar regulatory measures in other states. And once the genie leaves the bottle, she ain’t coming back. While it might ameliorate to some degree ‘problem playing’ issues, it would also adversely impact DraftKings’ bottom line, and, to be sure, the latter is certainly more important to DraftKings and its shareholders.”

The regulations won’t be implemented until “sometime this winter, as soon as possible after the conclusion of the comment period [on Jan. 22],” said Richard Johnston, the chief legal counsel of the Massachusetts Attorney General’s Office. But if they remain more or less intact, they’ll serve as a potent model for other states to follow, “the gold standard,” according to Wallach.

That doesn’t mean the industry won’t continue to negotiate behind the scenes. A spokesman for DraftKings told The Daily Beast that despite their concerns, they would continue to work with the Attorney General’s Office on “the substance of the regs” to “achieve an outcome that works for the industry and consumers.”

Then again, in Massachusetts “they have no choice,” Wallach said.

“Maura Healey is a powerful law-enforcement officer,” he continued, “And DraftKings is headquartered in Massachusetts. To some extent, they have to play ball with Healey. I think as you move from state to state, they’ll fight similar regulation... But let’s face facts: This is gambling and there does need to be robust consumer protection.

“Imposing those requirements is not antithetical to the success or the continued viability of the industry. It’s going to have regulation. You might as well make it meaningful.”