The fallout from the so-called DKLeak scandal continues, prompting many to worry about whether the daily fantasy sports (DFS) industry as a whole is unravelling as a result. It was two weeks ago now that DraftKings content manager Ethan Haskell accidentally posted ownership percentage data for a contest before that data should have been publicly available.
That small error has been compounding itself ever since; it next came out that Haskell had just won $350,000 in a contest on rival site FanDuel. That, in turn, led to the revelation that it was in fact commonplace for employees of one DFS site to play on rival sites, and that many of these people were big winners, and speculation about whether these players were exploiting insider information from their own sites in order to pick their lineups on the other sites.
Up until that point, legislators and regulatory agencies were taking a hands-off approach to the question of daily fantasy sports, while slowly trying to decide what to do about it. Due to the amount of money DraftKings and FanDuel were funnelling into their advertising efforts, however, the scandal made the front pages of mainstream media outlets throughout the US and the world, which made the problem much more immediate. Foremost among the hands that were forced is that of the Nevada Gaming Control Board (NGCB), which on October 15 declared that DFS does qualify as gambling in the state of Nevada and that all DFS operators must immediately cease operations and apply for a license before they can again serve Nevada clients.
This ruling poses a dilemma for DFS operators, because the continued legality of DFS in most other states hinges on the technical legal definition of gambling, and the insistence of the DFS sites that the service they provide does not fall under that definition. So, while fighting or ignoring Nevada’s decision would likely cause huge legal problems and a repeat of Black Friday, by accepting it, the sites are effectively admitting that yes, it is gambling, and thereby undermining their position elsewhere.
It has always seemed like a certainty that DFS would at some point face a legal crisis along these lines. Although the DKLeak scandal may have precipitated it sooner than expected, every company involved in DFS surely saw this coming and now we get to see what everyone’s plan is. Most sites, including FanDuel and the smaller sites, have adopted fairly similar strategies of quickly complying with the NGCB’s decision, while issuing carefully-worded statements of protest against it. Some have likewise pulled out of Florida, where rumors are circulating that the U.S. Attorney’s office is getting involved.
DraftKings and StarsDraft, on the other hand, have both responded in more deliberate, and opposite ways.
DraftKings drags its feet
Although it did eventually confirm that it would comply with the NGCB’s decision, DraftKings was by far the slowest of the sites to do so. When it did issue such a statement, its wording was very similar to that of FanDuel’s. Although we’re talking about a delay of less than 24 hours, it was enough hesitation to provoke speculation that they might be considering starting their ground, and what the repercussions would be to the company and the industry as a whole if that proved to be the case.
Wondering what people following #DFSWTF think: how long before silence from DK / FD starts to suggest they're thinking of staying in NV?
— Chris Grove (@OPReport) October 16, 2015
Moreover, although the site has said it is pulling out, it has in actuality done very little to stop anyone from playing from within Nevada. Accounts with Nevada mailing addresses can no longer enter contests, while accounts registered in other states must now check a box asserting that the player is not a resident of Nevada (or other states where DFS was already illegal). Thus, players with an account tied to an address outside of Nevada can still play from within the state, provided they’re willing to tick the box. This is in contrast to other sites, which use IP-based geolocation technology to block players from playing within state lines, regardless of where their account is registered; this is what regulated online poker sites operating in Nevada, New Jersey and Delaware are required to do, and would seem to be the bare minimum one would expect from DFS sites claiming to be complying with the NGCB.
The reason for DraftKings’s reluctance to comply is fairly evident. They’ve taken on massive debt – more even than FanDuel – in order to throw great heaps of money into advertising and establish themselves as the number one site. Losing Nevada on its own might not be a disaster for them, but if more states begin to follow suit, the overall DFS market could contract considerably. If that happens, the potential payoff for dominating the market may not be what they were counting on, or what it needs to be for their all-in strategy to work out. Although the company presumably understands that challenging the ruling would lead to disaster, the foot-dragging looks, to me, like a sign of desperately wondering whether there might be some kind of third option, or perhaps waiting to see what other states do before deciding whether to throw a legal Hail-Mary.
StarsDraft opts to be proactive
At the opposite extreme is StarsDraft, formerly Victiv, which was recently purchased by Amaya and rebranded to extend the PokerStars brand into the DFS space. StarsDraft was not only quick to withdraw from Nevada, it was also among the first sites to pull out of Florida.
They’ve now gone further still, much further than any other site, announcing yesterday that they will pull out of all states except New Jersey, Massachusetts, Kansas and Maryland. These four states are ones which have themselves been frontrunners in establishing the legality of and guidelines for DFS. The StarsDraft strategy, then, is to assume that any state which has not actively made overtures to the DFS industry may end up following Nevada’s lead and therefore to stay out until invited in, rather than risk being asked to leave again.
As with DraftKings, it’s not hard to see how the choice fits the company’s overall position and strategy. StarsDraft is neither a big money-maker nor a big liability for Amaya. Poker is still a much bigger industry than DFS, and PokerStars holds almost a two-thirds share of it, while Victiv was a second-tier DFS site, which did not invest anywhere near as much money in marketing as did DraftKings and FanDuel.
The true value of StarsDraft to Amaya is – or was – that DFS was legal (even if ambiguously so) in many more states than are currently allowing regulated online poker. It’s likely that more states will regulate online poker in coming years, and Amaya has big hopes for the PokerStars in that regard. StarsDraft, then, was an opportunity to provide a product to potential customers in other areas of the country and give them time to become reacquainted with the brand while waiting for legal online poker to return.
Due to former PokerStars’s owner Isai Scheinberg’s involvement in Black Friday, however, Amaya is on thin legal ice as it seeks regulatory approval. The company has just been approved for a license to operate in New Jersey, but it was a long process, and other states are surely keeping a close eye on every move the company makes. The potential damages to PokerStars’s chances in the U.S. due to any real or perceived wrongdoing by StarsDraft, then, massively exceed any small profits the DFS site could make by continuing to operate in any given state.
Thus, DraftKings and StarsDraft have very different goals, and this results in very different strategies, with the former being desperate not to give up any ground it doesn’t have to, while the latter may actually welcome the crisis as an opportunity to demonstrate how well-behaved it can be. As it stands, FanDuel – along with most of the smaller sites – is somewhere in between the two, but closer to DraftKings’s strategy. That may change in coming weeks, however, depending on what, if anything, other states decide to do. After all, the reluctant approach relies on a certain kind of inertia, and therefore works better when more people are doing it. If more companies begin showing a StarsDraft-like proactive attitude towards compliance, then those companies which remain more reluctant become increasingly likely to find themselves on the wrong side of a legal battle further down the road. If the little sites start following StarsDraft’s lead, then, it could conceivably lead FanDuel to make the jump as well, at which point DraftKings would find itself in a very dire spot indeed.
Alex Weldon (@benefactumgames) is a freelance writer, game designer and semipro poker player from Montreal, Quebec, Canada.
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