RegulatoryKings: Thoughts on the Duel Between Government and Fans

Full disclosure: I'm an investor in a stealth daily fantasy sports company.

Daily fantasy sports have exploded onto the scene in the last couple of years, and recent events have caused regulators to look at the area with increased scrutiny.  Generally, creating rules to protect individuals from nefarious business practices or to leverage things like taxes fairly and consistently is a good thing and I support it.

I can't say, however, that the government has a great track record of implementing consistent and sensical policy around this.  That's my major concern.

Take the argument around the influence of gaming on the sports themselves.  If lots of money was at stake around these games, would that increase the amount of cheating that happens?

(Side note, since when does the government really care about cheating?  It took them forever to act on the obvious steroid usage going on in baseball, and just recently, the government overturned Tom Brady's ban by the NFL for deflating footballs to gain an advantage as a quarterback.)

Yes, cheating is bad for everyone, but the idea that daily fantasy sports is going to create more cheating than, let's say, a player's potential to sign a huge contract, isn't logical.  With outsized player salaries these days, you'd be hard pressed to convince a player to cheat when actually sports success and actual winning gives them the opportunity to make tens of millions of dollars per year--not to mention the risk of getting completely banned from the game.  Players are much more incented these days to cork a bat, scuff a ball, or ingest something they shouldn't to try and win versus trying to throw a game. 

If you want to track the influence of gaming, you make it as legal as possible, but you make it a requirement for all the platforms to know their customer, just like in banking and securities.  Legality puts a spotlight in dark corners.  You can never prevent money from flowing to places people want it to go, but you can track it and pin it to individuals.

In terms of protecting the consumer from themselves, only applying this to daily fantasy sports is an incredibly inconsistent argument.  I'm allowed to spend as much money as I want on Candy Crush--an app built by the most thoughtful user behavior manipulators on this planet whose sole job is to get me to play more and more--but I won't be allowed to put money behind my fantasy baseball picks?  At least if I'm playing fantasy sports, I have the chance of earning some of the money back.  If you're playing Clash of Clans and buying weapons, none of that money is ever coming back--and you can't tell me there aren't lots of people who are hopelessly addicted to those other games.

I'm also allowed to empty my bank account and take it to Vegas, Foxwoods, Atlantic City, etc.  I can invest in penny stocks and I'm allowed to buy as much junk food no matter what.  To pick out this one particular "vice" and curb consumer freedom to spend their hard earned dollar as they please is a slippery slope.  

Plus, protecting people from themselves can have unintended consequences.  By not allowing individuals to invest in startups and venture capital funds unless they're already wealthy, we're widening the gap between the rich and everyone else.  When Uber goes public, the only people that will have benefitted from the growth of their market cap will be high net worth individuals and institutions.  So you can buy all the crappy penny stocks you want, but you can't buy private shares of the apps you spend money on everyday that are growing like wildfire and will actually increase wealth.

We've got equally screwball policies in the drug "war".  We've got less than 5% of the world's population but we house over twenty percent of the world's inmates--many of whom are in jail for minor drug offences.  By trying to make certain drugs more illegal than others, we've doomed multiple generations of mostly minorities to higher unemployment, lower wages, and increased future returns to incarceration.  You can drink, smoke and Xanax all you want, but get caught with pot in most places enough times and you'll never get hired anywhere legit again because of your criminal record.  

Thankfully, unlike with online poker, Daily Fantasy Sports sites have some power and influence on their side--the actual sports leagues and media networks themselves.  DFS creates lots of increased fan engagement.  It's a major driver behind the purchase of streaming media packages and cable plans that show all the games.  DFS sites are major advertisers as well.  The leagues want this fan engagement, as do the fans, obviously, and they'll fight tooth and nail to maintain it. 

So who's on the other side?

Vegas, for one--who for years has been the only game in town for sports betting.  Nevada's recent requirement that DFS sites get a license to operate in their state is protectionism at its worst.  They like their regulated government monopoly and don't want anything to change.  

Of course, being the US, we'll also hear from the moralists and religious right.  You know the type--the ones who will defend good from evil with their cache of semi-automatic weapons that you have to pry from their cold dead hand.  


Let's make sure kids aren't playing and the right safeguards are in place to prevent league influence, insider trading, etc, but let's not throw the baby out with the bathwater on an industry that employs people, makes sports more enjoyable, and has a huge potential to generate tax revenue.  

You remember tax revenue, right states?  

That's what you get when you run lotteries, otherwise known as a tax on the poor.  I guess taxes on the poor are better than Daily Fantasy Sports, where the user is more likely to be higher income and college educated.  More than 60% of players report higher than $75,000 annual income.  

My investment relies on fair and thoughtful, consumer friendly regulation.  I hope we get that.