Threat of Re-regulation Looms Over Daily Fantasy Sports Industry, Says Verse Gaming CEO

Read Verse Gaming CEO Dan Zimmermann's blog from January 2023, predicting the surge of re-regulation the DFS industry has seen since 2022. Read the article on Gaming Today here.

In the post-PASPA world, the fantasy gaming industry has continued to evolve past its roots that DraftKings and FanDuel established in its earliest days. Today, new products introduced under the fantasy moniker hinge on particular interpretations of the law to define what is and is not fantasy sports. Those definitions might be changing soon.

State fantasy regulators are re-evaluating their own definitions and codes to account for the rising influence of single-player fantasy games. Single-player fantasy is a game where the user is tasked to build a ‘parlay-like’ lineup centered around player performance such as Over and Under points for NBA players or passing yards for NFL QBs.

These games have grown into a vibrant and popular demographic of users that often mix their single-player fantasy gaming experiences with traditional sports betting. Despite these apps’ popularity, not everyone in the market is thrilled about their success.

While state regulators rushed to the tables to develop action plans to onboard legal sports betting since the repeal of PASPA in 2018, real money fantasy sports is the forgotten subplot in a lucrative business.

Sports Betting Companies Taking Notice of Rising Single-Player Fantasy Companies

The market share splits of daily fantasy sports are built upon the foundation of DraftKings and FanDuel’s original salary cap and lineup-style games. However, as rising single-player fantasy companies generate massive valuations and generate hundreds of millions of revenue, sports betting companies are taking notice.

The gaming industry has been defined by several major de-regulations in the past several years, from the early days of DFS advocacy by the industry’s pioneers to the repeal of PASPA itself. The potential for new legislation is looming large around the industry’s most underrated space: daily fantasy.

In my role as a startup founder in fantasy sports, I have learned firsthand from regulators and industry operators alike that the current interpretation of fantasy sports is subject to change.

This potential change, if enacted, will likely see the reclassification of fantasy sports to define a stricter interpretation of foundational laws and regulations that currently define the industry.

An overhaul of fantasy sports legislation would not take place on the federal level. Instead, states that regulate fantasy sports would re-evaluate and reform their application and renewal processes for applications currently classified as fantasy sports.

The motivation for states to suddenly reevaluate and restrict gaming companies from operating their fantasy products is limited. However, I can confirm that the process has already begun, with at least four states including West Virginia changing definitions to limit single-player parlay style contests.

Why Would New Legislation That Reforms and Limits Innovation in Space Be Implemented? Who Benefits From This Reduction of Operators?

The answer is simple. Regulators do not have the incentive to force a reckoning. However, with the recent failures by state legislatures in California, Texas, and Florida to bring regulated online sports betting to their states, major betting operators are starting to turn their attention to alternative measures to access the most lucrative markets in the country.

Leading single-player fantasy sites operate in California, Texas, and Florida, allowing users in those states access to products that are near mirror images of sports betting products currently excluded. To make matters worse for the operators, fantasy companies operate in CA, TX, and FL without regulators or licensing costs. Each of these states defers to federal definitions and laws around fantasy sports, resulting in easy access by ambitious DFS companies. The reality in these high-value markets is that legal sports betting will not be coming in the next two years at least and when it does, it will come at sky-high licensing costs and taxes.

Are DraftKings and FanDuel Willing to Wait Another Two Years to Enter These Markets With Sports Betting Products?

One would think not. As DraftKings, FanDuel, Caesars, BetMGM, and other legacy players frantically deploy lobbying efforts to legalize in these markets, the results are unlikely to materialize in the near term. This puts the industry’s leaders in a tough position. Do they take their armies of lobbyists and deploy them to shut down single-player DFS operators? Or do they embrace the opportunity that their fantasy competitors are exploiting to enter these markets with single-player fantasy products of their own?

It is unlikely that DraftKings or FanDuel, two companies who fought tooth and nail against regulators and each other to achieve a status that accommodated their innovative peer-2-peer lineup style contests, would suddenly turn on the new generation of innovators in the space. While sports betting and iCasino products drive a great portion of their current revenue streams, DraftKings and FanDuel each have their own multi-million dollar daily fantasy business that allows them to operate real money gaming products in 40 of the 50 US States. It’s almost inconceivable to think that DK and FD would do anything to jeopardize the years of trench warfare with regulators that led to this reality of DFS being normalized.

But there is a very important distinction between the fantasy products that DraftKings and FanDuel operate to that of the single-player fantasy competitors like PrizePicks, Underdog Fantasy, Sleeper, and more. DraftKings’ homegrown recipe for daily fantasy sports fused the beloved season-long fantasy sports experience with the thrill of a one-day contest. The companies capitalized on the familiar nature of building lineups and accumulating fantasy points for your lineup against other players.

While the DK and FD fantasy apps have seen unique new products join the ranks of classic salary cap and lineup fill type contests, none have deviated from their core peer-2-peer, prize pool nature. These products remain the most lucrative opportunities for users to compete over sports information and win big prize money without participating in gambling.

DraftKings and FanDuel built this product and influenced the modern-day interpretation of fantasy sports based on the 2006 Unlawful Internet Gaming Enforcement Act. They defended this product as a skill-based, competitive game amongst players competing against each other.

The single-player fantasy products of today trample over the modern interpretation of fantasy sports to enable the user to play in parlay style, gambling-adjacent contests against nobody else. These single-player games pit a player’s skill against the odds, effectively demanding a user to beat extremely low probabilities on 3-, 4-, and 5-leg prop parlays to ever walk away with a profit.

Thanks to the disruptive nature of the introduction of real money online sports betting in 2018 and the rapid rise of it thanks to the COVID-19 pandemic, this new wave of fantasy sports apps debuted shortly after PASPA’s repeal under the radar. The games are fun, exciting, and compelling ways to engage with sports by placing down some contest entries. Yet the reality is, this definition is not what DraftKings and FanDuel advocated for.

The relationship between fantasy companies and operators is inherently young and even more so for these newer players in the space that are seeing viral success after just a few years of operation. But the roots and efforts of the DFS pioneers to define and align with state regulators on fantasy sports definitions are much stronger than any current lobbyists fighting to keep DFS as open-ended as it is.

Three Options for US Fantasy Sports Industry’s Earliest Startups

The potential for massive reform and regulation in fantasy sports hinges on the decision-making of the US fantasy sports industry’s earliest startups. If they were to decide to take action in this space, they have three distinct options.

Option 1: Build Single Player DFS into Native Fantasy Apps

In a matter of months, major betting operators could set up fantasy sports applications utilizing their own current sports betting licenses. DraftKings and FanDuel could implement single-player fantasy games into their own Fantasy apps, and instantly start reaping the benefits of the high-value California and Texas markets with player prop parlays.

Option 2: Re-regulate the Industry

In a cutthroat move, the sports betting industry’s elite could look to deploy their resources toward the re-evaluation of fantasy sports products in select markets. This decision would result in further scrutiny of their own fantasy products but given the strong disparity between peer-2-peer fantasy and single-player, I’d expect them to take their chances. By redefining fantasy to fit their own DFS products but excluding single-player DFS, they could instantly see surges to their own DFS products as a benefit of this move. Perhaps most importantly, this being an option itself is a sign that betting operators hold all the leverage.

Option 3: Buy the Competition

It’s not as expedient of a solution as building their own product, but major operators could attempt to buy high-value DFS companies in an attempt to diversify their products and gain market share across new states. The looming threat of Option 2 (re-regulation) may very well drive a favorable price for the larger operators. Depending on the level of pressure surrounding re-regulation, the single-player companies in the space could be potentially forced into merger and acquisition discussions.

The looming threat of re-regulation in fantasy has not gone unnoticed by the players in the industry, nor has it gone overlooked by investors and founders in the space. The results of the potential fallout of any step by industry operators could spawn the biggest legislation in gaming in all of 2023. The impacts of any movement would not be made at a federal level, resulting in a domino effect playing out across the 14+ states that regulate fantasy sports.

A shakeup like this — pitting the industry’s earliest innovators against the industry’s newest — would likely be messy for everyone involved. The increased scrutiny around a public battle for the interpretation of DFS would only draw negative attention to the gaming space.

But the reality is that there is a metric ton of money to be made by gaming companies in markets yet to regulate sports betting. These companies will work to fulfill their duty to shareholders to drive their market value, and it’s very possible some companies may be caught in the crossfire.

The only pivot that current single player companies could hope to make — and that some newer fantasy companies are already focusing on — is to build products that fall under the shield of DraftKing’s definition and product interpretation of fantasy.

There is a great deal of potential for companies to innovate on top of the layers that DFS has been built on. Products that enable users to compete against other users on player performance will remain available in the market and will certainly see increased attention if single player fantasy products start to face backlash. In chaos, there is opportunity, and products that seek to future-proof themselves around the established definitions are most likely to be spared the wrath of future regulation.

The major companies that have grown into massive successes thanks to their single player product are not ignorant of the potential reckoning. Keep an eye out for new product announcements and innovations away from house-style gaming as these companies may look to diversify their product offerings in hopes to disarm regulators. It’s possible these companies could look to deploy some of their stored cash into buying other startups focused on other product styles.

As metrics continue to soar across the country in gaming handles and tax revenue, 2023 stands to be yet another installment in a storybook of growth for the US online gaming industry. While regulation will always be a deciding factor in gaming, the opportunity for serious re-regulations poses both a threat and an opportunity to the industry’s most ambitious companies.