Racing Regulators Discuss Daily Fantasy

The takeaway from a session on daily fantasy gaming at the Association of Racing Commissioners International conference March 23 in New Orleans? Racing regulators need to be prepared for a changing gaming landscape.

Serving as a moderator on a panel on the emergence of daily fantasy, Jack McGrail, executive director of the Oregon Racing Commission, noted that state rules and regulation continue to take shape.

Even in states that have banned daily fantasy, changes continue. McGrail said since Nevada ruled daily fantasy was a form of sports wagering and halted the major daily fantasy operators in the state last fall, a new daily fantasy company, US Fantasy, plans to apply to the gaming commission for licensing under the state's pari-mutuel rules.

McGrail said that game would be set up like other fantasy games, but as more fantasy players select certain players, the odds on those players would drop. He said there will be the standard forms of betting horseplayers are familiar with, win, place, show, exacta, trifecta, etc. If approved, that approach would add another wrinkle to the emerging gaming category that falls under "daily fantasy."

Daily fantasy evolved out of federal legislation, the Unlawful Internet Gaming Enforcement Act, that largely prohibited interstate wagering over the Internet but made an exception for fantasy games. Traditionally, fantasy games had been season-long leagues, in which participants based success on the performance of players in sports like baseball, football, and basketball.

Using that carve-out, daily fantasy sites like FanDuel and DraftKings put this practice into overdrive, allowing players to compete on a weekly or daily basis. Participants pay a small entry fee—a wager—assemble their team, and then can receive winnings based on performance of the selected players.

Eilers Research chief executive officer Todd Eilers told Forbes.com that daily fantasy games would handle about $2.6 billion in 2015 and grow 41% annually to $14.4 billion by 2020. With that kind of money involved, states have taken notice.

Panel member Justin Stempeck said that 32 states have adopted legislation or have pending legislation in place. Stempeck noted that while UIGEA gave daily fantasy room to operate, it did not mean that the games were meeting the legal standards in each state.

Stempeck made the case that the games have pari-mutuel aspects, in that players bet into a pool, money is removed by the operator, and then payouts are made to everyone else. Panel member Larry Eliason, executive director of the South Dakota Commission on Gaming, made the case that the games are not pari-mutuel, noting that payouts are not based on betting action.

Eliason noted that while some big numbers have been thrown around, daily fantasy would not generate the kind of money for racing the sport has seen from racino operations. He found it hard to justify a big push for the sport to seek some type of partnership with daily fantasy.

Stempeck noted that many of the daily fantasy sites are not rolling in profits. He noted that many of them initially paid millions to advertise their products and much of that money has now been shifted to pay attorneys as the sites seek clarification of state laws and fight class-action lawsuits that have been filed.

Stempeck said heavily taxing daily fantasy could slow innovation, as some of the smaller sites likely would not be able to afford high license fees and taxes. While he's confident that the demand is such that daily fantasy will succeed, he said some ill-timed taxation of the industry now could hinder progress, ultimately costing states tax money down the road that could be generated by successful daily fantasy operations.

Indiana is moving forward to recognize the games as legal, but will require they be regulated with operators paying an initial license fee of $50,000, followed by $5,000 license fees each year. A bill has been approved by legislators in the state and awaits the governor's signature.

As part of that legislation, Indiana Horse Racing Commission executive director Mike Smith noted that the racing commission will have the ability to approve or prohibit any fantasy games involving horse racing that wish to operate in the state. Horse racing contest sites have developed in recent years and they generally operate under the fantasy carve out.

Smith said it's important for states to have the regulations in place that are flexible enough to deal with whatever gaming forms may be coming in the near future.

"This is just the tip of the iceberg. How are you going to handle what comes next?" Smith said. "One thing we did do is carve out horse racing. They have to get board approval from the racing commission to provide fantasy sports. We've tried to carve out that if there is something that comes out down the road."

NTRA president Alex Waldrop noted that Indiana's approach will help ensure that any companies that come into the state and use horse racing will work for the sport. He noted that while pro sports like football and baseball enjoy the increased viewership that daily fantasy brings, that model doesn't work for horse racing because it counts on pari-mutuel handle as its main revenue generator.

"I think Indiana has done a great thing. Indiana has said we're going to regulate daily fantasy, going to make sure track and horsemen are going to get their share," Waldrop said.