Reality check for daily fantasy sports

Last month we published a story in our newsletter about Daily Fantasy Sports (DFS), labelling DFS “flavour of the month”. Subsequent events suggest “a month” may have been an over optimistic time frame.

Things began to unravel quickly for DFS in early October 2015 when a DraftKings’ content manager, Ethan Haskell, published a list of athletes arranged by “owned percentages” while some of that week’s daily fantasy sports contests were still ongoing. Owned percentages show how many participants in the contest picked certain athletes for their rosters. Haskell collected US$ 350k from FanDuel’s site, another DFS operator, that weekend. Other employees of DFS sites also seem to be doing well in the contests. FanDuel’s spokesman, Justine Sacco, even said that 0.3% of total money won on their website had been won by DraftKings’ employees. This percentage is worth around US$ 10m. However, the method used to identify the employees and their winnings remains uncertain.

But FanDuel employees are also doing well from DFS. FanDuel’s employee in charge of product operations, Matthew Boccio, is one of the top 50 players on DraftKings’ website, despite only having entered the competition on 16 June 2015. Employees of DraftKings were reportedly encouraged to participate in FanDuel’s games. Other fantasy sports companies also allegedly encouraged their employees to participate in daily fantasy sports.
A few days after the DraftKings’ story, a player from Kentucky accused DraftKings of negligence and fraud in a lawsuit filed in the Southern District of New York. The lawsuit states that players were “fraudulently induced into placing money onto DraftKings because it was supposed to be a fair game of skill without the potential for insiders to use non-public information to compete against them”. DraftKings and FanDuel eventually banned their employees from participating in DFS contests.
In wake of recent events, many are calling for tighter regulation of the industry. The New York Attorney General opened an inquiry into the insider trading case, and his Massachusetts counterpart is reportedly “reviewing the sector”. Many congressmen cited the need to regulate the industry, while a New Jersey Congressman called for a federal probe into daily fantasy sports. Additionally, the FBI and the Department of Justice are investigating whether the business model of DFS sites violates federal law.
If we look at the prospects of regulating the fantasy sports industry, it would likely occur sooner than allowing sports betting or online gambling on a federal level. Fantasy sports are exempted from the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). Many argue that UIGEA unintentionally paved the way for daily fantasy sports. Former Iowa Representative, Jim Leach, one of the creators of the legislation, said that UIGEA was meant to stop online gambling, not encourage it. He also emphasised that “carve out does not provide DFS operators the immunity against federal and state laws”.
There is also the question whether fantasy sports are a game of skill or a game of chance, an issue that would have to be addressed in future legislation. A season-long fantasy league game could be considered a skill game, since drafting a perfect team requires knowledge of sport and players. But with the appearance of daily fantasy sport games, the lines between a skill game and a game of chance are becoming more blurred. In daily fantasy drafts users have a salary cap, and are required to form an athlete roster in accordance with a set of salaries for each athlete. These athlete rosters play on a daily or weekly basis, and one can re-draft a team as frequently as the real-world games take place.
Even though DFS is in a legal grey area, Major League Baseball (MLB) has established a marketing partnership with DraftKings, and has an undisclosed equity stake in the company. There are 27 MLB clubs that have partnership or sponsorship agreements with daily fantasy sports companies. The question is whether MLB should be involved in such business practices with DFS companies, especially when leagues are lobbying against legalisation of sports betting in the US. But MLB is not alone. Daily fantasy sports sites have partnership/ sponsorship agreements with 28 National Football League clubs, 25 National Basketball Association clubs, 11 National Hockey League clubs, even with the National Association for Stock Car Auto Racing (NASCAR). It is precisely because many sports leagues have some kind of interest in the fantasy sports websites that a ban on a federal level is unlikely.
A state-by-state approach into legality of fantasy sports also shows that US states do not have a clear idea on how to regulate the industry yet. Only two states – North Carolina and North Dakota – allow participation in DFS. Arizona, Iowa, Louisiana, Montana and Washington, on the other hand, prohibit participation on DFS sites. Nevada is the most recent state that banned unlicensed DFS sites. The Nevada Gambling Control Board said that the activity constitutes sports betting, and that companies can apply for a sports pool licence. A clear stance on the issue is yet to be set in the remainder of the US.
Regulating the industry would undoubtedly lead to certain negative effects for the companies in the short term. Presumably certain taxes, fees and levies would be imposed on the industry. Bearing in mind that DFS companies do not make much profit due to high payouts, the companies would make even less profit after contributing to state coffers. Operators would likely resort to mergers and acquisitions in order to save on costs. Furthermore, restrictions are likely in respect of permissible contest types operators would be allowed to offer.
The fate of DFS does at least show that UIGEA has had unintended consequences, as much ill-thought out regulation does, and that the US really needs to get a grip on its out-dated and unworkable gambling laws.

Cut gambling taxes to pay for social responsibility

In our last newsletter I wrote about the decline of the independent bookmakers and the cost of “player protection” on revenue. Using the Drinkaware campaign and the fall smoking as examples of successful campaigns where the combination of taxation and publicity cause the undermining of a product. If gambling were to follow the same path then, over a five-year period, revenue could fall by sixteen percent.

Judging by the emails I received from readers it is something that the operators had not considered and possibly by coincidence a letter went out from the Gambling Commission warning operators they need to step up to the plate and really get behind social responsibility.

The Gambling Commission’s Matthew Hill in a speech to BACTA members at their AGM said, “public tolerance for gambling, and any growth in gambling, is likely to be sustained only by ensuring, as far as possible, that commercial success is built on the ‘good’ money coming from consumers choosing to spend their leisure time and money on gambling and not from ‘bad’ or financially risky money, coming from those who have difficulty controlling their gambling, or from criminals or the black economy”.
“I will continue to beat the drum about player protection and the major part that operators play here”.
I don’t know why Matthew chooses to mix up criminals and the black economy with social responsibility; I guess it just helps a negative perception towards the gambling industry when the authorities are aiming to achieve something.
Having said that, from the people I speak to in casinos and betting (both on and offline) are fully committed to implementing the Gambling Commission’s wishes. Just as a publican will serve time on a drunk, the gambling industry does not want to see people lose all their money. They want what is now the holy grail of gambling the ‘recreational gambler’ who bets for fun.
Managers have been trained to intervene and stop addictive play, often to the annoyance of many customers.
A question yet to be answered is when is enough? Because whatever the industry does it never seems to satisfy the regulators. Occasionally there is faint praise, soon to be followed by an ever increasing list of demands.
All of this compliance does place the industry in a dilemma. On the one side appeasement of the authorities and Government if you follow the policy, but consternation from shareholders when revenues decline as a consequence.
To require any business to get behind a policy where the supplier advertises that the product they sell is harmful and will cause a loss of profits, loss of jobs and capital value is a big ask of the operators.
The solution is obvious. For every one percent fall in revenue, due to social responsibility measures, there should be appropriate compensation from the Treasury, possibly through a lower rate of betting duty. After all it is Government policy that is blighting the business.
There is precedent. In 1994 The National Lottery was introduced to the UK. It was more successful than anyone had predicted. The Government had forecast yearly revenue of £1.5 billion but in the second year it topped £5 billion. This had a considerable effect on a wide number of industries and in particular gambling.
The then Chief Executive of the Betting Office Licensees Association (BOLA), Tom Kelly requested that Home Office economists track the effect on the betting industry. The Home Office said that for the first five years of the lottery the cost to betting revenue was fourteen percent.
In those days the Government was quite fair about it. They introduced various measures that compensated not only betting, but bingo, casino and greyhound and horse racing.
It is my view that an unfettered social responsibility campaign will cost the industry 15% – 16% percent of revenue over five years.
This does not mean to say that operators should abandon their social responsibility campaigns, they have a duty of care to their customers but by the same token they should not use shops and websites to advertise social responsibility at the expense of gambling products.
I have seen whole shop fronts dedicated to the social responsibility message and not to product. This is lunacy. There is no stronger negative message to the consumer to have the supplier of a product tell you it is harmful, particularly when for the vast majority of people it does no harm at all.
by Warwick Bartlett

Bet365 – A Remarkable Company

There can be few companies whose rise has been so stratospheric. Bet365 announced its profits for the year end 2015 with an operating profit of £406 million. Admittedly there was a modest payment to the Bet365 foundation of £10m compared to the £100m the year before and there has been a sharp increase in tax paid. Nevertheless Bet365 continues to march on and trounce all of its rivals.

Out of the combined operating profit of GB£ 882 million for the major firms in the sector, 46% is attributable to Bet365. In the current financial year Bet365 is likely to make one hundred percent more profit than the newly combined entity made up of Paddy Power and Betfair.

How did they do it? Was it because they stayed out of London and set up their headquarters in Stoke on Trent? I do not think so. Was it because they decided to create a commercial disadvantage for themselves by not going offshore (until recently) and to stay in the UK and pay gross profits tax at fifteen percent and corporation tax on all profits, when their competitors went offshore? Hardly.
The starting point to success in my view starts with Peter Coates. He set up Provincial Racing in Stoke on Trent. Peter had the good sense to ensure that his children Denise and John had a good education. Denise got a good degree in statistics and John a law degree. They both joined their father’s business with John running a catering business and Denise the betting shops.
It was Peter that provided the bookmaking DNA. Working in the betting shops Denise and John learned about the gambling customer, the people they are, their preferences, likes and dislikes. Bet365 has always been close to the customer and that in my view is one of the key elements of their success.
The online business was started in 2001 and Denise and John were joined by Will Roseff from Backhouse Bookmakers. Will is the most amiable man in the business, a chartered accountant and a good bookmaker. He understands punters and still loves standing behind the counter of a betting shop participating in all the banter that goes on. He became Bet 365’s finance director.
John with his legal background was able to offer good counsel and became the chair of the Remote Gaming Association, the industry body that provides “air cover” for operators.
A powerful combination: a statistician, accountant and lawyer all with their bookmaking DNA. All were driven but none more so that Denise Coates.
This is a remarkable woman. I recall the first time I met her when I was chair of the British Betting Office Association (BBOA).
Provincial Racing had just joined and they had about 40 shops so they were immediately granted board status. Denise, in those days, was a young timid girl, one who did not speak unless spoken to, she took notes but rarely offered an opinion. The entire board was male dominated so it must have been a daunting task even to be present. At the time Denise was a chain smoker as was Will Roseff, after every meeting my clothes went to the laundry! Denise rarely missed a meeting, she was hungry for knowledge.
After a few months she began to participate in discussions more. Her contributions were always relevant to the topic and you could see that here was someone who was not only very bright but very principled. She has a strong belief in what is right and wrong and always wanted to do the right thing. The setting up of the Bet365 foundation was no surprise to me at all.
The best thing about Bet365 is that it is a world-beating British company, a family business, whose chief executive is a woman, in an industry that is still male-dominated.
by Warwick Bartlett

I-gaming in Africa: an emerging gamble

For a continent with a population of over a billion people, Africa’s gambling sector fails to pull its weight by comparison with other regions of the world and accounts for less than 2% of global interactive gambling revenues. But there have been pockets of development in different African markets over the last few years that suggest new opportunities are on the horizon. As elsewhere, however, when governments and gambling regulation are involved the path of progress is not always a smooth one.

South Africa is a good example of the slow progress of regulatory reform in interactive gambling. It has been more than ten years since the National Gambling Act was enacted in August 2004 containing provisions requiring the National Gambling Board to consider and eventually introduce legislation to regulate remote gambling.
At first, progress appeared to be being made. In September 2007 the National Gambling Amendment Bill, which was to license and regulate remote gambling, was approved by the Trade and Industry Committee of the National Assembly. Operators were lining up to take licences but the process then got mired in political delays and the bill never became law.

A new attempt was made in 2014 with the Remote Gambling Bill but that also looks unlikely to become law. The frustrating part is that South Africa already issues internet sports betting licences through the Western Cape Gambling and Racing Board. But internet gaming – casino and poker – continues to be a stumbling block and the lack of new gambling regulation does seem to be costing South Africa investment and jobs.
In September 2014 Playtech announced that the South African market would be a key market for the company’s expansion in Africa. Playtech had already signed a joint venture deal with casino operator Peermont Group, but until changes are made to the country’s gambling laws, Playtech cannot really do too much. “Should the regulatory landscape change we are confident that Playtech is well-positioned to do well across Africa, but with a strong focus on South Africa.” Playtech’s chief executive Mor Weizer said at the time.

From a regulatory point of view, other African markets have been quicker to adopt internet gaming than South Africa. In Tanzania, for example, internet gambling has been legal since December 1999, by way of an amendment to the Gaming Act, although only fixed-odds wagering, sports betting, simulated games and lotteries were allowed.

In the first quarter of 2011 the Gaming Board of Tanzania said it was in the preliminary stages of drafting new legislation for online gambling which would allow online casino games. In late 2013 the first online casino and games operator Dunia was approved by the Tanzanian government.

Dunia Investments Limited, operating under the brand, chose Microgaming’s Quickfire as a games package and launched the website in October 2013.
It is interesting to note that the two language options for the Tanzanian-licensed iplay8 website are English and Chinese – a sign of the fact that much of Africa’s economic development is being spurred by investment from China, which brings with it large numbers of Chinese workers with some wages to spend.
For sports betting, M-BET and are both licensed by the Gaming Board of Tanzania. The latter is owned by Gaming Africa (T) Ltd, which also has retail betting operations in the country. Both sites lead heavily on football betting, which is an indication of what local customers wish to bet on.

Tanzania is part of a cluster of east African countries that have internet gambling regulation in place, a cluster which comprises Kenya, Uganda and Rwanda.
Elite Bet is one operator that is present in both Kenya and Uganda, holding licences with the Betting Control and Licensing Board of Kenya (BCLB) and Uganda National Lotteries Board. It focuses on football betting and seeks to overcome the low internet usage and payment issues by running its service through mobile phones. Customers can place bets via SMS, while deposits are made by sending cash via mobile micro-financing service M-Pesa.
Kenya started the process of Internet gaming legalisation in 2011 when it entered into an agreement with Amaya Gaming Group to run a pilot for online gaming. The online casino, the centrepiece of Amaya’s agreement with the regulator, was launched in October 2011, becoming the first legal gaming site in Kenya. But the high hopes for Bet Kenya were short-lived. It became increasingly difficult to access the website during 2012 and the domain no longer seems to exist. Amaya reported in its filings that “the revenue decrease in Africa for the year ended December 31 2012 is primarily attributable to a shift away from Africa to more profitable markets in North America, Europe, and the Caribbean.”

Nigeria, with a population of over 175 million people, has a very competitive and well-developed online betting and gaming market, centred around Lagos state (pop: 21 million). Most betting operators’ offerings are focused on football and virtual betting.

In Lagos state it is a requirement to run both retail betting alongside internet betting. This operational setup actually works well because it helps overcome one of the main issues of internet gambling in Africa, which is payment of funds. Having betting shops enables internet customers to deposit funds and collect winnings in cash. 1960Bet also offers a feature that allows a customer to create a bet slip online, generate a quick bet slip code, and then take that code to a cashier in the betting shop to place the bet.

Several of the regulatory and operational developments outlined above have come about in the last five years, in step with developments in general economic growth, mobile technology and mobile payment services. The on-going growth and success of interactive gambling in African markets will depend upon the following factors:
Stability – it is clearly preferable to build up a business in a region that enjoys political and social stability. The threat of political upheaval, social unrest, or even outright war will discourage the private sector from investing in a market.

Economic prosperity – as the benefits of economic prosperity permeate through society, more people become “consumers” with disposable income to spend on non-essential items, such as gambling. This process, however, does take time and at present the newly created wealth is concentrated among the emerging elite in Africa.
A growing, young population – the demographics of Africa are ideal for a burgeoning gambling sector. Africa’s population is a young one and this is good both for the general interest in gambling as well as for the adoption of internet and mobile phone technology.
Urbanisation – associated with the growing, young population is the move to urbanisation in Africa. Increased population density makes it easier to target large numbers of people more efficiently. Urban areas tend to be better equipped with mains electricity, internet access, and mobile phone coverage so the process of urbanisation is beneficial for a more developed gambling sector.

• A decision to establish an e-gaming business in Africa is taken with a long-term view
• Economic prosperity and growing disposable income are happening but are starting from a very low level
• Africa is not one homogenous market that can be targeted as a single entity
• A targeted approach is required for e-gaming, it will not be truly “mass market” for at least a decade
• In some instances a very targeted, almost 1-to-1 basis should be used to attract the wealthiest 10% in populations where wealth is very concentrated
• Specific market segments within heavily urbanised areas should be targeted where there is greatest access to mobile phone and internet services

There is clearly a well-established interest in football, betting and gambling in different African markets. But as Daniel Kustelski, sports betting general manager for Sun International (SunBet), has cautioned:
“Expanding into Africa isn’t a cheap decision. You have to do your homework and do the exploration and investigation into the country. East Africa is an easier launching pad than west Africa as most of east Africa is English speaking.”
This article was first written for Gambling Insider by GBGC’s Research Director Lorien Pilling. A copy of the original article can be found here: GBGC Africa An emerging gamble GI

GBGC to boost its presence at Malta iGaming Seminar

The gaming consultancy, which has tracked the trajectory of iGaming for over a decade, will be giving three talks at MiGS looking at the past, present and future of the sector.

Global Betting and Gaming Consultants (GBGC) has confirmed its presence at this year’s Malta iGaming Seminar (MiGS), where it will draw on its decade-long research into interactive gaming to give three in-depth presentations on the past, present and future of the sector.

GBGC will tap into its regulatory expertise in particular, offering insight into global trends, and advising delegates on the impact of high taxation on iGaming markets.
Director Lorien Pilling commented: “Malta benefits from the fact that it has a large e-gaming community, so seminar gets a good attendance. This year, we’ll be looking at opportunities in Eastern European markets, which seems to be following the pattern of Western Europe at present, and we’ll also be explaining to delegates the changes we’ve noticed in iGaming over the past ten years – and emerging opportunities.”
The leading consultancy firm has been tracking the sector for its Interactive Gambling Report, noting that the prevalence of local, onshore licenses has soared in the period between 2005 and 2015. A decade ago, the level of interacting gambling Gross Gambling Yield (GGY) in Europe earned under local, onshore licenses was at 27 percent, but in 2015 it is expected to reach 65 percent.

“The European Commission has been putting pressure on member states to open their gaming markets to competition and governments are technically doing this by offering licenses, but at the same time, they’re imposing high tax rates which make the region less attractive to do business in,” explained Pilling. “Gambling tax rates determine a huge range of factors, like what types of bets can be offered and whether the pay-outs to customers are attractive, so it’s really the basis for a successful or an unsuccessful market.”

Research collated by the Remote Gambling Association (RGA) in markets such as France and Italy confirms GBGC’s assessment that punitive tax regimes are damaging to the iGaming market. But Pilling suggests that operators can also find ways to thrive in the region if they adjust their strategies accordingly.
“Tax will have a knock-on effect on your marketing strategy, what kind of bets you promote, and even what kind of sports you promote because some sports have a higher margin inherent in their model than others,” he said. “For example, in-play sports betting tends to be high-volume, low-margin, so if you have a high tax rate you need to actively encourage recycling of winnings.”

Going beyond Europe, GBGC will also take a look at the most influential events in interactive gaming over the past decade, from the rapid pace of technological development to landmark legal rulings such as Internet Poker’s Black Friday in the United States.

“The main theme of GBGC’s session at MiGS is interactive gaming’s past, present and future, and we’re absolutely determined to fit the brief,” said Pilling. “As well as a talk on the opportunities in Eastern Europe from Tihana Jurican, manager in our Zargreb office, we’ve been mining the research carried out for the Interactive Gambling Report to understand the patterns affecting the sector and provide our audience with a well-informed picture as to where the sector stands going into 2016.”

Gambling struggles in the European olive belt

Gambling data compiled by Global Betting and Gambling Consultants for its Global Gambling Report shows starkly the impact of the Eurozone crisis on the southern European ‘olive belt’ countries of Italy, Spain, Greece and Portugal.

From 2001 to 2009 all four markets gambling saw the benefits of being in the Eurozone during the boom period and the expansion of gambling and new regulation, especially in Italy. Between 2001 and 2009 total land-based gross gaming yield (GGY) for these four markets rose from EUR 16.4 billion to EUR 27.3 billion.
Much of this growth was driven by the extraordinary performance of gaming machines in Italy which went from prohibition in 2001 to EUR 10 billion in GGY by 2012. Indeed, Italy’s policy of gambling expansion over the last decade has helped mask some of the dramatic declines in the neighbouring markets.

GBGC Italy gaming machine GGY

GBGC Italy gaming machine GGY

Horseracing has been particularly hard hit in these markets. In 2001 horseracing was nearly a EUR 1 billion market (by GGY) but was worth just EUR 200 million by 2014.
GBGC Olive belt horseracing GGY

GBGC Olive belt horseracing GGY State lotteries have proved more resilient but have still fallen from a peak of EUR 13.4 billion in 2009 to EUR 10.7 billion by 2014.

GBGC Olive belt lottery GGY GBGC Olive belt lottery GGY

Portugal and Greece will be wishing that their recent internet gambling regulation will replicate some of the success that Italy has had in contributing new tax revenues. Spain has recently permitted online slot games, which it will hope will invigorate its internet gaming sector.

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