State bills to allow fantasy sports could hurt smaller firms

By Geoff Mulvihill
Associated Press

Smaller companies in the exploding fantasy sports industry say they could be shut out of doing business in some states by legislation that is actually intended to recognize the games’ legality.

Virginia’s governor signed a bill this month that authorizes fantasy contests but requires operators that charge participants and offer cash awards to pay a $50,000 annual registration fee to the state.

On Friday, Indiana’s governor signed a bill allowing the state’s gambling commission to regulate fantasy sports and charging companies a one-time licensing fee of $50,000 with a $5,000 annual renewal fee.

Other states are considering legislation along the same lines.

A proposal in the state of New York calls for a whopping initial fee of $500,000.

The two big daily fantasy sports companies, FanDuel and DraftKings, say they are looking out for the whole industry and oppose high fees.

They have not made it a priority to fight such expenses, however.

Smaller companies say the costs could be devastating to their business.

“On one level, it’s ‘rah-rah, yes, let’s do this,’” Rishi Nangia, a co-founder of Syde, a startup fantasy sports provider based in Arlington, Virginia, said of the efforts to make sure the business is considered legal. “But we know now that these companies are fighting for their bottom line.”

Ultimately, he said, such legislation will create a market controlled by the two major players.

Season-long fantasy sports have been around for decades, letting fans pretend to be general managers of teams. Participants draft and trade players. Athletes’ real statistics are used to calculate how the fantasy teams perform. In some leagues, there are entry fees and prizes; in others, players do it just for fun.

Daily fantasy sports are a newer creation. DraftKings and FanDuel, which have partnerships with some pro sports leagues and teams, generally let players pick a roster for that day or week. The prizes are so big that some people can make a living at it. DraftKings, in an extreme example, is offering $4 million, including $1 million for first place, in a fantasy golf competition.

Some state attorneys general, including those in New York and Texas, have determined that the games amount to illegal gambling. While lawmakers consider the games’ legal status, FanDuel agreed this month to stop taking bets in Texas, and both companies said they would stop doing so in New York.

The big companies are encouraging state lawmakers to adopt legislation that makes their business legal and defines it in a way that it is not considered gambling. In return, they are willing to accept certain regulations. Virginia and Indiana are the first states to send regulatory proposals to their governors, but bills have been introduced in the majority of states.

Boston-based DraftKings, New York-based FanDuel and the fantasy sports trade association, which also represents smaller businesses, have hired lobbyists in nearly every state. Some are big names. Former Massachusetts Attorney General Martha Coakley is working for DraftKings. The industry’s lead lobbyist in New Jersey is a former state
labor commissioner.

The two biggest companies and the industry association also contributed a combined $244,000 to candidates and political action committees from September through mid-January.

Marcus B. Simon, a Virginia legislator and sponsor of the law there, said one reason for the fee was to make sure the companies have enough cash flow to pay winners. Syde’s Nangia said that unless something changes by the time the Virginia law takes effect July 1, his company will stop offering games in its home state. Four other smaller,
season-long fantasy sports websites said the same thing in a letter earlier this month to Virginia Gov. Terry McAuliffe.

Among the letter’s signers was Alex Kaganovsky, a co-founder of For Players By Players, a New York-based business. He said he has fewer than 200 customers in Virginia, and the revenue they produce is only about one-tenth of the fee there.

“Given the cost constraints of our hobbyist business model, any requirement that we each pay a $50,000 licensing fee to the state of Virginia would lead us each to exit the Virginia marketplace — thus depriving hundreds of thousands of Virginia sports fans of access to play in their favorite traditional fantasy sports games,” the letter said.

Scott Burlingame, a 33-year-old financial industry worker from Aldie, Virginia, figures he is ahead by about $100 in the eight months or so he has been using Syde. He has been playing daily fantasy sports in $5 contests where the winners make $9. If it disappears, he said, he won’t play another daily fantasy game, largely because he finds them too time-consuming.

“I’m not going to move to a different state just to participate in it,” Burlingame said.

Other players could end up switching to the bigger fantasy sites if the smaller ones withdraw.

“I can’t tell you that FanDuel and DraftKings wanted this type of situation,” said Darren Heitner, a Florida lawyer who represents several smaller daily fantasy sports firms, “but they’re not displeased with them.”

Peter Schoenke, chairman of the Fantasy Sports Trade Association, said his members do not want to limit competition. He noted that in Florida, where a bill died this month, the industry pushed to have a registration fee on a sliding scale so smaller companies would not be subject to the proposed $500,000.

The dominant daily fantasy sports companies say every state bill has drawbacks.

“There may be some requirements that not all operators — perhaps even us — will celebrate, but for the long-term growth of the industry we will continue to work with lawmakers and regulators so that the entire fantasy industry can continue to innovate and operate,” FanDuel spokeswoman Justine Sacco said in an email to The Associated Press.