Pennsylvania Daily Fantasy Sports Regulation Update

The commonwealth of Pennsylvania has been debating online gambling legislation for quite some time now. While that includes internet poker and other online casino games, daily fantasy sports is also under consideration.

A bill designed around the idea of regulating daily fantasy sports was introduced to the state House of Representatives back in June before it was lumped into a larger gambling expansion package. The House passed the bill and sent it on to the Senate. The Senate has not done anything with the bill as of yet, though, and Republican Senator Robert Tomlinson sent a letter back to the House that urged them not to rush DFS regulation.

Contents of the letter

Tomlinson wants his fellow lawmakers to focus on correcting other more pressing issues before focusing their attention on daily fantasy sports and other online gaming regulation measures. He would prefer to focus on one thing at a time.

He and the rest of the state Senate passed a measure that should help correct a casino tax previously deemed to have been unconstitutional. Rather than taking on daily fantasy regulation too soon, Tomlinson says that he wants to wait and see how DFS impacts the existing casino industry in the state.

His logic is simple.

Daily fantasy will continue to exist regardless if Pennsylvania decides whether or not to regulate it.

If they were to decide to regulate it eventually, DFS would not really generate a ton of revenue for the state. LegalSportsReport.com estimates that daily fantasy would add some amount in the “seven-figure range” to the Pennsylvania budget. That’s not a tiny amount, of course, but it’s not such a tremendous windfall that it is something the state should address above other, more relevant and pressing issues.

Rather than trying to demonize daily fantasy, Tomlinson takes a rational approach and calls it “primarily a recreational activity and hobby for friends and families across the commonwealth.” Considering how many other lawmakers we’ve seen trying to delegitimize the DFS industry, this senator’s apparent open-mindedness is refreshing.

He admits that whether DFS is predominantly skill-based or chance is debatable, but that’s not what he thinks PA should be focusing on. Instead, he thinks the current business model may need some tweaking.

What about the Draft Kings/FanDuel merger?

Tomlinson also makes a point of illustrating that there is a lot of uncertainty regarding the future of DFS. A major factor in Pennsylvania’s decision to potentially regulate daily fantasy may hinge on how competitive the marketplace is.

The merger of the industry’s two biggest sites, Draft Kings and FanDuel, could prove discouraging for newer, smaller companies that want to get in on the action. If the DK/FD tandem have the market completely cornered and that’s the only company generating substantial revenue, that figures to discourage new licensees. That, of course, would further hinder the money that would then be received by the state itself.

The two sites decided to merge in an effort to try and turn around what has been a rough fiscal 2016 for each of them. They garnered over $3 billion worth of entries fees between them thanks to huge marketing expenditures last year, but failed to turn a profit thanks largely to massive legal fees incurred due to fighting state regulation of their games.

The problem is that the merger effectively gives the new standalone company nearly 100 percent of the DFS market share. Yahoo has made strides in becoming the No. 3 site for daily fantasy, but they and the rest of the smaller sites out there remain worlds behind both Draft Kings and FanDuel.

As a result, Tomlinson urges the House that once they do take DFS regulation into serious consideration, the business models of potential operators should be the primary focus. Should Pennsylvania decide to regulate daily fantasy, it’s in the best interests of the state to do so in a way that would prove profitable for all parties involved, while also providing an avenue for smaller licensees to get a piece of the pie.

The DFS business model may need tweaking

Tomlinson also brings up the worry that DFS is dominated by the sharks. He cites a computer algorithm that estimated that 90 percent of winnings go to the top one percent of daily fantasy players. That leads to newcomers potentially being discouraged early on and eventually giving up because it’s not proving profitable.

At its core, the present day daily fantasy industry thrives by attracting new players. There’s a reason FanDuel and Draft Kings were all over your TV whenever an NFL game went to commercial. The two companies spent excess of $700 million in advertising last year in an effort to lure new players. It worked in 2015, but that may not be a viable long-term business model.

FanDuel has taken steps to try and ease new players into the games. They have a rating system that separates more experienced players from novices. Players that have entered a certain number of contests and spent a certain amount of money are not allowed to enter games designed solely for inexperienced players.

That is absolutely a step in the right direction, but the biggest money contests are still open to all. One way to really get new people engaged in playing would be to offer more lucrative prize pools to contests only involving newer players. On the bright side, at least they’re taking steps to try and ensure that the experience is a positive one for anyone that takes the DFS dive.

Tomlinson raises plenty of legitimate points in his letter, which was initially released by OnlinePokerReport. Rushing into any sort of legislation is often a fool’s errand, and it would be in the best interests of Pennsylvania if they were to put daily fantasy on the back burner for the time being.