Fantasy Gaming: Threat Or Opportunity for Racing?

Editor's note: This is the first piece in a two-part installment about fantasy sports gaming and the racing industry.

To understand the currently complex relationship between daily fantasy sports (DFS) games and the Thoroughbred racing industry, it's helpful to turn the clock back about half a year.

More precisely, zero in on June 5, 2015. It was 24 hours before American Pharoah (Pioneerof the Nile) would attempt to outrun history and become the sport's first Triple Crown winner in 37 years.

At Belmont Park, workers were tasked with putting the finishing touches on prominent advertisements for DraftKings, one of the dominant online DFS portals that allow Americans to buy into single-day contests for cash and prizes based on the performance of individual athletes in professional team sports.

In a marketing deal announced the week before the most important horse race of the 21st Century, New York Racing Association president Christopher Kay had gushed in a press release about DraftKings being named the presenting sponsor for the GI Belmont S., using words like “proud” and “excited” to describe how the DFS site's logo would be emblazoned atop the starting gate, on all of the entrants' saddle towels, and on a blanket that would adorn the winning horse. Other negotiated perks included a branded DraftKings Player Lounge and an exclusive hospitality area for VIP race fans.

Simultaneously, across the East River in the ballroom of the Grand Hyatt hotel in Manhattan, National Basketball Association commissioner emeritus David Stern had been invited to address the sport's prestigious Pan American Conference hosted by The Jockey Club. His role was to offer out-of-the-box ideas that might raise the racing industry's international profile, the way he did with the NBA during his three-decade tenure as the league's chief brand ambassador.

When asked point-blank if the meteoric growth of fantasy sports should be considered a threat or an opportunity, Stern was emphatic: “Opportunity. Enormous opportunity,” he told the room of racing dignitaries.

“Thoroughbred racing is actually one better than fantasy,” Stern continued. “If you have an itch to gamble, you can scratch it directly.”

But, Stern cautioned on the eve of the Triple Crown, racing seemed on the brink of losing that exclusive advantage without having sufficiently capitalized on it: “Once fantasy has arrived, how far behind can outright [sports] betting be here in the United States?”

Now, nearly six months later, numerous federal and state officials-along with an assortment of racing industry regulators, racetrack operators and casino lobbyists-are arguing that moment is already upon us.

In the eyes of an increasing number of attorneys general, the millions of Americans who risk money in an effort to win life-changing riches via sites like DraftKings and FanDuel are engaged in gambling. This clashes with the “games of skill” description that DFS companies insist is what goes on when customers put up cash to play in lucrative contests.
Within the past several weeks, New York has ordered DraftKings and FanDuel to stop doing business with state residents. Nevada has attempted to bar DFS sites from operating until they apply for and are granted gaming licenses. Other states and municipalities are mulling similar sanctions, and the U.S. attorney in Manhattan has launched an investigation into the federal legality of DFS.

Within the narrower focus of the racing world, last spring's description of fantasy sports play as an “opportunity” seems to have been overtaken by an autumn sentiment that it's now a “threat” requiring defensive action. At an Oct. 21 meeting of the California Horse Racing Board's pari-mutuel, advance-deposit wagering and simulcast committee, the topic commanded center stage in what amounted to the industry's first public debate on DFS.
“How in the hell is this legal?” asked Brad McKinzie, the general manager of Los Alamitos Race Course. “I thought sports betting was illegal. When you've got a guy holding up a check on TV, saying 'I won $1 million,' that's gambling. Is there any movement in this state to shut these things down? Because if we think for a second that we can compete with football/basketball/baseball fantasy, we are living in a fantasy. This is pure sports betting. I do not understand how it's even legal in this state.”

The definition of gambling

The definition of “gambling” is precisely what will be at stake in determining legality. Beyond the “game of skill” argument, DFS operators claim an exception for fantasy sports under the federal Unlawful Internet Gambling Enforcement Act of 2006. But there's a hazy overlap between that law and other federal betting statutes. Plus, when the UIGEA was conceived, sports fantasy leagues were more of a fan-centric hobby than a multi-billion dollar business.

Individual states can and do have laws that additionally restrict or permit DFS play. Arizona, Iowa, Louisiana, Montana and Washington bar it. Kansas appeared to have legalized it earlier this year, but an attorney for the Kansas Racing and Gaming Commission recently admitted that the commission is having difficulty determining how to interpret the law.
“It is a contest,” said CHRB executive director Rick Baedeker, describing at the committee meeting one way how DFS differentiates its modus operandi as something other than betting. “You are choosing a combination of players from different teams so that the performance of a particular individual cannot affect the outcome of the game. It is not based on the results of that game but just on compiling aggregate performances of different players throughout the league. That's considered to not be a wager.”

Although the exact definition of what happens when money changes hands for this sort of arrangement is in legal limbo, all sides agree that the stakes are enormous.

According to the Fantasy Sports Trade Association, an estimated 56.8 million North Americans will spend $257 each on some form of DFS play this year. That combined annual dollar turnover-which was not even tracked before 2012-is just shy of the $15.5 billion pari-mutuel handle racing last enjoyed in 2006. In the eight years since, The Jockey Club has reported that North American betting on racing has declined in every year except one, bottoming out at $11.1 billion in 2014.

According to the Wall Street Journal, FanDuel (based in New York, founded in 2009) and DraftKings (Boston, 2011), together control 95% of the continent's DFS market. Both companies are valued at over $1 billion, but neither is reportedly profitable because of their staggering start-up costs and all-out ad blitzes to compete for customers. FanDuel generated $57 million in revenue in 2014 while paying out $564 million in prizes; DraftKings took in $30 million while returning $300 million. Both competitors have vowed to eclipse the $1 billion mark in winnings payouts this year.

“And look how quickly it's gone up like this,” Baedeker said when spelling out the plight for the racing industry. “All of a sudden we're looking at significant, significant cannibalization. Those dollars have got to come from someplace.”

A Pricing Advantage

Although the danger of DFS to racing's handle is evident, the extent of that erosion is not easily quantifiable.

In addition to racing's daunting challenge of competing against sheer popularity of professional sports, DFS also boasts a significant pricing advantage. Measured in terms of entry fees retained above payouts, the rough estimate for what would amount to a DFS “takeout” ranges between 8-10%. For racing, the most-often reported round number for “blended takeout” is 20-25%. That makes it at least twice as expensive for customers to stake money on horse races than on a DFS entry.

Another way for the racing industry to calibrate the potential impact of DFS on the industry is to look both above and below where it sits on the totem pole of America's gambling hierarchy.

On the smaller end of the scale–and admittedly, from a purely anecdotal standpoint–TDN spoke with one Boston-area bookie last week who described his illicit business as “getting killed” by the attrition of regular customers to DFS. He said his greatest loss was “all the little guys who bet small but bet consistently, $50 or $100 a week, purely for the action.”

Yet higher up on gambling's food chain, America's most profitable gaming entities-casinos-are also dealing with the loss of that same demographic. Casual casino-goers who previously budgeted $100 or so for slots or poker play are also migrating to DFS. The chief difference is that unlike a nation of corner bookies, corporate casinos can and do employ powerful lobbyists and public relations armies to make sure elected officials get the message that, in their opinion, DFS sites are unregulated, illegal gambling operations that need to be served cease-and-desist orders.

Ever since the advent of legal gambling in the U.S., the most vocal opponents of other forms of expanded gambling have been existing gambling licensees. In 2015, many casino corporations include “racinos” in their gaming portfolios, but they generally only take on the horse racing portion of the business because it's a requirement for being allowed to operate slot machines and other forms of gaming at tracks.

So it was no shock when, in the wake of New York attorney general Eric Schneiderman's move earlier this month to shut down DFS companies, the New York Post pointed out that since 2010, casino and racino interests have contributed more than $150,000 into Schneiderman's campaign coffers.

“New York's brick-and-mortar casinos hit the jackpot with their wager on [Schneiderman], who is moving to shut down online fantasy sports-betting operations,' the Post reported on Nov. 16.

Citing filings with the state Board of Elections, the Post noted that among the AG's campaign donors were: 1) $48,350 from the New York Gaming Association, which represents nine racinos across the state, including Genting's Resorts World Casino New York; 2) Genting Resorts World itself, which contributed $40,000; 3) Two Genting lobbyists who gave $6,000 combined; 4) $36,000 from Jeff Gural, who owns Tioga Downs (and, in New Jersey, the Meadowlands); 5) The Saratoga Racing Casino and Racetrack Gaming Resource, which gave $9,500.

Fantasy Sports and Racing

So what has happened to turn the tide on DFS within racing in the past six months? Why has “fantasy” seemingly devolved into the industry's unpalatable F-word?

Two weeks ago TDN contacted NYRA to find out what effect the recent regulatory backlash and adverse press about DFS had on any future marketing initiatives that might involve fantasy games.

NYRA director of communications John Durso Jr. chatted briefly about the subject, but was firm that neither he nor any NYRA executive would comment on any aspect of fantasy gaming. Neither would Durso give an on-the-record reason for why the topic was suddenly taboo.

That unwillingness to go on the record about DFS was echoed by one of the country's other major players in the racino sphere, Churchill Downs, Inc. Last week TDN requested an interview with any appropriate CDI executive, or even just a statement outlining the corporation's position on fantasy gaming. After several phone calls and email exchanges, Churchill's vice president of racing communications, John Asher, apologized that CDI could only offer “no comment” on anything having to do with the subject.

Yet Scott Daruty, president of simulcast signal broker Monarch Content Management, LLC, was not at all shy about testifying at the Oct. 21 CHRB meeting how his parent company, The Stronach Group, which operates tracks like Gulfstream Park and Santa Anita, intends to approach DFS.

“We view it as a competitive threat because it's another form of wagering, but also view it as an opportunity,” Daruty said. “Because if it is determined after the current analysis and investigation that [what's] going on is legal…if they do anything other than outright outlaw it, then it's going to be another form of wagering on the landscape and we would intend to participate in it in some way shape or form, ideally using our brick-and-mortar facilities to attract people to come and to play fantasy sports under whatever framework ends up in place after this current investigation.”

In trying to come to grips with the overwhelming impact of DFS on horse racing, George Krikorian, the chairman of the CHRB's pari-mutuel/simulcast committee, came up with a different take at that meeting on how the industry might deal with fantasy play.

“The thing is, you've got 51 million people betting on fantasy wagering,” Krikorian said. “And so right now it's maybe a $20 billion industry and growing. So maybe, instead of fighting it, maybe we should look at a way that it can benefit our own industry; if it's possible to participate…with integrity, and if it's controlled the right way.”

Krikorian was touching on the idea of fantasy horse racing. This idea is not new, but it is not exactly mainstream within the industry either. A number of companies–DerbyWars, Derby Jackpot, and Race Track Warriors to name a few-have popped up in this sector over the past few years.

Some of these fledgling firms are attempting to gain a foothold by recognizing that fantasy horse racing play differs from DFS in one crucial way: Pro team sports are wildly popular in America but lack a legal betting pipeline. Horse racing, on the other hand, is not as popular but does have well-established pathways to legal wagering.

So wouldn't it be a no-brainer to create a fun, educational, fantasy horse racing platform that not only attempted to grow racing's fan base but simultaneously encouraged new and lapsed customers to wager on the sport?

You might think so, at least in theory. But in practice, fantasy horse racing is facing daunting challenges, not only because of all of the external pressures described in this article, but from fear and uncertainty within the industry itself.

Tomorrow, the second piece of this two-part installment will examine whether fantasy horse racing will be able to get a fair chance at trying to prove its merit–even as the racing world struggles to discern whether fantasy gaming is a threat or an opportunity.
@thorntontd