In 1980 the comedy team Cheech and Chong released a skit entitled Let’s Make a Dope Deal that was included on an album of the same name (this routine can be easily sourced on YouTube). The setting for the skit is a television show where a participant from the audience is given an initial endowment and can trade-up for better prizes by answering questions to earn the right to pick from the items behind three numbered doors. Contained within the prize pool, however, is the risk of getting a booby prize and essentially losing everything. The television show that Cheech and Chong were basing this skit upon was named Let’s Make a Deal, and its roots can be traced to the 1960s.
In the Cheech and Chong version a young drug dealer named Bob Bitchin (the fictitious former head of Harvard’s Department of Philosophy) is given an initial endowment of 50 keys and the opportunity to parlay this into a larger stash. Unfortunately, the game ends when he selects a door that contains a narcotics officer and is met with the shout “You’re busted.” This is one of many Cheech and Chong skits that have managed to make me laugh over several decades.
Whenever I listen to a presentation by the folks in the fantasy sports business I always think of this skit, especially when they are discussing daily fantasy sports (DFS), for DFS is getting big, is getting big quickly, and is operating in a space that certainly approaches the definition of being a gambling activity in many jurisdictions. At some level I am waiting for someone to spring forward with the charge “You’re busted.”
A major characteristic of the present day fantasy business is that it is generally considered to be unregulated, especially when compared to traditional gambling activities. And many would consider this to be a good thing about the business because everyone who is involved with the traditional gambling business knows that regulation is a pain—a huge pain. First of all, the regulatory agency is typically a monopoly, and monopolies are known to charge more, have poorer service levels, and hinder innovation. In addition, regulatory agencies are responsible for both the levying and collection of taxes, and these costs are direct taxes as well as the compliance costs associated with the added layer of regulations imposed upon the firms in the industry. Finally, it is often the case that the people regulating the business have little if any experience in it. This means that the regulations imposed are often based on fear and ignorance, and the regulators end up regulating things that should not be regulated, and vice verse. No, the fantasy folks want to avoid the fate of having to address the deleterious effects of a state imposed regulatory scheme.
The general gambling regulatory model addresses 5 different areas, and these areas include the suitability of the operators, the suitability of the operations, appropriate accounting practices and the proper collection of taxes and fees, the fairness of the game, and protections for the vulnerable. State imposed regulation normally surfaces from two primary sources. The first is an attempt to rein in an activity that has been noticed to be threatening or inappropriate by the firms within an industry, and the politicians jump in with a regulation package to protect the industry and/or the public. The second reason to regulate is to organize the collection of fees and taxes. The first example is a regulatory scheme mandated by behavioral issues within the industry, the second is simply a money grab by legislators to command a larger bankroll to execute their agendas.
There are several strategic avenues that can be employed by an industry to avoid the often-onerous affect of government-imposed regulation. The first of these is self-regulation, an example of which was employed by the National Association of Securities Dealers (NASD). NASD was formed to oversee the NASDAQ stock exchange and to provide training and certification for investors involved with that market. In 2007 NASD merged with the New York Stock Exchange (NYSE) to form the Financial Industry Regulatory Authority (FINRA). FINRA and its predecessor entity were designed to provide consumer protections from potential abuses in the securities industry. It is also probably safe to conclude that it was designed to avoid having this task assumed by a group of government bureaucrats who may, or may not, understand the business.
Another strategic avenue to employ in regulation is what I will call running towards regulation. This plan does involve the existence of a state-sponsored regulatory entity, but it is proactively sought. The motivation for this proactivity is to allow the industry to control the conversation, thereby limiting the deleterious effects of having the government impose regulations that are crafted by people who do not understand what they are regulating.
An excellent example of this was with the company Ultimate Fighting Championship that operates in the delivery of mixed martial arts. This industry was launched upon the public in the early 1990s, and by the end of the decade was suffering major image issues, as best represented by Senator John McCain’s pronouncement that compared the sport to human cockfighting. Purchased in the early 2000s by Frank and Lorenzo Fertitta, of Station Casinos’ fame, and Dana White, the company then set about to fundamentally work to ensure safeguards for the participants of the sport and to remake its image. Furthermore, the company did not wait for the regulation to arrive, but proactively approached state after state with an appropriate and reasonable regulatory scheme. The result is that this form of activity is now legal in 49 of the 50 states, and a company that was purchased for $2 million in 2001 is now worth an absolute fortune.
Which leads us back to our army of participants battling it out in the fantasy sports world.
The fantasy industry does have a trade association fittingly named the Fantasy Sports Trade Association. What is important to understand is that this is a trade association, and as such, should not be the controlling vehicle to offer regulation to the industry. In a model of self-regulation, the regulating entity must present the optics of being separate, distinct, and single purpose, albeit in the running towards model the trade association can offer research services, best practices, and a sightline toward public policy goals in the development of the new regulatory entity.
If any of the participants in the fantasy space believe that they can, in the long run, maintain their present sanctuary from state imposed regulation, it can probably be proposed that they possess a high degree of tolerance toward risk. And while the direct participants in the space may be willing to tolerate this risk, many of the related parties may not, and this would certainly include the payment processors, who do not want to see this layer of golden eggs unduly constrained, and the venture capitalists, who do not want their investments tied up in legal matters for the foreseeable future. What is being suggested is that somebody in the sector better start self-regulating, or running to regulation, and the most logical candidates for providing this impetus are the payment processors and the venture capitalists. The fantasy sports entrepreneurs are a bit young, unseasoned as to the vagaries of regulation, and are way too busy to appreciate all of this; but the payment processors and the venture capitalists have way too much skin in the game to think that state after state will continue to sit on the sidelines. Pick your poison, be it self-regulation or running to, for the third option state imposed regulation will not make you happy. And you might want to hurry up before you are subjected to the fate of poor Bob Bitchin, for in gambling nobody wants to be busted.
