By Martin Owens
Fantasy Coming True?
Monmouth Park takes a detour into a new world
"Fantasy is a necessary ingredient in living"
Philadelphia, PA (Sports Network) - This all began with an event that was not unexpected. A Federal judge upheld the validity of a Federal law when the state of New Jersey challenged it. That's what Federal judges do, after all. The Federal law in question was the Professional and Amateur Sports Protection Act (PASPA, or 26 USC 3701 et seq to give its lawyerly title). That law, passed in 1992, made it illegal for US state governments, and the Native American tribes, too, to legalize or license sports betting (apart from pari-mutuel betting like horse races) beyond those four states which already had gambling programs connected to professional sports: Delaware, Oregon, Montana and naturally Nevada.
Now the state of New Jersey long ago put its chips on expanded gambling as a path to prosperity. And for many years, the Garden State has been disappointed. The introduction of casino gambling in Atlantic City looked good at first, but now no fewer than five Boardwalk casinos have closed or are on the verge of it. Allowing Internet poker was supposed to be another lifesaver, but alas, the revenue figures were about 10% of what was projected. Never mind, the real money maker in gambling worldwide, online or off, is betting on team and league sports, like soccer, basketball, US football, and so forth. About $400 billion is bet on sporting events worldwide every year, and licensed US facilities, such as the Vegas sports books, take in a mere fraction .But PASPA prevented New Jersey-and everybody else- from tapping this admittedly rich vein.
Like many another law that has made it through Congress, PASPA was unnecessary, unfair, and un-Constitutional as hell. Perhaps the biggest single defect, in a crowded field, was that it enabled the big sports leagues - NBA, NFL, MLB, NCAA, and so on- to sue in Federal court any state which attempted to implement or allow expanded sports betting. Quite apart from being squarely against the Eleventh Amendment to the Constitution (states are sovereign entities, which means they can only be sued when they allow it), I invite the reader to imagine what would happen if this was a general practice. What if oil companies could sue the states over environmental regulations, or auto manufacturers drag the states into court over safety inspections?
Never mind, candidates for Federal judgeships are not selected for their readiness to overturn existing law. It is the task of the judiciary, in our Constitutional system, to keep the laws more or less on track, predictable, and usable. This is necessary so that the average Joe has a working idea of what he is supposed to do, what he'd damn well better not do, and at least a notion what will be tolerated in the "gray area" between.
The Big Leagues and Status Quo
The major leagues which are suing New Jersey over its attempt to admit sports betting-not actually legalize or license it mind you, simply refrain from enforcing state laws against it, or repealing those laws. To allow betting on major-league sporting events outside the race track, say the big leagues, is to compromise the purity of the games, undermine consumer confidence in the honesty of the proceedings. But a look at the police blotter shows that professional athletes, by and large, tend to be charged with DUI, substance abuse and domestic violence far more than shaving points or throwing games. For every Pete Rose there are a hundred Adrian Petersons. Still, the allergy to negative publicity is quite understandable. When a given athlete falls into disfavor, fans are liable to return his official, league endorsed jerseys and official sports apparel. This is no light matter, for marketing and endorsements, together with TV rights, represent an income stream many times the sale of mere tickets to the game.
Whatever the validity of that argument, it is clear that the status quo holds the high ground, as always. To change a long established policy, and entrenched societal views, is the work of generations. It is not to be wondered that New Jersey's initial efforts to break the blockade against state licensed sports betting have been turned down. What is remarkable, rather, is that the proponents have kept up such as spirited fight for so long.
Another Way Around?
But the most interesting development in the New Jersey sports betting saga was the reaction of Monmouth Park to the latest setback. Like most racetracks in the USA, Monmouth has been declining, and from the same causes - shrinking customer base, deteriorating facilities, and a so-so economy. In that light it's extremely ironic that the US thoroughbred industry was the first to embrace cross-border Internet gambling, to help get the most out of state licensed horse racing. But the plain fact is, more is needed. Many tracks across the country, such as West Virginia's Mountaineer Park, have prospered under the "racino" business model. Horse betting is combined with other gaming, such as slots or poker. Unfortunately, in New Jersey there are already very powerful claimants for slots and poker, namely the Atlantic City resorts.
Since approved (or at least, not disapproved) sports betting was new on the scene, it was possible to allot some participation to both the tracks and the resorts. And this is what New Jersey tried to do. Unfortunately, the Federal court has stopped that as well.
What did not stop was a very urgent all-around need for money. Monmouth Park had been all set up to offer traditional type sports betting. It was clear that the policy against such betting was not going to change anytime soon. Was there a way out? It turned out there was. Sports betting as an option of gambling was out. But gaming - not gambling - organized around sporting events was now possible, in the form of fantasy leagues.
A Fantasy with Money in It
Was that a second choice, forced on Monmouth Park by circumstances? Maybe, but it turns out that calling this format "fantasy", as in an unrealistic dream, is very inaccurate. 32 million Americans play, most of them in the coveted 19 to 49 white male demographic. They spend about 500 bucks apiece per year. Yes, Virginia, that's a $15 billion market. Factor in advertising revenue and associated economic activity, and the figure might reach as high as $70 billion, at least according to Forbes magazine. By comparison, the worldwide market in online gambling is about $30 billion. Not only that, unlike Internet gambling licensed by the states, this is an existing market-no lag time, nothing to prove, no predictions that have to come true. It's there right now.
By now everybody knows how fantasy sports leagues work. A contestant signs on as a "team owner" or "manager" and assembles a roster for a fantasy team, drawing from, and using, statistical facsimiles of the available athletes in the actual sports leagues. The actual real-world performance of a real world athlete- let's say Aaron Rogers of the Packers - are turned into statistics week by week. The combined statistical performance of the fantasy "teams" in a particular fantasy "league" determines that week's winner, and, just as in real life, the most wins determines the champion at the end of the season. Victory, however, can't be based on final scores of any game, nor solely on the performance of any particular real world athlete. Computer calculation and the Internet naturally figure very strongly in this model.
Legally speaking, the fantasy league model has several very strong advantages. First and foremost, when properly organized and conducted, it avoids the definition of "gambling".
This means that the complicated applications, background checks, fees taxes, and delays that a traditional gambling business must go through don't have to be dealt with. It can cross state lines with no particular trouble. In fact, even the murky, menacing UIGEA features a safe harbor for fantasy leagues, provided that they're not simply a cover story for actual gambling.
Also legally speaking, and financially, too, fantasy sports gaming is available right now as a proven mainstream money maker, and unlike traditional gambling, is heartily supported by the major sports leagues. CBSSports, just to name one example, sponsors fantasy football with prizes up to $5000. Since participants pay nothing to play, it is not gambling. Even with small entry fees, by the way, fantasy sports play is not considered gambling - most states class it as a game of skill rather than chance. In CBS's particular case, advertising is the principal path of monetization. But there is more. Traditional fantasy sports leagues have thrown off a variation called daily fantasy sports.
The big difference between traditional fantasy sports leagues and daily fantasy sports is that in the daily version, the "league" lasts only a day. A player goes online, picks his teams, and awaits the results from, let's say, next Sunday's NFL games. At the end of Sunday, the results are tallied, the stats compared, and the winners are paid out based on the results of that single day. There are two principal sites for daily fantasy sports, DraftKings (affiliated with major-league baseball and the National Hockey League) and Fanduel (NBA).
And the third, and perhaps most important legal consideration is that daily fantasy play and its immediate ancestor, fantasy league play, avoid the pitfall that has led to the condemnation of sports betting in general for decades - outside rigging of the games. Ever since the 1919 Black Sox scandal, professional sports in the USA has been haunted by the fear that unscrupulous gamblers will seek to fix games and make a killing on the odds. Never mind that as a practical matter ,the average professional athlete today makes too damn much money to be susceptible to the offer of bribes from the side, and the college athletes in the NCAA are too well watched. It could happen, however unlikely. And for that reason anything associating league sports with sports betting has been not merely taboo, but taboo with a vengeance. Beat your fiance senseless in an elevator? Rip up a small tree and beat your kid? Strangle your fighting dogs? You get suspension, but counseling, too. And you can be readmitted. Get caught making a bet? You get run down the road, then and there. No way back.
But fantasy sports play is not susceptible to the practice of bribing players, referees, or coaches. Once again, the payoff can't be based on team wins, final scores, or the particular performance of any individual athlete. What matters is somebody breaking the statistical pattern by doing better than expected. As the head of FanDuel rightly noted, that isn't something you can rig or anticipate. Well, all right, you might be able to do it if you buy every player, coach, team, referee, commentator, and sportswriter/columnist who might be remotely involved. But in that case you would already have so much money the whole enterprise wouldn't be worth your time anyhow.
The Way Forward?
Well, if the fantasy sports genre opens up the thrill and action of betting on sports, but avoids the crooked pitfalls of the older straight gambling system, how many states have taken it up? My researches indicated only Montana has done so. And only then on a limited basis - just NFL football and horse racing.
The other states have not. But I think it's time to ask the question: why not? When states try to legalize traditional sports betting, they get into a tooth and nail fight with the big sporting leagues, the self-appointed guardians of public morality, and vested interests of other state licensed gambling formats. Fantasy sports leagues, and daily sports play? The big sports leagues are already in there, elbow deep. On what moral grounds could they possibly object if the states were to stake a claim along the same gold bearing river?
What most of our regulators and legislatures- and all too many of our online gaming operators-don't understand is that there is a fundamental change taking place in this country as one generation gives way to another. They're not just dealing with different individuals, they're dealing with different generational experiences, giving rise to different attitudes about electronic communications, personal interrelationships, money, the role of government, and practically anything else you can think of.
To visualize the difference think of this. Here's Grandpa. He's about 90 years old. He went through the Great Depression, Prohibition, World War II, The Great Society, Vietnam. His attitudes of gambling and money were formed early on. Gambling is bad. There are only a few places you are allowed to do it- the race tracks and Las Vegas. Satellites and computers belong to the government. You and I don't use them. For business and other debts, you use checks and cash. If you want to gamble you can sneak out to Vegas for a weekend, where Frank Sinatra presides over the festivities, singing songs with little bit of suggestion in them and winking at everybody.
Now here's Grandson. He's 25 or so. He has never known a world without satellite communications, personal computers, cell phones, ATMs and credit cards. In his world, 48 of the 50 States have some form of legalized gambling, and you can do it anywhere. He uses the online world for everything: news, entertainment, finance, personal engagements. Today, practically any personal interrelationship apart from childbirth can be done online. Frank Sinatra? Probably died before he was born. Nice songs, though. Now Grandson sees no reason why he should have to go anywhere in particular to gamble, when he does everything else over the wire.
But the big advantage of Grandson over Grandfather as a customer, is Grandson is not nearly as careful with his money . Not only is Grandson much more liable to contribute money to charities and causes using Internet links and social media, but he is willing to lay down good, hard cash for what amount to mere bragging rights. Social media games and handicapping leagues use features like "freemium" payments: you can play for free, but if you want more chips or some advantage in playing the game, they are available for a small fee. ZYNGA was the first company to pioneer this concept on a large scale. And they made money at it. Another approach is to offer "prizes" which are not cash or cars, but status and mere tokens of affection - online icons of such things as a "bouquet of flowers" which the players can present to each other, or even compete for as prizes.
And Grandson's willingness to operate in this new environment opens the way toward offering online gaming which is not, in fact gambling. The three elements of gambling are consideration (pay to play), chance, and prize. The new forms of gaming remove consideration and prize from the equation. In which case it doesn't matter whether people are playing a game of chance, the game does not fit under gambling regulations of any state. Perhaps sweepstakes rules, perhaps not.
The New State of Things?
So if there is a new format of gaming which offers the excitement and attractiveness of traditional gambling, is popular, is billion-dollar profitable, and above all does not have to negotiate the minefield of traditional gambling law and regulation, the only question left is: how soon will the states wake up and look for their place in the income stream?
It may well be that Monmouth Park took a detour, only to find it had left a thorny, twisted path to slowly growing revenue in favor of a four-lane highway.
Mr. Owens is a California attorney specializing in the law of Internet and interactive gaming since 1998. Co-author of INTERNET GAMING LAW with Professor Nelson Rose, (Mary Ann Liebert Publishers, 2nd ed 2009); Associate Editor, Gaming Law Review & Economics; Contributing Editor, TSN. Comments and inquiries welcome at to firstname.lastname@example.org.