The next generation of DFS or just a fantasy?

USFantasy has become the first fantasy sports operator to be licensed in Nevada by using a pari-mutuel wagering system. Martyn Hannah takes a closer look at the product and the industry veterans behind it

Hindsight is a wonderful thing. A little over a year ago the daily fantasy sports (DFS) sector was riding a wave of unprecedented growth, driven by a multimillion dollar advertising blitz from market leaders FanDuel and DraftKings.

Such was the appetite to get in on the action that both operators were able to raise large amounts of investor capital, turning them into billion dollar businesses overnight. Their success led to countless other firms developing and launching their own products in order to cash in on the meteoric growth trajectory the sector was on track to achieve by the end of the decade. Then the DraftKings data leak scandal happened. And the DFS bubble burst.

But some saw these issues coming ahead of time, in particular Nevada bookmaking veterans Mike Knapp and Vic Salerno, who themselves were looking at ways of bringing a fantasy sports product to the market.

“After a thorough review of DFS wagering offerings during 2013 and 2014, it was clear to us the industry would soon be facing critical consumer and legal issues,” says Knapp, who along with Salerno founded USFantasy. “It was easy to note the creation of a salary cap was the same as creating a static point spread, thus the potential of capitalizing on insider information through knowledge of player distributions was obvious. The phenomenal growth of DFS at the time, coupled with the publically noted rebellion from most of the major operators towards regulations was shocking, if not telling, and certain not to end well.”

Having spotted some of the pitfalls in the current DFS model, Knapp and Salerno began to work on an alternative platform, one which could be used in land-based casinos, at racetracks, OTBs, online and on mobile. Knapp says they realized the original ‘skilled’ selection platform had already been developed, tried and tested decades earlier through the pari-mutuel system, and that it could be easily converted into a fantasy sports betting product absent of regulatory, legal, and player protection concerns.

“Pari-mutuel systems provide unparalleled transparency, eliminating concerns of insider trading. The original system was developed as an ‘auction’ of public investment and allows the contestants to determine pricing. As such, all selections, whether they be ‘expert’ or otherwise, are fairly and transparently comingled, effectively mitigating the sharks eating minnows issue. Further, contestants have the ability to choose the difficulty of team compilation to their self-determined skill level,” he adds.

How it works

By using the pari-mutuel model, USFantasy, which was recently approved by the Nevada Gaming Control Board (NGCB) to offer fantasy contest in the state via land-based casinos, online and mobile, will look very different to the contests offered by FanDuel and DraftKings. USFantasy resembles fantasy sports in that players in real-world games score points based on their performances, but after that it is more akin to horserace wagering. Here’s how a contest would work in football, for example:

• A contest is based on a single position; such as quarterback, tight end, wide receiver.

• Players choose from a pool of players in that position, betting on them to ‘win’ ‘place’ or ‘show’. The number of fantasy points the player scores determines their position – five for a touchdown, for example.

• Players can also place more exotic bets; such as exactas (top two players), trifectas (top three players) and daily doubles (winners of two contests).

• Wagers are placed in a pari-mutuel pool and are distributed after all player performances are completed and tabulated.

• A Pick 7 progressive jackpot will also be offered for NFL, allowing players to enter all seven available contests in a given week. If a player picks the top fantasy points scorer from each, they could be in line for the jackpot.

On launch, USFantasy will offer contests on NFL, MLB, NBA, NHL, NASCAR and the PGA Tour, with plans to add additional leagues and sports in the near future. It will go live in Nevada first, and will be solely available through B2B agreements with the 80 pari-mutuel and sports locations that are members of the Nevada Pari-mutuel Association, with online and mobile entries executed through its licensed partners. USFantasy will also provide an informational site for players displaying entries, pricing, results and other related data. But with a focus on land-based consumers, can USFantasy compete with the likes of FanDuel and DraftKings, and, more importantly, will it be a boon for the wider DFS industry?

“The pari-mutuel model is a great concept that has been looked at in the past by many others,” says Rich Roberts, CEO of DraftDay. “Land-based venues are very important to the growth of DFS. The success of DFS will be the ability to make it more social like season-long fantasy games. While DFS has grown significantly over the past few years, it is still far behind the season-long numbers and much of that is to do with the socialization around the game.”

Indeed, the general consensus is that fantasy sports is a millennial pastime, driven by the mobile and tablet platforms offered by most DFS operators. But Knapp agrees with Roberts, and says socialisation needs to be at the heart of the product to fully engage millennials and other demographics alike.

“Having worked at sports lounges and racetracks over our careers, Vic and I understand they’re energized social environments where like-minded fans gather for information, to watch sporting events and wager their opinions. The comical contrast became apparent during last year’s onslaught of fantasy sports commercials which often displayed large groups of sports fans gathered together, but to what – look at their phones? That’s not to say mobile delivery is un-important – we firmly believe mobile convenience will be desired and we will fully support it,” he adds.

Through the front door

Given Knapp and Salerno’s background, it’s no wonder regulation has been front of mind throughout the development and launch of USFantasy. In order to avoid the issues that have plagued other fantasy sports firms, they met regularly with state gaming regulators, particularly A.G. Burnett from the NGCB, regarding their concept in order to seek guidance and legal clarity prior to launch.

“Given our intentions to work with the existing gaming licensed industry, the USFantasy mission from the beginning was to go through the front door, not the back,” says Knapp. “Several DFS operations have made scrambling efforts for regulatory compliance this year with varying results, while our consumer protections have confidently been built, tested and regulated through our potential land-based and mobile partners. What’s more, we believe the regulations suggested and adapted this year for the traditional DFS models have the real potential of creating more problems than they solve within the burgeoning industry.”

But given its recently awarded sports betting license in Nevada, USFantasy can operate in the state without concerns of falling foul of and changes to the wider regulatory landscape. Indeed, A.G. Burnett says he was impressed with the product and believes it is just the sort of innovation the DFS sector needs, proving it can be “conducted legally in a regulated fashion” within the state. “This is a turnkey for the regulators and operators because it essentially fits into an already-existing regulatory and operational model. It is one form of innovation that I am pleased to see and I think the product will be a great additional offering for patrons,” he adds.

USFantasy will first go live in Nevada, but has ambitions for a wider national and international rollout. Pari-mutuel wagering is legal and licensed in 43 US states, providing the firm with a sizable market to tap into. Further, in those states where sports betting is yet to be legalized it has the potential to claw back some of the $150bn the American Gaming Association estimates is wagered through black market sportsbooks each year. What’s more, Knapp believes the major sports leagues will be in support of the product as it will “accelerate the individual sports media consumption” they desire while “protecting the integrity of their live games.”

Work still to do

USFantasy’s Nevada license has certainly caught the attention of the wider industry, with many excited to see how the product is launched and received among operators and players alike. The firm has yet to sign an agreement with a land-based partner, but Knapp says finishing contract points are “in the works” and due to be reviewed by regulators in the coming weeks. “Verbally, we have been speaking with individual locations since our original license application in December 2015 and have been extremely encouraged by the reception,” he adds. In a year’s time, the firm hopes to be offering its content to every single legal fantasy sports jurisdiction possible, not just in the US but internationally with enquiries already coming from Europe, Australia, Asia and South America.

Its ambitions are certainly bold, but with DraftKings and FanDuel also eyeing international expansion, USFantasy still has its work cut out. That said, the potential is certainly there to bring fantasy sports to a whole new demographic of player.

“The reality is that DFS players on FanDuel and DraftKings are overwhelmingly male and overwhelmingly white,” says Stephen Murphy, CEO of BoomFantasy. “These businesses have done a great job of monetizing the hell out of these customers, but they haven’t succeeded yet in offering a product that satisfies the very diverse landscape that is American sports fans. I think USFantasy’s launch is yet another sign that fantasy sports is still in its earliest days and that the industry can continue to reinvent itself.”

Indeed, FanDuel and DraftKings may have brought fantasy sports into the mainstream, but by taking a more considered approach to product, legality, and regulation, operators such as USFantasy may be what takes the sector into its next chapter, one of long-term stability and sustainability.