This morning’s news includes a report that fantasy sports gambling is now legal in the state. This brings the number of states where one can play on-line fantasy sports, which for football alone is a market estimated at $70 billion, to forty. Fans of fantasy sports sites such as DraftKings and FanDuel who live in New York can now resume enjoying the entertainment they were debarred from back in March, when NY Attorney General Eric Schneiderman decided that fantasy sports was a game of chance, not a game of skill, and therefore was illegal under the state’s gambling prohibitions. Schneiderman will reportedly continue chasing the big fantasy sports companies over other matters, which sounds a bit like either sour grapes or a payday for the state.
The latter is, by the way, what this whole brouhaha was likely all about. Consider what the new law does. First, it declares that fantasy sports betting is a game of chance rather than a game of skill. This definition was at the heart of the ban, and I presume the legislators decided to define it the way they wished to reinforce their right to regulate it. By regulate I mean, of course, tap it as a revenue source.
Not content to simply let companies engage in business and collect income taxes (and if there was a question about those taxes, legislators could simply have written a law that put the companies on equal footing, tax-wise, with traditional in-state businesses), they decided that each operator would have to pay an annual fee of $50,000 AND fork over 15% of revenues. Lets repeat that: 15% of revenues, not income.
Bookmakers, legal and illegal, manage the bets they take from gamblers by setting odds that balance, in the aggregate, the money paid to winners against the money collected by losers. That process is called “laying off.” The bookies make their money by charging a fee, typically 10%, on losing bets. This fee is slangily known as vigorish, or vig for short. Ideally, bookies lay off all their action perfectly, meaning that payouts to winners match collections from losers, with the “house,” i.e. the bookmaking operation i.e. the casino or whichever mob organization is running that book, keeping the sum total of vigorish collected as profit. If the bookies don’t lay off all their bets perfectly, and game outcomes go the wrong way, they’ll have to pay out from their profits. Of course, if the the game outcomes go their way, they’ll make more money. All in all, it’s a business model, and it’s associated with some degree of risk.
Consider, though, governments’ relations to gambling. In states where casino gambling is legal, governments collect income tax. If the businesses do poorly, the governments collect less, but they have no down-side risk. Governments also run gambling operations directly, in the form of various lotteries. Lottery payouts are not “at risk” in any way whatsoever. They are a fraction of the total revenues collected, and usually a lousy one at that. The big lotteries keep as much as half the revenues collected, which means that a gambler can expect an average 50 cents on the dollar return for each bet he makes. In contrast, the 10% vig collected by bookies means the house edge is just that, 10%, slot machines typically give the house a 2%-15% edge and the most common/popular casino games like blackjack and craps hold a house advantage of 1-2%. In other words, gambling with the government is a far worse proposition than gambling with any private entity, legal or illegal.
Consider, next, the skill element of fantasy sports betting. While there is skill in a game like blackjack, the skill (known as basic strategy), is available to anyone who wants to spend a buck or two on a reference card (and many casinos will let you consult that card while playing), fantasy sports players at the highest tiers engage in time consuming and sophisticated research. As with poker, there are people who are fantasy sports “professionals,” with the top players (known as “sharks”) earning six figure incomes. One report indicates that the top 1.3% of players of daily fantasy sports won 91% of the total prizes. This qualitatively mirrors professional poker, where the top pros win disproportionately. Why? Because they are better at the game. This puts the lie to the assertion that fantasy sports gambling is a game of chance.
Put all this together, and the “game of chance” bit is a red herring that masks the real reason governments might object to fantasy sports gambling: money. The government, like any mobster worth his salt, wants its taste. It wants to wet its beak.
So, in exchange for the privilege of engaging in consensual economic activity, the fantasy sports outfits have to cough up a vig greater than that any bookie would charge i.e. 15% of total revenue (vs 10% of the losing side). AND, they have to spring a $50K annual fee. The latter is trivial to a company that collects hundreds of millions in fees every year. It, however, represents a significant barrier to entry for a startup, which is probably the point. In the typical fashion of economic fascism, the government leaves ownership (and risk) in private hands, while tightly regulating (and milking) businesses in a fashion that ensures only a few large operators will exist. The fee is actually of benefit to the big operators, because it acts as an entry barrier to competitors.
Politicians tell us that they ban or regulate “sins” like gambling for the public good. The ugly facts about state-run lotteries exposes this as the basest of lies. They regulate gambling to protect their revenue streams, to ensure that gamblers’ money flows into state coffers. They pretend that the money collected is dedicated to education. Money, however, is fungible, and every lottery dollar they spend on education is a tax dollar they can spend on other government programs.
Fantasy sports is legal again in New York because the politicians got their vig. Remember, the next time that someone complains about “greedy” businesses and corporations, that
There’s no one greedier than a politician.
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