Government Should Hurry-Up and Do Nothing in FanDuel, DraftKing Drama

Last week, the daily fantasy sports world was rocked when news broke that a DraftKings employee — with access to nonpublic, proprietary data — won $350,000 playing a football contest on the competitor site FanDuel. While it’s still unclear whether the employee actually used the data, many are now calling for government to rein in the burgeoning industry to prevent future perceptions of an uneven playing field. And the putative unfairness of these recent revelations has become their rallying cry.

These widespread calls for regulation evoke buzzwords of “transparency,” “accountability” and “fairness,” yet few propose any solid regulatory framework or plan for how government policies would effectively accomplish those ends. The rhetoric instead merely reflects one of the most dangerous attitudes in American politics — the knee-jerk reaction to hastily “do something!” in response to the news du jour.

Growing beyond the editorial boards of newspapers such as The New York Times and The Boston Globe, the chorus calling for government intervention into daily fantasy sports is nearly as ubiquitous as the ever-present commercials for DraftKings and FanDuel. The New York attorney general already opened an inquiry, theMassachusetts attorney general launched a review, the U.S. attorney's office in Tampa is conducting an investigation and two class-action lawsuits have been filed.

The conversation we ought to have is whether government could accomplish these goals in light of the potential pitfalls of rushing to regulate. Stepping in to regulate fantasy sports platforms at this early stage may have the opposite effect that proponents seek: it could reduce the likelihood of real reform ever occurring, stop more consumer-friendly platforms from entering the market and create a false sense of fairness in a relatively unfair game.

Of these potential pitfalls, stopping real reform — likely to only come from inside the industry — is probably the first to occur. The daily fantasy sports industry is so young that it is still figuring itself out. Improper use of data may be a problem for the integrity of these new firms, but it’s a problem that the firms themselves should confront, not government. Over time, competition between these sites will drive them to get better and improve internal controls as they compete for users who demand more transparent assurances of fairness.

Both DraftKings and FanDuel have already taken swift action to resolve issues, and continued competition may ultimately drive them to find an innovative approach to protect their users in ways regulators could never imagine. Intervening at this point will lock the industry in a world envisioned by whoever ends up writing the rules, rather than allowing reform to emerge from within these digital platforms. These firms know their users’ preferences better than a government agency could, and they also have a strong incentive to keep their users satisfied.

Aside from stifling what could be beneficial competition between DraftKings and FanDuel, regulating the industry right now could also discourage — or even prevent — more consumer-friendly platforms from entering the market. The current issues facing the established daily fantasy sports platforms are opportunities for others to step up to the plate and provide the types of protections and assurances that users seek. It’s an opportunity for entrepreneurs to offer what customers want and push existing platforms to create better products. But if calls for regulation are heeded, it’s likely the daily fantasy sports world currently dominated by two large sites will remain that way, leaving consumers with fewer choices and little power to shape the future of the industry.

Another key question we should ask is whether government can play a role in achieving the sort of fairness proponents seek. Success in daily fantasy sports is a product of how much information players can accumulate and process. This gives an inherent advantage to more sophisticated players, which seems to be borne out by the data. According to a recent study from the Sports Business Journal, over 90% of winnings go to roughly 1% of players. This pool is dominated by sharks.

As it stands now, however, playing daily fantasy sports is like swimming at your own risk. Those who enter understand what they’re getting into and are much more aware of the risks around them. Regulating the industry could create a false perception that the government has somehow made the games fairer — and render a false sense of security for unsophisticated players. In essence, it would be like placing a “safe to swim” sign near those shark-infested waters.