Reaching critical mass: What does the MA report on online gambling mean for DFS and egaming stakeholders?

The Massachusetts special commission charged with investigating how best to legalize and regulate egaming and DFS in the state delivered its verdict in late July, with a report that divided the online gaming industry.

DFS firms were deeply unhappy with the report’s finding, which will guide the legislature in its approach to online gambling, while there was more optimism for proponents of online poker and casino.

In short the Special Commission on Online Gaming, Fantasy Sports Gaming and Daily Fantasy Sports recommended that DFS be legalized, but only as a subset of gambling, a designation which fantasy firms have lobbied hard to shed. The report went on to say other forms of online gambling like poker and casino should not be legalized at present, but it would likely be “inevitable” in the state.

Starting with DFS, the impact could be dramatic if the legislature does indeed pass legislation classifying it as gambling. As gaming attorney Jeff Ifrah explains, that designation from a state that has studied the issue more closely than any other, could feasibly provide a template for others to follow when regulating the activity.

And if other states start classifying DFS as gambling rather than a game of skill, any regulation would need a referendum and an amendment to the state constitution, rather than the (comparatively) simple act of passing a bill.

Massachusetts State House. Credit: iStock

Likewise, investors in these companies, already spooked by a failed merger and annual losses, would hesitate to plough further money into an online gambling business. That could have a major impact on the future of the big two firms, with FanDuel reportedly trying to raise new funds for the NFL season after the failed merger.

The gambling designation could also expose DFS operators to higher licensing fees, higher taxes and more regulatory scrutiny, as is customary with gambling operators.

Backlash

DraftKings urged legislators to reject the designation, saying it would “restrain its ability to thrive and create jobs here in Massachusetts.”

“These recommendations, if ever adopted, would put us behind every other state in the country on this issue, and send a troubling message to other start-ups. We urge Governor Baker, Speaker DeLeo, Senate President Rosenberg, and the rest of the legislature to reaffirm their commitment to Massachusetts start-ups and reject these ill-advised recommendations in whatever legislation is finalized,” the firm said.

However the commission chairs, Representative Joseph Wagner and Senator Eileen Donoghue dismissed those concerns, saying they would forward their report to all members of the legislature, and push to write DFS legislation over the next year. “You can expect legislation,” Donoghue said. “It’ll have to be this session.”

DFS in Massachusetts is currently regulated under a set of consumer-protection rules imposed in 2016 by Attorney General Maura Healey that include prohibiting players under age 21, banning contests based on college sports, and limiting advertising.

Those rules informed a temporary measure passed by the legislature last year that clarify the legal standing of daily fantasy sports. However those rules expire in July 2018.

Glass half full

But while the DFS industry can be concerned about the impact of the report on its future, traditional online gambling operators were cautiously optimistic at its finding and the language involved.

“Legalization of online gaming in the state will both create jobs and help to retain young graduates with high-tech backgrounds,” the report said. “Providing a safe, legal, regulated venue for online gaming is a much more attractive alternative to unknown black market operators.”

“The US states are being wonderfully timid about regulating internet gaming. It doesn’t change our short-term strategy” Dermot Smurtfit, GAN

The report also dismisses any notion of cannibalization, while adding that any online gaming tax rate should be based on gross gaming revenues and should be “carefully balanced” to avoid “crippling an emerging industry.”

“Any discussion of taxes for online gaming should include research into the profit margins of such operators particularly given their lack of revenue from food, drink, hotel rooms, entertainment, and other sources,” the commission wrote.

The report authors also displayed a clear understanding of other important issues like geolocation and responsible gaming measures, suggesting it has taken on board the advice of the experts it engaged with. But despite all of the benefits the report identifies, it recommends online gambling not be legalized in the short- term, in order to “allow brick-and-mortar casinos to open.”

“The licensed casinos are in the process of investing billions of dollars in their facilities and the special commission believes that it would be prudent for Massachusetts to monitor the outcomes from these investments before proceeding with more robust online casino gaming,” the report stated.

It adds: “The special commission also recommends that, if and when legislation permitting online casino gambling does occur, the existing brick-and-mortar casinos in Massachusetts be offered some form of preferential treatment. For example, through right of first refusal if a certain limited number of licenses are considered in deference to their investment in Massachusetts.”

What happens next?

It’s certainly a positive development, and Ifrah, chairman of the egaming trade group iDEA, said his group would be moving Massachusetts up its list of priorities.

“There’s not a lot of detail here yet and we still need to figure out how the legislature will approach this issue, but we are very hopeful that this is a strong indicator of regulatory change in the near term,” Ifrah said.

Other stakeholders were less optimistic. Dermot Smurfit, CEO of platform provider GAN, told EGR North America the report wouldn’t change his company’s approach. “I don’t think there’s much for us to do. The US states are being wonderfully timid about regulating internet gaming. It doesn’t change our strategy in the short-term at all,” he added.

Chairman Wagner said the special commission hopes to meet every four to six weeks and will continue to consult and inform the legislature as it tackles first DFS and then other forms of online gaming.

However, stakeholders in the latter industry would be wise not to hold their breath. The MGM Springfield is set to open next year in MA while the Wynn Boston Harbour is slated to open its doors in 2019. Only once these projects are up and running is the legislature likely to sink its teeth into online gambling. In the meantime it seems, all eyes should remain fixed on Pennsylvania.