A Quick Discussion of Aspects Regarding Pari-Mutuel Wagering

Pari-mutuel wagering in its application manifests certain peculiarities associated with the psychology of wagerers.  A quick article on this topic was presented by William Shanklin in BloodHorse.com.  We'll quickly discuss a couple of these peculiarities.

The first is that favorites tend to be bet less than their realistic chance of winning and longshots tend to be be more than their realistic chance of winning.  The reason for this is simple.  A longshot will pay more than what a favorite will pay.  So for a bettor, wagering $2 to win on a favorite at even money is less sexy than wagering $2 to win on a longshot paying 30 to 1.  It is similar to the phenomenon where people tend to buy lottery tickets when the jackpot gets high.  Bigger potential payouts generate more wagering interest.

The other relates to the relationship between field size and overall wagering interest.  Typically when the number of entries in a race falls under 8, the wagering on that race tends to diminish.  That is why racing secretaries try to have races with 8 (or more) entries to maximize wagering handle.  Another related concept is the concept of partition dependence.  This term means that people tend to think some event is more likely to occur if it is partitioned in smaller intervals. 

To describe, let's use an example of how many games the Dallas Cowboys will win this NFL season.  If you had just two intervals, 0 to 7 games and 8 to 16 games, wagering on this offering would be less than if you had the following intervals:  0 to 4 games, 5 to 8 games, 9 to 11 games and 12 to 16 games.  As you can see, this also tends to illuminate the concept that more entries in a wagering offering is better. 

There is a point made in the article that coupled entries attract less wagering interest than if each entry was wagered on separately.  This does not mean that coupled entries don't have utility.  In ProContest.com's pari-mutuel fantasy sports contests, coupled entries are used often as a Field/Other entry, in addition to large fields of players, giving players the ability to select any player, not just those specifically named.  This functionality, even though a coupled entry, does tend to increase field size/more partitions, which is typically a positive with regard to wagering handle per race.

Daily Fantasy Sports Contests Continue Rise in Popularity

The daily fantasy sport contest format continues to grow in both customers as well as companies providing the product.  With the growth of this product also came the claims from various quarters that these games weren't legal or at the least took advantage of some "loophole."  These barbs were typically provided by competitors not providing these games, or online gaming providers shut out of the US market, or typical naysayers who didn't like fantasy sports in the first place and had some other axe to grind or ulterior motive.

Regardless, the daily fantasy sports game market is growing such that revenues from this segment is on the order of one-third of the yearly $1.6 billion spent on fantasy sports - not insignificant money.  An article that tries again to stir the pot and create the appearance of uncertainty of the legality of daily fantasy sports games can be found here. 

Daily fantasy games have threats, but in my view they are not from the legal front, but from the competitive front.  The threats come in two ways.  The first is from the current large fantasy operators like CBS, Fox, ESPN, Yahoo, etc.  These operators currently focus on the season-long contests but don't have any barriers to keep them from offering daily games.  Once they do, the current leaders in this segment may lose significant market share and quite possibly be run out of the market.  The current daily game operators should keep looking over their shoulder because the big boys could enter this market whenever they want.

The other competitive front is from new entrants with an even newer and superior short-term fantasy sports game.  Current daily games generally have prize to entry fee ratios somewhat less than 2 to 1. So for a $10 entry fee game, the winner will win somewhere around $18, where the game operator keeps $2 for their expenses and profit.  The new daily game contest format can offer games that have prize to entry fee ratios as high as 100 to 1, or for a $10 entry fee game, could offer a prize as high as $1,000.  Since this game concept is patented, it can't be copied and the current daily game operators will have no easy counter to this superior product.  If you were a customer and for $10 could play two $5 games, each game having a chance to win up to $500, what game would you think they would play?  Right, a no brainer.

The daily game segment will continue to grow and is on the cusp of some very disruptive change.

Daily Fantasy Game Errors in Legal Article

An article in Gaming Law Review and Economics tries to describe the future of the daily fantasy format as an "unsure bet."  The title of the article also tries to portray daily fantasy games as exchange wagering.  This article by and large is weak and a poor attempt to challenge the legality of the daily fantasy game format.  The article is biased and references are "stretched and tortured" in order to fit the article's bias.

I'll discuss just a few of the errors.  The first is that the UIGEA created or enabled the daily game format.  The evidence used was that the UIGEA was passed, then the daily format appeared after.  The daily game format could have easily been fielded before the UIGEA and the UIGEA doesn't impact the daily game format.  If the length of time the multiple games that constitute the basis of a fantasy sports game could entail an entire season, post-season or in the daily game format, either a day's games or week's worth of games.  In all of these cases, multiple games are used as a statistical foundation for the fantasy games and it can be argued that the UIGEA took its cues from the reality of how fantasy sports games were played to create their definition and contouring of the safe harbor.

Another error is the so called admission by a fantasy sports operator that by not offering their games in certain states that is an admission of the uncertain legality of the daily fantasy sports format.  Baloney.  There are certain states in the US where there really isn't enough of a distinction between skill games, sweepstakes and gambling such that even the season-long fantasy sports operators avoid offering games in those jurisdictions.  If those states' laws are very strict as to what they define as gambling, no rational fantasy sports operator, daily or season-long, operates there.  To use that as an admission of the uncertainty of the legality of the daily game format is more than a stretch, it is basically dishonest and again shows the bias of the authors.

The last issue I'll discuss is the authors' "fantasy" about the daily games using mark to market accounting.  The daily games operate like the season-long games.  You select some players that have a fictional "salary" constraint such that you craft the fantasy team of players where the total "salary" fits within the constraint.  The actual games are played and the statistics generated by the players the fantasy sports contestant chose are converted to a single numerical metric or score, with the contestant whose team has the highest score wins.  To call that mark to market accounting in order to try and make a case that daily fantasy games are radically different from season-long games in dimensions other than just the timeframe is just wrong.

There is a saying that everyone is entitled to their own opinion but not entitled to their own facts.

For those interested, the article can be found here.

Appeals Court Ruling Against New Jersey Shows Path To Sports Betting

The United States Court of Appeals for the Third Circuit yesterday ruled against New Jersey in its attempt to implement sports betting by a 2-1 decision.  The case is now clear for New Jersey to appeal to the US Supreme Court.  Although a defeat at this stage, New Jersey can actually see very good news.  For the first time, a judge did side with New Jersey and against the US and the sports leagues.  The dissenting judge put forward a very well reasoned dissent that picked apart the majority opinion and showed in detail how PASPA was unconstitutional.

New Jersey does have the option of asking for the full Third Circuit to hear the case.  The information I received is that it doesn't do much for New Jersey to do that.  The first thing is that the full court could side with the majority, which doesn't help.  The second thing is that the loser is going to go to the US Supreme Court anyway, so why not go there now and save time and money?  That appears to be the path New Jersey will take.

The opponents of sports betting will take this as a great victory - not so fast.  From the majority opinion, this sentiment I found interesting:

We are cognizant that certain questions related to this case—whether gambling on sporting events is harmful to the games’ integrity and whether states should be permitted to license and profit from the activity—engender strong views. But we are not asked to judge the wisdom of PASPA or of New Jersey’s law, or of the desirability of the activities they seek to regulate. We speak only to the legality of these measures as a matter of constitutional law. Although this “case is made difficult by [Appellants’] strong arguments” in support of New Jersey’s law as a policy matter, see Gonzales v. Raich, 545 U.S. 1, 9 (2005), our duty is to “say what the law is,” Marbury v. Madison, 1 Cranch 137, 177 (1803). “If two laws conflict with each other, the courts must decide on the operation of each.” Id. New Jersey’s sports wagering law conflicts with PASPA and, under our Constitution, must yield. We will affirm the District Court’s judgment.

So they pretty much put blinders on and crafted an affirming opinion based on a subset of the issues.  The court also just used the "rational basis" test and took only a cursory look at PASPA to find anything to say that PASPA was a regulation of interstate commerce, as opposed to Congress using a state as a puppet, which isn't allowed.  In other words, if Congress wanted to outlaw the sale of beef jerky, Congress can do that directly, but they cannot tell the states to pass laws to prohibit beef jerky or keep them from passing laws allowing beef jerky, while declining to do so themselves.  In the case of PASPA, they allow some states to have sports betting, but not others, which is even more strange.  They later in the opinion stated a very odd way of how a state could comply with PASPA:

Thus, under PASPA, on the one hand, a state may repeal its sports wagering ban, a move that will result in the expenditure of no resources or effort by any official. On the other hand, a state may choose to keep a complete ban on sports gambling, but it is left up to each state to decide how much of a law enforcement priority it wants to make of sports gambling, or what the exact contours of the prohibition will be.

We agree that these are not easy choices. And it is perhaps true (although there is no textual or other support for the idea) that Congress may have suspected that most states would choose to keep an actual prohibition on sports gambling on the books, rather than permit that activity to go on unregulated. But the fact that Congress gave the states a hard or tempting choice does not mean that they were given no choice at all, or that the choices are otherwise unconstitutional. See United States v. Martinez-Salazar, 528 U.S. 304, 315 (2000) (“A hard choice is not the same as no choice.”); see also F.E.R.C., 456 U.S. at 766 (upholding a choice between expending state resources to consider federal standards or abandoning field to federal regulation).

What does this mean?  The court is saying that New Jersey does not run afoul of PASPA if they ban sports betting or they totally deregulate sports betting.  So, in theory, New Jersey could simply allow sports betting with no regulation or oversight whatsoever and the US Government, sports leagues and NCAA couldn't do a thing about it.  That logic is insane and was properly called out in the dissenting opinion.

The opening of the dissent is well written and sums up what I believe the essence of New Jersey's appeal to the US Supreme Court will be:

I agree with my colleagues that the Leagues have standing to challenge New Jersey’s Sports Wagering Law, N.J. Stat. Ann. § 5:12A-2, and that the Professional and Amateur Sports Protection Act (“PASPA”), 28 U.S.C. § 3702, does not violate the principle of “equal sovereignty.” I therefore join parts III and IV.C of the majority’s decision in full. I also agree that, ordinarily, Congress has the authority to regulate gambling pursuant to the Commerce Clause, and thus I join part IV.A of the majority opinion as well. Yet, PASPA is no ordinary federal statute that directly regulates interstate commerce or activities substantially affecting such commerce. Instead, PASPA prohibits states from authorizing sports gambling and thereby directs how states must treat such activity. Indeed, according to my colleagues, PASPA essentially gives the states the choice of allowing totally unregulated betting on sporting events or prohibiting all such gambling. Because this congressional directive violates the principles of federalism as articulated by the Supreme Court in United States v. New York, 505 U.S. 142 (1992), and Printz v. United States, 521 U.S. 898 (1997), I respectfully dissent from that part of the majority’s opinion that upholds PASPA as a constitutional exercise of congressional authority.

This case isn't over and it is my view that the Supreme Court will take it up.  How it turns out is a matter of debate, but my view is that New Jersey should prevail.  It should be noted that a recent statistic indicated that 60% of the rulings from the Third Circuit Court of Appeals are reversed by the Supreme Court.  I think yesterday's ruling overall wasn't too bad at all for New Jersey and those wanting expanded legal sports betting in the USA.