So What Did We Learn In Las Vegas?

[Greg Ambrosius]

The 16th annual FSTA Winter Trade Conference took place last week at the Bellagio Las Vegas with a record crowd of attendees. When I started this event in 2000 in Orlando, we had 84 attendees, which was a solid start to this. Heck, it grew to 280 industry executives in 2014, but this year there were more than 390 industry executives, the biggest jump in a single year.

Why the big jump? Take one guess: Daily Games. There were at least 15 different daily games there and most of the new companies introducing their products were daily content providers, daily software, new daily games for all different sports, etc. It was amazing to see how this area of the market is just transforming this industry. Heck, I barely know anyone at these conferences anymore, but it's cool. I enjoy the extra energy that everyone is providing.

I know some people think these Trade Conferences don't produce results for the consumer, but they do in a lot of different ways. Here are some things that I saw that was interesting:

** Exempt States: I'm a member of the FSTA Board of Directors and I salute Peter Schoenke of Rotowire.com who has headed this Committee that is working on the exempt states. Peter has hired a lobbyist in Iowa and another lobbyist in Arizona to work on legislation that would allow those residents to play in fantasy games. Right now there are 5-6 exempt states because their gambling laws are very vague and we're trying to either make them less vague or to include the same carveout language that we have in a federal law. Iowa is the closest to enacting this new language in a bill that is being sponsored by a first-term representative. We hope that something will move forward by March of this year and hopefully both chambers will approve it. Iowa looks promising. We have another good contact in Arizona and believe that there are positive vibes there for the new language. This one might take longer, but we are hopeful in Arizona. Even Washington is a possibility as we are talking to a representative there about adding this language involving fantasy sports. The fact that Arizona is hosting the Super Bowl this week with a team from another exempt state hasn't been lost on us. We're letting folks know.

** STATS was involved on the Next Generation Panel to talk about SportVu and the analytics that come from that technology. The NBA is sharing much of that data on NBA.com, which can help fantasy players who set daily lineups. Now the NFL is working with Zebra Technologies that involves unique data that will incorporate chips into the football and onto players' shoulder pads. It will be unveiled at the Pro Bowl this week and you'll be able to see the velocity on the ball, velocity on the players' tackles, and more. This is a new partnership with the NFL and the data likely will be owned by the NFL, but hopefully they will share a lot of this on NFL.com like the NBA is doing. But it's very unique technology that likely needs approval yet from the Players Association before being implemented in regular season games. But this is the next step in stats.

** STATS was on another panel involving fantasy sports in national restaurant chains and Ben Nelson of Buffalo Wild Wings was one of the presenters. He said that more than 100,000 local leagues held their fantasy football drafts at Buffalo Wild Wings this year and the future is very bright for that combination. We like the sounds of that as well as it's a nice way to reintroduce fantasy players into live drafts at cool venues. You'll hear more about this in the near future.

** Nigel Eccles of FanDuel was on hand for our Demographic Trends Panel where we compared consumers from daily games to consumers from season-long games. We compared FanDuel's numbers with the FSTA's annual incidence survey and the results showed that the consumer base is very similar. The daily player is probably 5-7 years younger than the season-long player, but demographics are very similar. Here are some interesting facts about the daily game:

a) 95% are male at FanDuel
b) 39.2% of daily players are between ages of 25-34 compared to 34% of season-long players
c) 83% of FanDuel customers are also season-long players
d) 17.2% of FanDuel players are not season-long players and half of that total are playing fantasy sports for the first time
e) FanDuel's user base is closing in on 1.2 million uniques
f) 20% of daily fantasy players increased their consumption of watching sports, reading sports, using Apps for sports; They increased their level of participation in sports from 17 hours a week to 24 hours and 7 hours is dedicated to research
g) $25 is the median deposit at FanDuel
h) 62% of entries at FanDuel are at $1 or $2
i) 65% of FanDuel customers are under the age of 35
j) The #1 reason for playing daily games is excitement & competition. Winning money was 3rd

They are interesting facts and I think we'll do this comparison each year going forward. The daily space is growing faster than any other segment of the industry and everyone is trying to carve out their niche. Good luck to all of them and we'll just continue to grow our high-stakes games in quiet over here.

[Greg Ambrosius]

Big news today in the state of Washington. Someone tell Walla Walla about this!!!

http://www.auburn-reporter.com/news/289237771.html

Decriminalize fantasy-sports play in Washington, says Sen. Roach

For the Reporter

Washington residents should be free to play fantasy football and other fantasy sports, says state Sen. Pam Roach, sponsor of legislation to decriminalize such games.

"Our state sees fantasy football as a game of chance – a felony crime. Congress has long considered fantasy football to be a game of skill. My bill will change the state's definition," said Roach, a Republican from rural Auburn.

Roach estimates 500,000 people in Washington play fantasy sports. She introduced Senate Bill 5284 on Monday to legalize their activity. It has bipartisan sponsorship and has been referred to the Senate Commerce and Labor Committee.

Players of fantasy sports generally compete by assembling make-believe teams composed of real-life athletes, then tracking how members of their teams perform in actual games. For example, the same strong results that Seattle Seahawks running back Marshawn Lynch has produced on the field this year have made him a desirable pick among fantasy-football players.

Roach's legislation would bring Washington law on fantasy sports into line with the Unlawful Internet Gaming Enforcement Act passed by Congress in 2006.

[Cocktails and Dreams]

The FSTA will always be a joke until something is actually done to protect player investments. Until there is something along the lines of an FSTA bank where all contests hold the prize winnings, it always will be a joke in my eyes. It comes across to me as a big insignificant waste of time. Until something is done to enforce payouts I have learned nothing. Players know who is the best at what. We don't need to see things awarded in what seems to amount to a political advertising type of convention. We know that the NFFC is awesome at hosting live drafts. We know that other companies do other things better. The FSTA has never given a rats ass about what is the most important thing. And it will continue to be a joke until it does. Considering the amount of respect I have for so many board members on that thing, it is mind boggling how they cannot figure that out. No way I would ever be part of such an organization without helping solving that problem.

[Greg Ambrosius]

The FSTA will always be a joke until something is actually done to protect player investments. Until there is something along the lines of an FSTA bank where all contests hold the prize winnings, it always will be a joke in my eyes. It comes across to me as a big insignificant waste of time. Until something is done to enforce payouts I have learned nothing. Players know who is the best at what. We don't need to see things awarded in what seems to amount to a political advertising type of convention. We know that the NFFC is awesome at hosting live drafts. We know that other companies do other things better. The FSTA has never given a rats ass about what is the most important thing. And it will continue to be a joke until it does. Considering the amount of respect I have for so many board members on that thing, it is mind boggling how they cannot figure that out. No way I would ever be part of such an organization without helping solving that problem.

Chad, if there was a simple way for one organization to guarantee prize money in all contests it would be done already. But I don't need the FSTA to hold STATS' prize money to guarantee that it will be paid out. I don't think Fanduel wants a third party holding their prize money either. They know how to take in funds and pay out prizes just like we do. And legally, how can the FSTA FORCE game operators to send their money to a non-profit organization to hold until prizes need to be paid? Not only that, but not all game operators are FSTA members and yet consumers would still play with them as long as the rake is good, so there'd still be problems.

It's not a simple solution to make sure no game operator goes under in the future. Look at Fantasy Phenoms: 12+ years in the industry, seemed like a revenue model that took in more than it paid out and yet one day all funds are gone and players aren't paid for 2014. They were never in the FSTA that I know of and yet they ripped consumers off, and now the FSTA should have prevented it? How? Who is the next company to do the same thing, whether they are an FSTA member or not? There are dozens of daily fantasy games who are FSTA members and non-FSTA members who are paying off high percentages in prizes. Will all of them make it? Who knows.

I feel your frustration on unpaid prizes, but the FSTA isn't the answer there. Heck, the legal system wasn't even there to help consumers after the fact. If there was a way for any of us in the industry - forget about the FSTA - to prevent fantasy games from going under before paying off all prizes we'd do it. Any one of us would step in and do it, but like you the consumer we usually don't see it until it's too late. I wish I could pick the next fantasy game to go under, but even though I see some red flags around the block I can't actually pick them out.

I'm not an apologist for the FSTA, but they are spending funds and working hard with legislators to get the exempt states in the fold. It would be a big help. And we did some good things years ago involving the CDM vs. MLB Advanced Media suit, demographic surveys, and more. But if there was one thing we'd all like to solve it's prizes being paid in full by every fantasy company on time and in compliance with IRS laws. That's one goal that we haven't accomplished yet.

[KJ Duke]

I don't know of any industry organization that is set up to guarantee customer assets. Businesses in every industry go bust everyday; suppliers and sometimes customers pay the price. Most industry organizations are created by its larger participants to lobby lawmakers, share ideas and promote growth. Regulatory authority is generally in the hands of regulators, and even those industries that have self-regulatory bodies to an extent are generally regulated first by reg agencies. This industry is still in its infancy in the bigger picture.

If a solution emerges at some point down the road - something more likely once legal issues surrounding the industry are clearer - it is far more likely to be a private for-profit entity for clearing payments than an industry group.

[Cocktails and Dreams]

I don't agree. All of the current full season companies would benefit by finding a solution. You have no idea how much business has been lost by the stiffing in the full season contests. As for fanfuel and other daily games, no daily game has screwed anyone. It is a full season problem so far. And the full season companies should figure it out before the daily games take all of their business.

Lets see. If one was playing a phenoms league. They get screwed. You think they are going to put funds in full season when daily games have had no such issues? Probably not. If the funds are banded together and insured amongst the full season industry participants you can easily get a superior return on investment. This benefit while also having player funds safe and secure. But the fact of the matter is the FSTA never has done anything about it and it doesn't sound like they ever will. And that is why it will continue to be a joke as far as the players are concerned, at least those I know.

Even worse is the fact that it easily could lead to the demise of the full season industry, which is why I feel strongly about it. I would guess baseball will be less popular in a full season format this year than in a long while. And it likely will trickle into football eventually. People have limited funds. And when full season sites screw people and nothing is done about it, it is much easier to play daily. If I didn't care I wouldn't mention it.

Obviously it is not your fault Greg. But you are on the board of directors so I can at least voice my concerns, and I will do the same with other members of the board that I respect. I cannot imagine what will happen if a big daily company goes under. It could ruin the entire fantasy industry. If the full season companies had something in place, perhaps it wouldn't be the end for them as well when new laws are written. I honestly think players would migrate to the companies that were a part of an insured group where monies were held securely, rather than opting for a little better rake at a company that chose not to be part of an industry standard. The sky is the limit with a little creativity, rather than being one big death blow away from being put out of existence, even if it not your company that creates that death blow.

[Cocktails and Dreams]

I don't know of any industry organization that is set up to guarantee customer assets. Businesses in every industry go bust everyday; suppliers and sometimes customers pay the price. Most industry organizations are created by its larger participants to lobby lawmakers, share ideas and promote growth. Regulatory authority is generally in the hands of regulators, and even those industries that have self-regulatory bodies to an extent are generally regulated first by reg agencies. This industry is still in its infancy in the bigger picture.

If a solution emerges at some point down the road - something more likely once legal issues surrounding the industry are clearer - it is far more likely to be a private for-profit entity for clearing payments than an industry group.

It doesn't mean there cannot be. And the more stuff like this that happens in our beloved industry, the more likely that there will not be a beloved industry. That is why I would like to see this organization do something about the problems that exist.

[KJ Duke]

I don't know of any industry organization that is set up to guarantee customer assets. Businesses in every industry go bust everyday; suppliers and sometimes customers pay the price. Most industry organizations are created by its larger participants to lobby lawmakers, share ideas and promote growth. Regulatory authority is generally in the hands of regulators, and even those industries that have self-regulatory bodies to an extent are generally regulated first by reg agencies. This industry is still in its infancy in the bigger picture.

If a solution emerges at some point down the road - something more likely once legal issues surrounding the industry are clearer - it is far more likely to be a private for-profit entity for clearing payments than an industry group.

It doesn't mean there cannot be. And the more stuff like this that happens in our beloved industry, the more likely that there will not be a beloved industry. That is why I would like to see this organization do something about the problems that exist.

I don't see any viable way a group like this becomes a holder/guarantor of assets. Best case scenario would be that members submit to an independent financial review to a group like the FSTA for review by a financial analyst to receive a rating such as a debt rating agency like Moodys or S&P would provide.

[CC's Desperados]

I don't agree that this is a full season problem only.

There were multiple daily companies on the ropes when other daily games companies absorbed them. I believe this was done to project the big daily sites from any negative publicity that may stall the progress of their game.

[Greg Ambrosius]

The FSTA will always be a joke until something is actually done to protect player investments. Until there is something along the lines of an FSTA bank where all contests hold the prize winnings, it always will be a joke in my eyes. It comes across to me as a big insignificant waste of time. Until something is done to enforce payouts I have learned nothing. Players know who is the best at what. We don't need to see things awarded in what seems to amount to a political advertising type of convention. We know that the NFFC is awesome at hosting live drafts. We know that other companies do other things better. The FSTA has never given a rats ass about what is the most important thing. And it will continue to be a joke until it does. Considering the amount of respect I have for so many board members on that thing, it is mind boggling how they cannot figure that out. No way I would ever be part of such an organization without helping solving that problem.

Chad, you know I LOVE your passion on this subject and I'm with you every step of the way when it comes to protecting the industry from unpaid prizes. Again, we started this trade association in 1999 and called it The Fantasy Sports Players Association because our No. 1 goal was to protect the players. Believe it or not, in 1999 companies not paying prizes was an even bigger problem than it is today and one of the biggest companies in the industry at that time folded without paying off prizes after promising a ridiculous grand prize. Smaller companies were doing the same thing. The FSPA did give a rat's ass at that time and I believe they still do, but finding that one solution isn't as easy as it sounds.

We couldn't force owners to put their prize money in a fund managed by the FSTA back then, nor can we do that today. There isn't any one easy answer, especially when all game operators aren't part of the FSTA. I mean, for high stakes, should STATS, FFPC and FFWC all give their prize money to the FSTA so that all prizes are secured? You may say yes, but who are we worried about here that won't pay out prizes? And when Fantasy Phenoms goes under -- a company that runs Dynasty leagues mainly and isn't high-stakes -- it's a stain on the season-long games? They aren't even an FSTA company and they aren't even a one-and-done season-long contest, yet their stupidity after years of paying on time has suddenly brought a stain on the season-long games? Maybe, but it's not a true reflection for this part of the industry.

If there is one big concern that the FSTA has now it is the daily games. There are so many of them running at a loss to gain market share that something has to give and our industry can't afford to have any of these companies do that. There's no way to manage all of that prize money from the FSTA's standpoint -- I mean we're talking close to $1 billion now -- yet you say the season-long games are more of a risk to fantasy owners than daily games are. I think they are both a risk, but the bigger black eye right now would come from the daily games.

I can understand why some people are playing daily games rather than season-long games, but I would hope nobody is running away from the NFBC because they are worried about getting their prize money. We're not Fantasy Phenoms. And we can't worry about all of the other contests. We know how easy it is to take in entry fees, pay out prizes and still have enough left over for expenses and yes, even profit. It's a doable business. If you manage your guaranteed prizes correctly you can grow each year and we plan on growing this year with really no other competitor in the high-stakes space. I know DFS will grow, but I also know that not every daily game will survive the season. The competition is just too intense there and something has to give, even if it is acquisitions.

I wish we had the perfect answer here, but personally all I can say is that there will NEVER be a payout issue here. I hope and pray the rest of the companies in the fantasy sports industry can say the same thing.

[Greg Ambrosius]

I don't know of any industry organization that is set up to guarantee customer assets. Businesses in every industry go bust everyday; suppliers and sometimes customers pay the price. Most industry organizations are created by its larger participants to lobby lawmakers, share ideas and promote growth. Regulatory authority is generally in the hands of regulators, and even those industries that have self-regulatory bodies to an extent are generally regulated first by reg agencies. This industry is still in its infancy in the bigger picture.

If a solution emerges at some point down the road - something more likely once legal issues surrounding the industry are clearer - it is far more likely to be a private for-profit entity for clearing payments than an industry group.

It doesn't mean there cannot be. And the more stuff like this that happens in our beloved industry, the more likely that there will not be a beloved industry. That is why I would like to see this organization do something about the problems that exist.

I don't see any viable way a group like this becomes a holder/guarantor of assets. Best case scenario would be that members submit to an independent financial review to a group like the FSTA for review by a financial analyst to receive a rating such as a debt rating agency like Moodys or S&P would provide.

My one thought here is that the companies who went under recently all likely would have had a 4 or 5 star rating before taking the money and running. I mean, Fantasy Phenoms paid prizes for 12+ years without a hiccup before this year. Heck, even WCOFF was the biggest high-stakes company in the industry, had paid prizes for 9 straight years and they had a record year for revenue in 2010 and should have had enough money to pay off football prizes. No way they would have had a low rating at that time before not paying off prizes. The same things could be said for Fantasy Jungle, AFFL.com and Ant Sports, right?

These guys do stupid things as private owners and the consumer gets hurt. No rating agency could have prevented these bad scenarios and no consumer saw it coming or they wouldn't have given them their hard earned money. I just don't see the simple solution that Chad is asking me as an FSTA board member to come up with, and trust me, I want it as badly as Chad does. As he says, these other stupid business decisions could and probably has affected my business. When daily games are more trusted than our business, which has been around 11+ years now and paid off over $25 million in a timely fashion each year, that's disconcerting.

[Greg Ambrosius]

I don't agree that this is a full season problem only.

There were multiple daily companies on the ropes when other daily games companies absorbed them. I believe this was done to project the big daily sites from any negative publicity that may stall the progress of their game.

I'd be surprised if there isn't more consolidation in this space very soon. With the announcement that ESPN will enter the daily space starting in football, something has to given. You can't have 3+ dozen daily companies when 2-3 own 90 percent of the business.

Don't get me wrong, I'm all for DFS and what they've done for our industry. They're bringing in first time fantasy players and I'm sure for some of you it's allowed you to make some good money. From my standpoint, the one thing they can't do that we can do is offer off-season drafts and I believe people still love to draft and still love to manage a team from start to finish. It's my job to create more games that allow you to draft every day of the off-season and easily manage your teams. When everyone has decided that they just want to pick salary cap games during the season, then I'll retire. But until then, I think there's a market for us and our players and we'll continue to innovate enough to keep folks here.

[Gekko]

I don't agree that this is a full season problem only.

There were multiple daily companies on the ropes when other daily games companies absorbed them. I believe this was done to project the big daily sites from any negative publicity that may stall the progress of their game.

Agreed. Anyone thinking this is contained to only season long games is not thinking this through

[CC's Desperados]

I don't agree that this is a full season problem only.

There were multiple daily companies on the ropes when other daily games companies absorbed them. I believe this was done to project the big daily sites from any negative publicity that may stall the progress of their game.

I'd be surprised if there isn't more consolidation in this space very soon. With the announcement that ESPN will enter the daily space starting in football, something has to given. You can't have 3+ dozen daily companies when 2-3 own 90 percent of the business.

Don't get me wrong, I'm all for DFS and what they've done for our industry. They're bringing in first time fantasy players and I'm sure for some of you it's allowed you to make some good money. From my standpoint, the one thing they can't do that we can do is offer off-season drafts and I believe people still love to draft and still love to manage a team from start to finish. It's my job to create more games that allow you to draft every day of the off-season and easily manage your teams. When everyone has decided that they just want to pick salary cap games during the season, then I'll retire. But until then, I think there's a market for us and our players and we'll continue to innovate enough to keep folks here.

Daily baseball burns out fantasy players over time. It is way more work that the season long games. The rainbow prize is attractive, but a fantasy player could lose his season long bank roll very quickly in the daily baseball season. This leave them on the sidelines for long parts of the season. Someone has to figure out a football balance for daily baseball that compares to the NFL experience. Something to create high volume interesting on one day of the week. 180 days of daily baseball sucks the life out the game and it crushed your life personally.

Last year Fanduel and DraftKings eliminated the low dollar player from having the life changing dream. It just proved that they don't have enough players to support their big prize pools, which leads to the deep pockets having a huge edge.

Any lost season long players will return when they see it brings longer entertainment for more fixable dollars.

[KJ Duke]

My one thought here is that the companies who went under recently all likely would have had a 4 or 5 star rating before taking the money and running. I mean, Fantasy Phenoms paid prizes for 12+ years without a hiccup before this year. Heck, even WCOFF was the biggest high-stakes company in the industry, had paid prizes for 9 straight years and they had a record year for revenue in 2010 and should have had enough money to pay off football prizes. No way they would have had a low rating at that time before not paying off prizes. The same things could be said for Fantasy Jungle, AFFL.com and Ant Sports, right?

If done superficially you're right, no help at all.

But not if the due diligence is .... diligent. A company's payout history should have minimal bearing on a rating of how secure player funds are, since we all know that as long as a company is growing it can use cash from new entries to fund old payouts.

A high rating should require either funds in escrow to pay players or a sufficient balance sheet and/or cash flow along with management controls.

[Tom Kessenich]

My one thought here is that the companies who went under recently all likely would have had a 4 or 5 star rating before taking the money and running. I mean, Fantasy Phenoms paid prizes for 12+ years without a hiccup before this year. Heck, even WCOFF was the biggest high-stakes company in the industry, had paid prizes for 9 straight years and they had a record year for revenue in 2010 and should have had enough money to pay off football prizes. No way they would have had a low rating at that time before not paying off prizes. The same things could be said for Fantasy Jungle, AFFL.com and Ant Sports, right?

If done superficially you're right, no help at all.

But not if the due diligence is .... diligent. A company's payout history should have minimal bearing on a rating of how secure player funds are, since we all know that as long as a company is growing it can use cash from new entries to fund old payouts.

A high rating should require either funds in escrow to pay players or a sufficient balance sheet and/or cash flow along with management controls.

Greg and I were privy to the WCOF financials at one point since Fanball looked into buying them before they ended up buying us. So we saw potential warning signs. But even at that time there was really no way (in my opinion) to see what was eventually going to happen. Pursuing us in baseball with an ill-advised prize structure was a horrible business decision and they began bleeding money as a result but even then I don't think anyone anticipated the entire entity going under.

So I guess what I'm wondering is how would such ratings be conceived and applied? Like Greg said, I'm not sure there's a perfect system that could be implemented. I'm sure you will find plenty of long-time players in WCOFF, AFFL, Fantasy Jungle, Phenoms etc. who would have sworn by those companies before the chit hit the fan. And as you know these aren't people lacking intelligence. Many of the top fantasy players in the country were burned by one or more of these groups.

That's one reason Greg and I have always been transparent when it comes to our signups. I'm not saying those who do not are being deceitful so please don't make that assumption. But you can look at our contests, the prizes we're offering and the signups we're generating and figure out if we're overextending ourselves and putting our prize winners in potential jeopardy. We work very hard to put plans in place every year that are financially intelligent. There are certainly other aspects to take into consideration but I think that's always a good place for the player to start.

[KJ Duke]

So I guess what I'm wondering is how would such ratings be conceived and applied? Like Greg said, I'm not sure there's a perfect system that could be implemented. I'm sure you will find plenty of long-time players in WCOFF, AFFL, Fantasy Jungle, Phenoms etc. who would have sworn by those companies before the chit hit the fan. And as you know these aren't people lacking intelligence. Many of the top fantasy players in the country were burned by one or more of these groups.

That's one reason Greg and I have always been transparent when it comes to our signups. I'm not saying those who do not are being deceitful so please don't make that assumption. But you can look at our contests, the prizes we're offering and the signups we're generating and figure out if we're overextending ourselves and putting our prize winners in potential jeopardy. We work very hard to put plans in place every year that are financially intelligent. There are certainly other aspects to take into consideration but I think that's always a good place for the player to start.

I could easily conceive and apply, as could a decent credit analyst with knowledge of how fantasy companies operate. Companies would be required to submit/update certain information periodically for analyst review to achieve and maintain a rating. Failure to do so would move them to an "unrated" or worse category. There would be straightforward guidelines for achieving certain ratings. Tenure alone doesn't say much as we've seen with wcoff, jungle and whoever was the latest ... you can run your business with high-risk practices or excessive leverage and everything can seem fine until circumstances change.

It would no doubt be helpful for operators like the NFBC to stand apart from the fly-by-night schemers.

[Greg Ambrosius]

I could easily conceive and apply, as could a decent credit analyst with knowledge of how fantasy companies operate. Companies would be required to submit/update certain information periodically for analyst review to achieve and maintain a rating. Failure to do so would move them to an "unrated" or worse category. There would be straightforward guidelines for achieving certain ratings.

It would no doubt be helpful for operators like the NFBC to stand apart from the fly-by-night schemers.

What rating would you put on the daily contests today who need to generate VC money to keep paying out prizes? And what rating would you put on the daily companies that are paying more in prizes than revenue but hoping for an acquisition soon? I agree the Ratings would help those of us who have paid in full every year and are very sustainable, but I'm not sure it really shows the true red flags that something is about to happen because even those with low Ratings may be acquired and be just fine. Or they may just go away, you never know.

Seems easier to do in finance than fantasy sports!!

[mdecav]

I work for a rating agency though no longer in the analytic end of work. It's doubtful any of these entities are investment grade.

[KJ Duke]

What rating would you put on the daily contests today who need to generate VC money to keep paying out prizes? And what rating would you put on the daily companies that are paying more in prizes than revenue but hoping for an acquisition soon?

Unless/until both of those companies had significant balance sheet strength they would certainly be in the very high risk category.

[Greg Ambrosius]

What rating would you put on the daily contests today who need to generate VC money to keep paying out prizes? And what rating would you put on the daily companies that are paying more in prizes than revenue but hoping for an acquisition soon?

Unless/until both of those companies had significant balance sheet strength they would certainly be in the very high risk category.

Exactly, yet major media companies and even the leagues are investing in them now. And once ESPN gets involved and maybe even the NFL, look out. They suddenly become good investments, so the Rating system would look flawed.

What would the season-long high-stakes companies that are still alive get for Ratings? And as Tom said, what would WCOFF have gotten as a Rating BEFORE they jumped into baseball? It would have been a good Rating, but once you did the math on baseball payouts and their investment in Randy Moss and other side stuff, you could see it didn't add up and yet people still jumped into 2011 baseball. They needed owners pushing their prize money to future events to make it work and the NFL strike of 2011 made a run on the bank and there was no money there. I don't think the Rating system would have prevented any of that.

Chad is looking for answers to make sure every fantasy company pays off every penny of prizes. We want the same thing, but our competitors keep letting us down. He says no daily company has done that yet and if that's true I couldn't be happier. But let's hope that continues and that the rest of our season-long friends don't screw up again. How we prevent that is beyond me and definitely beyond the FSTA.

[KJ Duke]

And as Tom said, what would WCOFF have gotten as a Rating BEFORE they jumped into baseball?

Rating are subject to change, just like on Wall Street ... if the baseball plan didn't make financial sense the player community would see the resulting downgrade and at that point they've been warned. Not only might that have saved people from investing in wcofb baseball teams or football the next season, the downgrade threat could potentially change management behavior for the better before the disaster happens.

But to answer the question directly, from what I know of the situation the rating may well have been less than stellar because: a) funds were not escrowed, and b) the balance sheet and cash flow may not have provided an adequate cushion for a substantially increased investment. Likewise, the ownership structure and funding was convoluted, another red flag.

Risks CAN be analyzed by someone that knows the industry and finance. But there needs to be a structure in place to do it, as a pure outsider it's all just speculation, even as an analyst. If the FSTA wants to hire me and require members to answer my questions and provide data, players would be better protected so long as they pay attention to the analysis. It still wouldn't save everyone though, since you can't insure stupidity.

[COZ]

I started to write something last night in response to Chad's prior post and saved it to finish later but it became a bit outdated after KJ's posts, which picked up on many of the ideas I was going to make. His was more from a financial analyst point of view and rating the strength of the business, mine is more from a lawyer's point of view about handling and protecting money. I think the anger of Chad's post was borne more out of the back-slapping, self-congratulatory nature of the FSTA Convention and celebrating the growth of the "industry" and bragging about the numbers, and the money, while yet another "Industry" competition has stolen consumer money. Yes, stolen. This is not about a company losing money and going belly-up, this is theft, misappropriation, stealing, and whatever other label you want to put on it.

And I think this is where Chad's anger, and in my opinion justifiable anger, is borne from. I think the concept of a business rating is on the right track, but to me, as a lawyer with very strict rules on how we handle money, specifically client's money, it starts with these companies that run major contests and the FSTA as the umbrella organization to set up guidelines and rules about how consumer's money in these contests is to be handled. To me the issue is NOT about guaranteeing a successful business operation, no one can do that, but what can be done is to protect the entry fees of the customers by not allowing the contests to control and co-mingle the entry fees. As a lawyer, the biggest no-no, which leads to many lawyers suspensions, is co-mingling of funds, and that is as simple as placing your client's money (of which you have not earned yet) into your general operating account, even though there is no intent to even steal or misappropriate the funds. The mere mixture of your clients money with your own account is co-mingling. There are a multitude of reasons why this is not allowed that I don't want to address, but basically it is because it is the client's money and it must be kept separate. It is required to be placed into a client trust account, which means it is actually the property of the client, not the lawyer. The same concept needs to be applied to the entry fees of these major contests, with the FSTA leading the way, setting guidelines on how to handle the money, how to set up an escrow account, etc. Maybe these contests agree to allow the FSTA to act as a trustee over the escrowed accounts, that the consumer's money is placed directly into these escrow accounts and controlled by the FSTA as trustee. Most importantly, the money is not the property of, nor controlled by these fantasy companies, it is not placed into their general business operating accounts, and it is not co-mingled, but instead it is placed into separate escrowed accounts. Bottom-line, the entry fees are not be used to "float" the business operation. It is the consumer's money and then that money is paid for prizes, and the 20% profit then dispersed back to the game operators. Until that is done, all of these contests are misappropriating OUR money. And when a contests then goes belly-up, the FSTA can simply refund everyone's money individually back to the consumer since it is the property of the consumer, not the company. The FSTA could then certify through a "rating" or "certification" that these contests agree to be bound by these guidelines and then the FSTA could give a "seal" akin to the BBB that gives the consumer's some level of confidence in various contests. THAT is what the FSTA can do.

The FSTA, as the trade association over this "billion" dollar industry that they always love to brag about, could also require it's members, as small portion of their membership fees, to go towards an insurance policy to protect consumer's who lose money in these scams...I mean contests. In Illinois, as part of our annual registration dues, a portion of our registration dues goes to fund victim's who had money stolen from unscrupulous lawyers. THAT is what the FSTA can do.

The FSTA, and I'm not even sure if this possible, could start some sort of licensing and disciplinary committee akin to doctors and lawyers professional regulatory commissions to ensure some protection to the consumers. There is a lot the FSTA can do to protect consumers, and maybe some of this is beyond the scope of a mere Trade Association, but something must be done to actually protect people's money, otherwise the Fantasy "industry" will be no different than...and will attract the same criminal-types as...and have as much public trust and integrity as...the sports memorabilia "industry."

COZ

[KJ Duke]

Excellent post COZ, and likely a better solution than rating these companies (more of a band-aid type solution). So, my only caveat would be the cost of escrow and administering fund disbursement since the industry isn't exactly operating on fat margins. You would know these costs better than me; I'd be interested in how many basis points you think that would cost. Although self-regulation along these lines would probably end up being less costly than gov't regulation down the road, and maybe the industry can avoid that if it can get in front of the problem.

Also, I would suggest that only the prize-payable portion need be in escrow not the entirety of all entry fees, that would save at least a few pennies.

[COZ]

Excellent post COZ, and likely a better solution than rating these companies (more of a band-aid type solution). So, my only caveat would be the cost of escrow and administering fund disbursement since the industry isn't exactly operating on fat margins. You would know these costs better than me; I'd be interested in how many basis points you think that would cost. Although self-regulation along these lines would probably end up being less costly than gov't regulation down the road, and maybe the industry can avoid that if it can get in front of the problem.

Also, I would suggest that only the prize-payable portion need be in escrow not the entirety of all entry fees, that would save at least a few pennies.

Basis points? It's minimal costs, if any. it's basically just opening a trust account. I'm not even charged to have one, I believe banks are required to offer these accounts, it's called an IOLTA (Interest on Lawyer Trust Account) account. The interest earned on our trust accounts is actually used to fund various charitable legal services. Hell, the interest earned while our entry fee money is sitting in the Trust account could be used to pay for premiums on an insurance policy to guarantee prizes.

So for example, the FSTA could require (obviously they can't force every game operator to participate, it has to be voluntary), in order to get their certification or seal or whatever, all High Stakes Fantasy Game Operators to get a permit/license and then to establish a trust account and name the FSTA as Trustee over that account. Maybe allow the game operators to take their 20% profit right away, but then at least have the remaining 80% sit in the account until the contest concludes.

The reality is, this will not happen, since as Greg alluded to, there is an attitude of, "I don't need anyone to tell me how to handle our money." Well, yes you (in the plural Spanish "usted"-sense of the word) do as has proven by these various other contests. Abuse by the unscrupulous leads to regulation of the scrupulous. And for the reason as stated below, of game operators not wanting to lose control of "their" money, it likely won't happen until the government steps in, and until some sort of commission like the Gaming Commission in Las Vegas steps into regulate the High Stakes Fantasy "industry." Hell, as has been discussed, even past performance of payouts is no guarantee of future performance of payouts (where have I heard that before?). Until then, the only protection we as consumers have to go by is the 'ole "well he seemed like a great guy" type crap.

The devil is in the details, and I for one, do not have all the answers. But the first step is to prevent co-mingling of entry fees from business operations, and that can only be accomplished through creation of escrow accounts, taking control of the money from the game operators, and designating the funds as property of the consumers not the game-operator. Most likely, this will only be accomplished through government regulation and laws, and not a mere voluntary trade association.

COZ