Garrett Baldwin
The Daily Alpha - 10.06.15

Garrett Baldwin
The Daily Alpha - 10.06.15

Alternative Thinking on the DraftKings Scandal, ESPN’s Marketing Problem, Why We Can't Have Nice Things, Gambling Versus Gaming, and Kullman’s Exit from DuPont.

"It is absolutely akin to insider trading. It gives that person a distinct edge in a contest.”

Once again, this is why we can’t have nice things…

The New York Times reported on Monday that one-day fantasy site DraftKings is mired in a controversy. There are accusations that “employees were placing bets using information not generally available to the public.”

DraftKings and FanDuel have defended the integrity of the one-day fantasy industry after news broke that a mid-level content manager at DraftKings won $350,000 on his company’s rival site.

This story includes charges that the employee may have used information in a way that some compare to insider trading.

The information at the center of the controversy is the data tied to ownership of different players in daily contests. Dan King, a gambling lawyer in Miami, explained to the Times that this process mirrors insider trading.

Now, questions are emerging about how valuable data is protected and accessed by company insiders, what levels of regulations might be required in the future (for an unregulated industry), and whether this story undermines two businesses that have seen an huge boost in popularity (for reasons to be explained soon) in 2015.

But there's way more to this story... and that's why we're going even deeper.

“[Bill] Burr doesn’t take DraftKings’ explanation lying down, and essentially ridicules this opinion for a good five minutes. But at the same time he offers up a better argument DFS could use to win over the hearts and minds of the general public – yes we’re gambling but we’ve created a new exciting way to gamble.”

While reports on DraftKings and FanDuel are busy defending their integrity… they have a simple request to members of the media and advertisers.

Just don’t call “one-day fantasy games” a form of gambling.

After all, gambling is defined by “taking a risky action in the hopes of achieving a desired result.”

According to 45 U.S. states – and the self-regulating daily fantasy operators – DraftKings’ contests are a "game of skill." They’ve ingrained this myth so well in recent months that players and regulators are openly debating this at the highest levels of state government, and may soon breach the halls of Congress. 

Meanwhile, online poker is banned by Congress because it’s considered a “game a luck.”

The reality is that’s between both of these pastimes, there’s a distinction without a difference.

One-day fantasy sites are a form of gambling.

In fact, it’s a newer, perhaps better way to gamble.

And that’s completely okay. We’re all adults. Comedian Bill Burr has been arguing all year that DraftKings – his former advertiser – is a gambling product. They were sending him angry letters telling his producers to not refer to their games as a form of gambling. He never complied.

Finally, they cut him off in July.               

“A significant number of the whales at the top DFS sites are employees – often executives – of other sites.”

As this scandal unfolds, what is in question, and what will remain in question, is whether some individuals have a larger advantage than others on this site, and due to these disadvantages, will players continue to flock to this site – or will they turn away in large droves.  

On Sunday, an anonymous employee within the one-day fantasy sites industry told Legal Sports Report that “a significant number of the whales at the top DFS sites are employees – often executives – of other sites.” For everything you need to know on this controversy, be sure to read their full report from the weekend

Both DraftKings and FanDuel have said publicly that Ethan Haskill – the content manager who won $350,000  – didn’t do anything illegal.

The players he chose still had to outperform his competition. He still had to beat thousands of other participants, and his selected NFL players needed to put up big numbers and avoid the injury bug.

And that’s fair, for right now.

But that being said…


Haskell’s LinkedIn photo isn’t helping his case…

“I like the product, I like the company, I know the people who run the company and they’re good people. I really enjoy playing daily fantasy and I really enjoy doing it on DraftKings. I’d recommend them anyway, so if they want to send me a check to do it? You bet. Where do I sign?”

That’s ESPN Fantasy expert Matthew Berry in September discussing ESPN’s partnership with DraftKings (by partnership, DraftKings is paying him and his organization to sell their product.)

Matthew Berry has built an immensely successful career as the nation’s most popular Fantasy sports analyst. He regularly appears on ESPN, hosts a podcast, writes thousands of words a week on the topic, and has a bestselling book about his (and America's) love for Fantasy sports.

This year ESPN announced that it was partnering with DraftKings to “include branding and promotions across multiple platforms of both companies, including integration into ESPN’s digital properties and TV programming.”

A week into the season, Berry sort of went overboard with his endorsements.

It was as if he’d magically discovered sliced bread and was trying to convert an army of heathens into giving up their bagels and joining the new century’s revolution in wheat.

Berry wrote in his weekly column to address accusations that he’d sold out. He wrote that he really enjoyed the product, and for those reasons he was fully endorsing DraftKings. That still didn't sit well with everyone of his readers.

Here’s where it gets fuzzy: Disney, the parent company of ESPN, initially planned to purchase a $500 million stake in DraftKings earlier this year. The media giant got cold feet – presumably because they were concerns about the embracing of an organization with such close ties to something that “resembles” gambling.

ESPN is arguably the most significant sports brand today. Like the leagues they cover, they try to tip-toe around any link to any forms of gambling.

Instead, Disney executives accepted DraftKings’ commitment to purchase $250 million in content promotion and advertising over two years, with an option for a third year.

And boy, has that purchased a lot of online and television space.

Based on the advertising and the content that they feature prominently across their media channels, they might as well have done a reverse merger and renamed the entire channel DraftKings.

So, let’s address what should become a topic of debate right now...

This major news organization has a specific financial interest in a company that is pretending that it is not a gambling operation, one that is seeing the massive level of profits going only to a very small percentage of people, and one that has inadvertently revealed that some of the top winners on FanDuel are employees at FanDuel and vice versa. Let's hit each point.

Fantasy sports combine a game of mathematical skill, luck, and a form of betting. This is what we explored from an academic and journalistic perspective just a month ago as the season started in the September issue of Modern Trader. Anyone who says that Fantasy sports does not incorporate luck should chat with anyone who won a match-up two weeks ago by three points when Ben Roethlisberger blew his knee out on a freak play or this week when Calvin Johnson missed a touchdown by inches on the goal line.

Second, the whales are eating the minnows on a weekly basis on these sites. "In the first half of the 2015 MLB season, 91% of daily fantasy sports player profits were won by just 1.3% of players," according to authors Ed Miller and Dan Singer.” At the blackjack and roulette table, you’re getting better odds…

It’s hard to disagree with the Fiscal Times assessment that daily fantasy games are for suckers. That doesn’t mean they should be banned, but the advertising that continues to hit every 20 seconds implies that anyone with an internet connection can take home cash just by entering a promo code.

Third, regulation is needed.

But finally, though ESPN has initially covered this scandal, they haven’t done a good job disclosing that they do have a significant financial interest of the growth of DraftKings as an advertiser.

This was the same time of concern that many raised when George Stephanopoulos failed to disclose that he had received payments from the Clinton Foundation when interviewing Presidential Candidate Hillary Clinton over concerns about ethics at the foundation.

When it comes to journalism, credibility comes first.

ESPN needs to address this. The channel sold its editorial priorities to the alter of one-day fantasy sports games. Today, entire portions of its flagship shows are dedicated to offering gambling tips.

Baseball Tonight has been one of the greatest specialty sports shows for two decades. But like SportsCenter, it too is becoming harder to watch because of the over saturation of fantasy insight (and we all like and play fantasy sports.)

It’s been painful to watch America’s top baseball analysts Buster Onley and Tim Kurkjian pushed aside in the middle of a pennant race by “one-day fantasy analysts” to make room for a debate about which number-four starters to pick from two last-place teams and why we should gamble on DraftKings.

"We invested in GE because it is undervalued and underappreciated by the market despite what we believe is a transformation that will allow its world-class industrial businesses to drive attractive shareowner returns."

We have to address it…

In the end, Nelson Peltz won. He always does.

In a statement this morning, Peltz stated his goals for the Dupont Company in the wake of news that its chairman and CEO Ellen Kullman will retire on October 16.

More on that tomorrow, as we’ve taken up a lot of your time today…

In the meantime, be sure to look to Finalternatives for a breakdown of what’s happening in the hedge fund world today.


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