This Man Wants To Beat FanDuel And DraftKings At Their Own Game
Vic Salerno always puts his left shoe on first. He does not carry $50 bills. To avoid jinxing a team — his favorite being whichever is on a winning streak — he watches their games on the same television and drives the same route to work. He believes in rules, and that if you follow them, no matter how seemingly arbitrary, you'll get the outcome you want.
All gamblers have their superstitions. But Salerno, an amiable 72-year-old with a raspy voice and a cleft chin, isn't just an ordinary gambler. The Los Angeles native, who now makes his home just outside Las Vegas, is a sports-betting legend who almost single-handedly brought his industry into the wired era.
He computerized betting tickets. Helped usher in the era of over-the-phone bookmaking. And made sure that when it came to sports betting, there was an app for that. He is "one of sports gaming's great innovators," according to the American Gaming Association, which named him to its hall of fame last year. His longtime friend Michael Knapp calls him "the godfather of the industry," adding, jokingly, that "it has nothing to do with the fact that he has a vowel at the end of his name."
But now he's taking on a pair of tech titans in a fight that pits his rule-following philosophy against the move-fast-and-break-laws ethos of Silicon Valley. It's a fight with hundreds of millions of dollars at stake, money that the established gaming industry in Nevada largely missed the boat on and may now want to capture.
On a hot August day, Salerno steered his 2011 Lexus convertible to an office park two-and-a-half miles south of the Strip. On a floor newly subleased from a real estate firm, in what he likes to call his "war room," flat-screen TVs streamed sporting events from everywhere in the world. In four other rooms, a handful of employees alternated between watching games out of the corners of their eyes and typing on laptops.
"Right now, I'm going crazy, to tell you the truth," Salerno said, laughing. "But I feel great." On this day, Salerno was in crunch mode on USFantasy Sports, a new daily and weekly fantasy sports startup that launched last week — at first only in Nevada sportsbooks and casinos, but, if all goes according to plan, nationwide and on smartphones by year's end.
It won't be easy. Salerno is up against many things — startup costs, consumer whims, a complicated and inefficient regulatory apparatus — but most immediately, he's up against FanDuel and DraftKings, behemoths that have dominated the industry for the past half-dozen years. You know them because you're one of the millions of customers who assemble football or baseball lineups on their sites, hoping to score payouts worth hundreds or thousands, maybe even millions. Or you know their ads, which swallowed your TV and phone last fall.
Or perhaps you've followed the regulatory crackdown that, since last October, has driven the industry to the brink of extinction. Like Uber, Lyft, and Airbnb, other self-described disruptors that operated in legal gray zones and got in trouble, daily fantasy sports companies are now at a major moment of reckoning.
Salerno thinks he's come up with a daily fantasy game that does right by everyone. In his model, customers wager in a style that resembles horse-race betting, one already legal in most of the country. If Salerno is successful, he'll have not only staked out profitable territory in the high-risk, legally ambiguous, crowded, and very, very lucrative world of daily fantasy sports, he'll have invented a fairer — and, crucially, more legal — way to play the game, showing two of the world's hottest startups that it pays to play by the rules.
Either that, or he'll have sacrificed time, money, and a hard-earned reputation for a product nobody wants to use.
USFantasy Sports President Vic Salerno poses in the "war room" at his office in Las Vegas.
Jason Ogulnik for BuzzFeed News
Before Salerno was a Vegas legend, before he went up against FanDuel and DraftKings, he was a dentist.
After dental school in Wisconsin, he moved back to Southern California, where he'd grown up playing football, and into an eighth-floor office that overlooked the Marina del Rey harbor, where he made $200,000 a year working three and a half days a week. But he was bored, and soon channeled his energy into gambling. On a Friday, he might start the afternoon at the now-closed Hollywood Park racetrack, head to the evening horse races at Los Alamitos, and hop on an 11 p.m. flight to Vegas. "The sports-betting and sports entertainment business — once it gets in your blood, it's such a high," Salerno told me.
In 1978, Salerno took over the Vegas sportsbook Leroy's Horse and Sports Place from his then-father-in-law. The place offered smoke, 50-cent pickled eggs, a floor full of empty beer bottles and losing tickets, and unruly patrons nicknamed Dick the Pick and Bobby the Midget. Once, a camera crew was getting ready to film the crowd, and Salerno warned them to be careful: "Some of our customers might be on the lam."
"You can't be a dentist and then be a bookmaker," retired Vegas oddsmaker Michael "Roxy" Roxborough recalled thinking when Salerno showed up. "The professionals will just spit him out."
But Salerno, always an early adopter, made his mark. He was among the first operators to allow people to place bets over the phone. In 1984, he co-developed hardware and software that let patrons trade their betting slips for computer-generated tickets and cashiers instantly look up every bet and payout; the first-of-its-kind system became a virtual monopoly across Vegas when Nevada required all race and sports books to be computerized. In 2002, Salerno developed one of the first self-service kiosks where gamblers could place sports bets 24 hours a day. In 2010, he masterminded the first regulator-approved app to let people in Nevada put money on a game without getting off the toilet.
"The sports-betting and sports entertainment business — once it gets in your blood, it's such a high."
By then, a transformation was taking over fantasy sports. Traditionally, it had worked like this: You picked imaginary team lineups at the start of a season and "played" other teams each week. At the end of the season, whichever team racked up the most wins, based on how its players played in real life, won. But starting around 2007, a new kind of site let players enter dozens, even hundreds of contests every day and week, for entry fees from $1 to $1,000 and prizes as high as $2 million.
In 2009, FanDuel was founded; headquartered in New York City, it now has $360 million in funding from Google, Time Warner, Comcast, and NBC, and partners with 15 NFL teams and about as many NBA teams, plus the NBA at large, which also has an equity stake. Boston-based DraftKings, founded in 2012, has raised nearly $600 million from Major League Baseball, Major League Soccer, the National Hockey League, and, as of this month, a firm co-founded by the Washington Capitals and Wizards' owner. NASCAR, Major League Baseball, a dozen NFL teams, and nine basketball teams are just some of its partners. Both companies have been reportedly valued at more than $1 billion. More than 57 million people overall play fantasy sports.
During last year's NFL season, FanDuel and DraftKings muscled their war chests and connections to flood the world in videos of fist-pumping bros waving banner-sized checks. The brands spent a combined $208 million on nearly 38,000 TV ads, according to iSpot — more than half the $371 million spent by the pizza industry. For three weeks, an ad aired every 90 seconds.
"Even the novice can come in and spend one or two dollars and win ten, twenty thousand dollars," one commercial said. Another promised, "It's the simplest way of winning life-changing piles of cash."
And then in came the law.
On Oct. 5, 2015, the New York Times reported that a DraftKings employee had won $350,000 at FanDuel. The next day, New York Attorney General Eric Schneiderman was reportedly investigating whether the companies were letting staff use insider information to play each other's sites. (The initial DraftKings employee was later cleared of such charges.)
As Schneiderman dug into their businesses, he came to believe they were using "deceptive advertising" to lure customers into an "unregulated online gambling operation." By emphasizing instant gratification, rather than long-term strategy, they set up consumers for addiction, he argued. Moreover, whether they realize it or not, amateurs are facing off against a handful of "sharks" who employ deep research, deeper pockets, and, until recently, off-site computer scripts that automatically adjust hundreds of lineups. DraftKings data showed that nearly 90% of daily fantasy players had overall negative returns in 2013 and 2014, Schneiderman reported. And in the first half of last year's baseball season, McKinsey & Company estimated that just 1.3% of players won 91% of the profits. (Some in the industry dispute these figures.) The consistently top-ranked player, Saahil Sud, told Bloomberg in 2015 that he'd banked more than $2 million that year. Every day he spent eight to fifteen hours, and an average of $140,000, entering hundreds of baseball and football contests.
This activity has defied easy legal definition. "Fantasy sports" are federally allowed, thanks to a 2006 online gambling ban that excluded what was then viewed as a low-profile, season-long hobby among friends, not a big-jackpot daily contest. But "sports betting" is gambling, according to a 1992 law, and permitted in only four states. (Even though office pools happen every day, most are illegal.)
DraftKings CEO Jason Robins has described his service as "almost identical to a casino."
Several attorneys general argue that predicting which athletes will win, when their performance is beyond your control, is mostly a matter of chance. They note that DraftKings CEO Jason Robins has described his service on Reddit as "almost identical to a casino." FanDuel and DraftKings, for their part, insist daily fantasy is not gambling, but another breed of game altogether. If a tiny minority wins most of the jackpot, they argue, that's even more proof that picking successful lineups predominantly requires skill. "If it's chance-based," one industry veteran explained, "you should have winning percentages that look more like 50–50."
"You can't really drop an activity into a machine and it spits out a piece of ticker tape and it says it's 28% skill, 72% chance," said Chris Grove, publisher of Legal Sports Report, which tracks the industry. "Daily fantasy sports really reignited interest in that question of, 'What does it take to qualify for these exemptions from the definition of gambling?'"
Regulators began seeking answers last fall. Ten days after the New York investigation went public, Nevada's attorney general was the first of several to declare that daily fantasy sports were gambling. Blocked from operating without a license, FanDuel and DraftKings pulled out. And Salerno swooped in.
A digital billboard displays an advertisement for USFantasy Sports in Las Vegas.
Jason Ogulnik for BuzzFeed News
Two years earlier, in September 2013, Salerno met his friend Knapp, a gaming and race and sports books veteran, at Santa Anita Park in Arcadia, California, for a day of throwing back martinis and wagering on horses ("probably not very successfully," Knapp recalled). Salerno was basically retired, having folded Leroy's into a company called American Wagering and sold it for $18 million to William Hill, a British gambling corporation. The men got on the subject of FanDuel and DraftKings. Although the sites hadn't yet bubbled up into the mainstream, the duo were already wondering how far legislators were behind them.
FanDuel and DraftKings contests come in every size and style: one-on-ones, big tournaments, 50–50s that pay the top 50% of winners, "multipliers" that double your money, friends-only competitions. You assemble a team of athletes with assigned values (say $9,000 for a top quarterback) under a given "salary cap" (like $60,000); filling one slot can mean choosing from 100 athletes.
It's an impenetrably complex system, said Salerno, who rarely meets anyone who's "won money, or won one contest, or gotten money back ever." So at Santa Anita, Knapp proposed a simpler alternative based on the very track before them. Horse-race betting uses an accounting system called pari-mutuel wagering, conceived by a Frenchman in 1867. What if you were to bet on athletes like you bet on horses?
USFantasy's contests let you choose from 20 or so athletes according to position. Bet on Aaron Rodgers to "win" in a quarterback contest, and you collect if he gains more yards and scores more touchdowns than all other quarterbacks that week. For a "place" bet, you collect if Rodgers comes in first or second, and for "show," if he finishes first, second, or third. You could also make wagers like a "daily double," where you'd have to pick, for example, both the winning quarterback and running back. And for a $1 entry, a weekly $1 million jackpot rewards whoever picks the top performers in all the contests. Just like in horse-betting, all bets are pooled together before the games, taxes and the house's cut (in USFantasy, around 12%) removed, and the rest split among the winning tickets. Unlike FanDuel and DraftKings, USFantasy also shows odds changing in real time. If most people bet on Rodgers, their wagers won't pay as well as ones on much-maligned Mark Sanchez.
USFantasy Sports / Via usfantasy.com
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