Episode 7: Little Big Short

Summary

Against the Rules with Michael Lewis

Episode 7: Little Big Short
Release Date: December 3, 2024
Host/Author: Pushkin Industries

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Introduction to Sports Betting’s Evolution

In Episode 7 of Against the Rules with Michael Lewis, Michael delves into the burgeoning world of legalized sports betting in America. He recounts his personal foray into sports gambling at Circa, a relatively new casino in Las Vegas, highlighting the initial excitement and subsequent challenges he faced when attempting to place bets through popular platforms like FanDuel and DraftKings, only to discover that sports betting remained illegal in his home state of California.

Michael Lewis (00:49): "I downloaded FanDuel and DraftKings on my phone at home in California, but they wouldn't accept my bets. That's how I discovered that sports betting was illegal in California, which in and of itself was weird."

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The Moral and Legal Battle Against Sports Gambling

Michael explores the resistance against sports betting in several U.S. states, primarily rooted in moral objections. He interviews Reverend Joe Godfrey, a lobbyist for Alabama's Southern Baptist churches, who articulates the religious and ethical arguments against gambling, citing biblical commandments that condemn covetousness and greed.

Reverend Joe Godfrey (06:28): "Gambling is a form of covetousness and greed. But the Bible says in Exodus 20, verse 17, you shall not covet your neighbor's... anything that is your neighbor's."

Despite these strong moral stances, Reverend Godfrey expresses a sense of impending defeat, acknowledging the relentless push from gambling forces and the weariness it causes among Christian communities.

Reverend Joe Godfrey (09:01): "The gambling forces never stop. They come back every year... churches get tired of the fight."

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Tribal Casinos and the Federal Legal Landscape

Transitioning from moral opposition, Michael provides a historical overview of casino gambling on Indian reservations. He explains how tribes like the Seminoles in Florida and the Chickasaw Nation in Oklahoma have leveraged gaming to generate significant revenue, often outpacing expectations and altering local economies.

Steve Ruddock, a sports gambling industry analyst, sheds light on the strategic maneuvers of tribes in the casino business, emphasizing their foresight and adaptability.

Steve Ruddock (12:40): "The San Manuel tribe... started making billions of dollars over the years. They donated to that hospital that was doing that. That's the difference of it."

However, the 2018 Supreme Court ruling that allowed states to legalize sports gambling introduced new challenges. Major companies like FanDuel and DraftKings aggressively entered the market, often sidelining tribal interests and establishing a dominant presence.

Gus Garcia Roberts (14:22): "These companies backed by Wall Street basically swooped into California, I think, kind of confident that they could do what they did in every other state."

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The Duopoly of FanDuel and DraftKings

A significant portion of the episode focuses on the oligopolistic control exerted by FanDuel and DraftKings over the sports betting industry. Michael interviews Jim Chanos, a renowned short seller, who initially bet against these companies based on their unsustainable business models. Although Chanos faced setbacks when DraftKings defied his predictions by thriving, he highlights a critical flaw in the companies' strategies: their reliance on encouraging bettors to make increasingly risky parlay bets.

Jim Chanos (25:04): "We made a fundamental error in that we modeled out the business based on it being the same economics as a typical Vegas sports book."

Michael explains how FanDuel and DraftKings have perfected the art of enticing gamblers into making multiple-leg parlays, thereby increasing their profit margins exponentially with each additional bet.

Jim Chanos (25:38): "What really has changed is because of the ease of gambling... people are making dumber and dumber bets."

Despite fierce competition attempts by traditional casinos and other new entrants, FanDuel and DraftKings maintain an overwhelming market share, buoyed by massive investments in marketing and proprietary data systems that outpace their rivals.

Sean Kelly (30:51): "It's 2 billion in marketing and 1 billion in technology."

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Tribal Resistance and Future Prospects

Victor Rocha, chairman of the Indian Gaming Association, discusses the strategic resistance by tribes against the encroachment of big sports betting companies. He underscores the tribes' suspicion of these corporations, viewing them as predatory entities intent on undermining tribal sovereignty and economic interests.

Victor Rocha (17:27): "We saw those pricks right on the horizon... We're going to plan it. We're just riding along."

Despite efforts to introduce tribal-led sports betting initiatives, such as partnerships with the Seminole Gaming's Hard Rock brand, tribes struggle to compete with the entrenched dominance and technological prowess of FanDuel and DraftKings. Rocha remains skeptical about overcoming the duopoly without substantial support and innovation.

Victor Rocha (21:21): "If you go out, kind of imagine out 20 years... What they're doing is a different business from the old sports book at a casino."

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Case Study: The Seminole Tribe’s Struggles

Michael narrates a case involving Danny Moses and his experience with the Seminole tribe's Hard Rock betting app. Moses identifies erroneous betting odds that could have potentially provided significant returns, only to find that the Seminoles voided his bet without sufficient explanation. This incident highlights the operational shortcomings and customer service issues within tribal sports betting platforms, further cementing the tribes' inability to challenge the market leaders effectively.

Danny Moses (36:06): "They canceled, didn't reach out to me, didn't call me... They didn't honor it."

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Conclusion: The Unstoppable Duopoly and Its Implications

Michael concludes by portraying FanDuel and DraftKings as formidable villains in the sports betting landscape—not merely because of their aggressive and sometimes unethical tactics, but because of their unparalleled efficiency and market control. He warns of the profound societal impacts of this duopoly, including its effects on athletes, college sports, and fan experiences.

Michael Lewis (39:13): "They make great villains because they're so incredibly good at what they do... The damage is already inflicting on athletes, on college sports, on how fans feel about the whole thing."

As the episode wraps up, Michael hints at future discussions involving gambling legends and old-school Vegas bookies, promising deeper insights into the evolving sports gambling empire.

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Key Takeaways

• Dominance of FanDuel and DraftKings: These companies have secured an 80% market share in sports betting through aggressive marketing, technological innovation, and data acquisition.

• Tribal Challenges: Native American tribes, despite their initial success in casino gambling, find it difficult to compete with large corporations in the sports betting arena.

• Ethical and Moral Opposition: Strong opposition from religious and moral groups continues to shape the legal battles over sports gambling legalization in various states.

• Economic and Social Impacts: The duopoly’s practices have significant implications for consumers, athletes, and the integrity of sports, raising concerns about addiction and exploitation.

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Notable Quotes

• Michael Lewis (00:49): "I downloaded FanDuel and DraftKings on my phone at home in California, but they wouldn't accept my bets."

• Reverend Joe Godfrey (06:28): "Gambling is a form of covetousness and greed."

• Jim Chanos (25:04): "We made a fundamental error in that we modeled out the business based on it being the same economics as a typical Vegas sports book."

• Victor Rocha (21:21): "If you go out, kind of imagine out 20 years... What they're doing is a different business from the old sports book at a casino."

• Michael Lewis (39:13): "They make great villains because they're so incredibly good at what they do."

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This episode of Against the Rules offers a comprehensive exploration of the current state and future trajectory of sports betting in America, highlighting the complex interplay between corporate dominance, tribal sovereignty, and ethical considerations.

Transcript

[Michael Lewis]

Pushkin.

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[Michael Lewis]

What can I get for you? I want to do 100 bucks on yes for the A's Yankees score in the first inning and I want to do 100 bucks on a parlay. That's obvious many months ago at a newish casino in Vegas called Circa, placing my very first two sports bets. I bet that yes, someone would score in the first inning of the A's Yankees game and I placed a parlay bet on the 76ers, the A's and the Denver Nuggets. Thank you very much. I'd only just started to figure out sports gambling. I downloaded FanDuel and DraftKings on my phone at home in California, but they wouldn't accept my bets. That's how I discovered that sports betting was illegal in California, which in and of itself was weird. For years I'd been bombarded with ads on my home television trying to get me to make some sports bet with FanDuel and DraftKings. But the moment I tried to do anything, they told me it was against the law. Anyway, I just flown to Vegas because if you want to gamble, where else are you going to go? I'm a calm bettor. I'm not going to cheer. I got ice water in my veins. I just care about my process, right? And my process is good. It's pulling my bets out of my ass. That's my process. As always, I'm with lj, my producer, who at that moment was still as innocent about the world of gambling as I was. It'll be months before she transforms herself into a mule for professional sports gamblers and quickly gets her bets rejected from all sorts of sports books. We're just standing in this sunken theater staring at 20 different sports being played on enormous screens outside. Circa had built huge swimming pools beneath another gigantic screen. Out there you can float and drink and watch your money vanish. If you were sitting there with us Inside the circus sportsbook. And you knew nothing about sports gambling. You might think that you were right smack in the middle of the sports gambling industry. And obviously I knew nothing but my bet that someone would score in the first inning of the A's Yankees game. So we're one swing away from going to collect. It was still looking pretty good. Oh. Oh, don't do this. Oh, my God. It happened. Oh, no.

[Jim Chanos]

I lost.

[Michael Lewis]

How did this happen? How did this happen? I don't know. How did this happen? You jinxed me. You came here and you jinxed me. I was supposed to win and you came. Your presence is in. It's like on the other hand. On the other hand, there's silver lining here. Darren has pointed out my parlay is looking better in Vegas. Hope dies hard. Three different games in two different sports needed to break my way for my parlay to win, in which case my $100 would turn into over 1,200. So if we win the parlay, I get credit for that? Yeah, if we win the parlay, that would be a big deal. I'm Michael Lewis, and this is against the rules. And you're going to have to forgive me my ignorance for a minute because I was just getting started. I didn't know that a parlay was the dumbest sports bet you could make. Nor did I know that. If you want to see the future of sports gambling in America, the last place to be was a Vegas casino. That Vegas was a sort of PG 13. And all the adult stuff was in other states. And I had no idea why California, of all places, was banning an activity that was now legal in most other states. But I was about to find out. Way back in 2008, during the global financial crisis, I remember thinking how weird it was that it played out so differently from country to country. In the years leading up to the event, every developed country was subjected to the same temptation. Everyone was basically left alone in a room with a giant pile of money. But what people wanted to do with that money differed from country to country. The Irish wanted to create an insane commercial real estate boom. Iceland's 300,000 citizens wanted to have 3 of the world's biggest banks. The Greeks turned their state into a pinata for its citizens to whack at. It was like you could go from place to place and see how these cultures differed by their financial kinks. One country's yuck was another's yum. You can see the same sort of thing right now in the United States with sports gambling since 2018. When the Supreme Court ruled that states could legalize sports gambling, every state has struggled with this new temptation. Actually, most haven't struggled very much. But as I'm recording this, 11 states are still holding out against legalization. My own state, California, but also Texas, Idaho, Utah, Minnesota, Alabama, Georgia, Oklahoma, Alaska, South Carolina and Hawaii. These sports gambling holdouts are each kind of cool in their own way. No two are exactly alike, but many share a similar reservation, a moral reservation.

[Reverend Joe Godfrey]

Our focus was on addictive behaviors, moral issues in general, but particularly addictive behaviors. Alcohol, tobacco, gambling, marijuana, those kinds of things.

[Michael Lewis]

That's Reverend Joe Godfrey, a lobbyist for Alabama's many Southern Baptist churches and a leading opponent of sports gambling in Southern states. What does the Bible have to say about gambling specifically?

[Reverend Joe Godfrey]

First of all, gambling is a part of the get rich or get something for nothing mentality, a get rich quick syndrome that characterizes our culture today. But One of the Ten Commandments says in Exodus 20, verses 3 and 3 and 5. But in verse 3 particularly, you shall not, you shall have no other gods before me.

[Michael Lewis]

When you're looking for something to tell you what you can't do, there's of course no book as useful as the Bible. But even I was a little surprised by how many ways the Bible tells you not to gamble. And so I've had to leave out most of the Reverend's speech on the subject, but he ended with this.

[Reverend Joe Godfrey]

The fourth principle, gambling is a form of covetousness and greed. But the Bible says in Exodus 20, verse 17, you shall not covet your neighbors house. You shall not covet your neighbor's wife, or his male servant, or his female servant, or his ox, or his donkey, or anything that is your neighbor's. That's almost half of the ten Commandments that address the issues related to gambling.

[Michael Lewis]

I sort of think that you should just feel what you feel for your neighbor's donkey. But enough people in Alabama believe what Reverend Joe Godfrey believes, that he won his first skirmish with Fanduel and DraftKings. The lobbyist for DraftKings got so irritated that he named his fantasy sports team doctor Joe Godfrey. The Southern Baptists fought and won battles not just in Alabama, but also in Georgia and South Carolina. In Utah, the Mormon Church has prevented sports gambling on religious grounds. But to me, the Mormons feel different. The Mormon Church just runs the show in Utah, and no one really argues much about whether they should drink Coca Cola or have 39 children. And somehow that all works for them. The Mormons, of course, would love to convert you, but when that fails, they sort of leave you alone and maybe even speed you along your journey to hell. For decades, Mormons basically ran the money end of Vegas casinos, and that was fine as long as they didn't themselves gamble. Southern Baptists aren't like that. They're surrounded by people who don't share their views, and they want to stop everyone from gambling. That's a way bigger lift. Do you have any sense of where this is headed if you had to bet where Alabama law is going to be 10 or 15 years in the future?

[Reverend Joe Godfrey]

First of all, the gambling forces never stop. They come back every year. And what happens is a lot of Christians and churches begin to get weary of the battle. And that's another thing I have to remind them. The Bible tells us, do not grow weary in doing what is good and doing what is right. But the fact is that churches get tired of the fight. Gambling crowd never gets tired.

[Michael Lewis]

The sound you hear in that voice, that's resignation. He knows he's going to lose. The Wall street analysts I talk to who follow the industry think Alabama will legalize sports gambling in the next year or two. Anyway, the Southern Baptists aren't the main story here, because the main story is no longer really about morality. It's about money. More than 100 million Americans are still being denied legal access to the new sports gambling apps. The vast majority live in states without any obvious moral reservations to gambling. What they have instead are actual reservations, blasting ads like this, discover your perfect.

[Danny Moses]

Combination at Pechanga Resort Casino, where you can rock and roll.

[Michael Lewis]

There's a very long story about how casino gambling came to Indian reservations. It's too good to totally ignore. But let me just give you the short version of it.

[Steve Ruddock]

We had all these different little bingo halls. So tribes were sort of able to offer that without any outside regulation. Or if it was illegal in the state, tribes could still offer it.

[Michael Lewis]

That's Steve Ruddock, who writes a newsletter on the sports gambling industry, and he says no one paid the tribes much attention at first. But in the early 1980s, the reservation's bingo games became bingo machines. And the bingo machines were basically slot machines. I'm curious, do you have any idea what tribe first put the slot machine in the bingo hall?

[Steve Ruddock]

I'm going to draw a blank on the tribe, but it was in Minnesota, and it was like bingo machines in someone's garage on the reservation. They started to get legal challenges.

[Michael Lewis]

Actually, more than legal challenges and more than just Minnesota. In Florida, a local sheriff threatened the Seminole tribe with force unless they shut down the bingo games. There was also some fighting in California and Michigan. Lawsuits filled the air. One reached the Supreme Court in 1987. The Supreme Court ruled that states couldn't prevent the native Americans from doing anything on their own reservations that was legal off the reservations. A pattern soon emerged. The federal government, responsible for giving financial support to tribes tended to smile upon activities that might reduce the need for that support. State and local governments tended to frown on activities such as gambling that might transfer money from their coffers to the tribes. In 1988, Congress finally passed a law. Indian tribes could offer bingo without asking for permission. If they wanted to open a casino, they needed to cut a deal with the state. And so tribes began to cut deals with the states. One odd There was only the loosest correlation between where native Americans received a license to open a casino and where native Americans actually lived. Connecticut has huge tribal casinos, but not very many native americans. Alaska has lots of native Americans, but hardly any casinos.

[Steve Ruddock]

Well, it turns out that a lot of tribes are pretty sharp. And 92, you got Foxwoods. So all these tribes suddenly were like, hey, you know what? People are going to travel these casinos. Then you started getting commercial casinos also coming into the fold. Some have both.

[Michael Lewis]

And how big has this been for the tribes? Huge.

[Steve Ruddock]

One of my favorite stories to tell about this is the San Manuel tribe.

[Michael Lewis]

The San Manuel tribe resides just outside of Los Angeles.

[Steve Ruddock]

They're basically one of the biggest tribal casinos in the country. They're like billions of dollars of revenue. Before that, doctors used to ride in on horseback to the reservation to give kids their vaccines for free. So now this tribe is now making billions of dollars over the years. They donated to that hospital that was doing that. That's the difference of it.

[Michael Lewis]

But your sense is that they were granted this right because the people who granted them this right didn't think it was that valuable.

[Steve Ruddock]

Yeah, exactly. When it happened, it wasn't expected to be what it is.

[Michael Lewis]

The same thing that happened in California also happened in the least likely places. In Oklahoma. The chickasaw nation opened a casino on the Texas border that soon became the biggest in the world and effectively controlled the Texas market. In Florida, the seminole seized control of gambling in the entire state. But then came the supreme court ruling of 2018 that allowed states to legalize sports gambling. And the lobbyists for fanduel and draftkings were suddenly everywhere.

[Gus Garcia Roberts]

These, you know, companies backed by wall street basically swooped into California, I think, kind of confident that they could do what they did in every other state.

[Michael Lewis]

That's gus Garcia Roberts of the Washington Post, who covered the first battle in this new war. That was back in 2022, when FanDuel and DraftKings and some other sports gambling companies sponsored a California ballot proposition to legalize mobile sports betting.

[Gus Garcia Roberts]

I love the name of the proposition that these companies ultimately pushed forward, which is. I have it written down here. It's Californians for Solutions to Homelessness and Mental Health Support, a coalition of housing and mental health experts, concerned taxpayers, and digital sports entertainment and gaming companies for.

[Michael Lewis]

Permanent solutions to homelessness, mental health and addiction in California. Prop 27 supports financially disadvantaged tribes that.

[Jim Chanos]

Don'T own big casinos.

[Michael Lewis]

What were we actually voting on when we were voting on this proposition?

[Gus Garcia Roberts]

So what you were actually voting on was the legalization of mobile sports betting in the state. There would have been minimal kind of involvement of California tribes. These companies had. It was kind of an ingenious strategy in order to, I guess, divide the tribes. Their proposition would have benefited some of the smaller tribes that are not near cities and so did not have very lucrative gaming operations. And so it would have made California like any of the other states, where you can just kind of gabble on sports on your phone. Everybody I spoke to, they were just moved by commercials that they thought were for a proposition that was going to finally do something about homelessness or, you know, mental health.

[Sean Kelly]

27 means getting people off the streets and into housing.

[Michael Lewis]

Yes.

[Gus Garcia Roberts]

On 27, there was one guy who I spoke to who was a truck driver, and he was passing through California, and he was just saddened by the homelessness situation. And then he was in his motel room and he saw the ad and he. And he decided to contribute what he could. To me, that really encapsulated the confusion around these ballot measures.

[Michael Lewis]

Not just confusion, duplicity. It's sort of like FanDuel and drag. They're foul. Hooking donors by persuading them that they're doing something other than what they're doing.

[Gus Garcia Roberts]

Right. And it's not like those companies were reliant on the $100 from the truck driver, but it really showed how they were trying to, you know, essential, if not mislead, at least hoodwink Californians into not really knowing the true purpose of these propositions.

[Michael Lewis]

But Proposition 27 did not go unopposed. From the moment the lobbyists from FanDuel and DraftKings massed along the California border, they've been spotted by Indian scouts because the tribes knew from bitter experience that the white man had a gift for what the white man called Indian giving.

[Victor Rocha]

We want this Thing in perpetuity, you know what I mean?

[Michael Lewis]

That's Victor Rocha, chairman of the Indian Gaming Association.

[Victor Rocha]

Listen, if the Indians from 100 years ago would have had the lawyers we had, you know what I mean? It'd be a whole different story in America. We would be, instead of bows and arrows, we'd be chucking attorneys. Excuse me, Mr. Custer. You know, Mr. Sheinbaum, my attorney.

[Michael Lewis]

Quivers loaded with Shein bombs. The California tribes watched and waited.

[Victor Rocha]

We saw those pricks right on the horizon. We saw them coming.

[Michael Lewis]

You did see them coming?

[Victor Rocha]

We saw it coming a mile away. It was very obvious because we're Native Americans. We suspect everyone, and everyone. If it isn't Steve Wynn and the pricks at mgm, then it's these new version of an old version of the guy. We kind of believe these guys are the same mindset.

[Michael Lewis]

It must be odd to know that your role always is to wait for the peace treaty to be somehow violated. In this case, the California tribe saw a very specific threat. By law, their casinos were confined to their reservations. If Californians were allowed to bet on their phones, no one would bother to drive to the reservations. Sports gambling was just a Trojan horse. Eventually, they could imagine every Californian would have an entire casino in their pockets. A casino run not by tribes, but by FanDuel and DraftKings.

[Victor Rocha]

These guys are like, we're not going to wait for you guys to get on the same footing. They saw it as an opportunity to screw us. And that's what happened.

[Michael Lewis]

That's what had already happened in other states, even states with big tribal casinos. Arizona, for example. FanDuel and DraftKings talk the Arizona legislature into handing out 20 sports gambling licenses. 10 to tribes, 10 to companies like FanDuel and DraftKings and also sports teams themselves. They made it sound like a fair competition, but in no time at all, Fanduel and DraftKings routed the field.

[Victor Rocha]

Listen, I told DraftKings to their face. I go, listen, if you come into California, we are going to curb stomp you. And they got pissed off, you know, because they go, no, no, we're your friends.

[Michael Lewis]

So you didn't. You didn't trust them?

[Victor Rocha]

Oh, fuck, no, man. Do you trust them? You know, these are the same guys that scooters for our water, the scooters for land. Different package, same schools. You know, it's this MBA mentality. You know what I mean? They're smarter than you. They know the future of the world. They're going to plan it. We're just riding along. So all Of a sudden they come into California and so we tell them, don't do it.

[Michael Lewis]

Did any part of you think they're going to be too powerful and they're going to overwhelm us?

[Victor Rocha]

No, no, not at all. Never had a doubt. One second. You need a great villain in a story and they were great villains in this narrative. They make great villains.

[Michael Lewis]

That feels to me just very true. FanDuel and DraftKings make great villains. Why they make great villains is another matter. Stick a pin in that question. We'll come back to it in a little while. Anyway, the California tribes fought Prop 27 with their own ballot initiative. Theirs proposed limiting sports gambling to reservations. The two sides then vaporized half a billion dollars, trashing each other's propositions. After the dust settled, both propositions failed and nothing changed, which was a huge win for the Indian Gaming association.

[Victor Rocha]

That's why FanDuel and DraftKings are so freaked out right now that when we won the day after, the tribes go, fuck you, you're not coming into our market. The name FanDuel and DraftKings will not exist in this market.

[Michael Lewis]

If you go out, kind of imagine out 20 years. Can you imagine mobile sports betting in California but run by the tribes?

[Victor Rocha]

Yes, absolutely. And that's what they're doing in Florida. What the tribes in Florida did that freaked everybody out is the Seminoles said, you know, we're going to have mobile sports betting. We're have all this, everything you want, but everything goes through us.

[Michael Lewis]

It sounds good, but I'm not so sure things are going to go Victor's way. There's something weird about this industry and something unstoppable about these two companies, FanDuel and DraftKings. There have been some skirmishes. The Indians have won a few of them. But the war that's not even close to over. In the run up to the global financial crisis back in like 2006 and 2007, there was a character who was the first to see that something was off. The short seller. The character who makes his living by finding companies or whole countries to bet against. People love to hate short sellers. They seem so negative, so hostile to other people's hopes and dreams. But short sellers are also incredibly useful. More than useful, necessary. Because you learn a lot when you think about the other side of the bet.

[Jim Chanos]

I think we got an average price of about 40 and I think we average exit was about 15. So you never get the highs or the lows. But it was a successful position.

[Michael Lewis]

That's Jim Chanos. Maybe the World's most famous short seller. Actually, if you Google world's most famous short seller, a picture of Jim Chanos pops up. In his spare time, he teaches a course at Yale on financial fraud, which. Well, of course he does. And he has a track record of successfully betting against gambling companies. He did it first back in 2005 after a bunch of online poker sites sold stock to the public. And he read their prospectuses, and in.

[Jim Chanos]

The board of directors section, there was a list of, you know, five or six people who were on the board of this particular online poker company. And at the very end of one of the listings, it said, Mr. So and so is currently a fugitive from justice.

[Michael Lewis]

Jim Chanos just loves it when the board of directors are fugitives from justice.

[Jim Chanos]

I mean, I kind of summed it all up. These entities were all offshore. A lot of them were being used to launder money, which is one of the things the US authorities were worried about at the time. And ultimately they all got shut down hard in the U.S. all right, so.

[Michael Lewis]

You shorted those and it worked.

[Jim Chanos]

Yeah, those worked.

[Michael Lewis]

The poker companies all went bankrupt. Then in 2021, Jim notices these new sports gambling companies, DraftKings and FanDuel. He reads their prospectuses. He sees that they're run by some of the same people who ran the poker companies. DraftKings goes public and its stock soars, but it's still losing money hand over fist. And it feels like those online poker sites. Jim does a back of the envelope calculation. In mid 2021, he shorts DraftKings stock and sure enough, it soon collapses. He buys back the stock and takes a big profit. But then, incredibly, DraftKings bounces back and keeps on rising. And that's when Jim Chanos realizes he screwed up.

[Jim Chanos]

We made a fundamental error in that we modeled out the business based on it being the same economics as a typical Vegas, you know, sports book. At a casino, will basically and historically has earned 5 to 6% on the amount wagered. And that's been a. That 5 to 6% number has been kind of static for years and years and years.

[Michael Lewis]

But DraftKings wasn't a casino. It was something else, something new, something very weird.

[Jim Chanos]

What really has changed is because of the ease of gambling, by having this device in your pocket that allows you to place a bet is that people are basically making dumber and dumber bets, right? They're making more and more parlay bets. They're making more crazy odds bets. You know, will Taylor Swift be wearing a chief's jersey at the game?

[Michael Lewis]

You Know, a casino has all these games and the odds are of course always against you. But casinos don't coax you into playing, say roulette with one set of odds and then once you're hooked, switch out the odds to make them far worse. But that's exactly what these sports books are doing by coaxing people into parlay bets. Here's an example of how this works in practice. On a simple bet on say the Kansas City Chiefs to beat the San Francisco 49ers. DraftKings average profit in casinos, they call it, the win margin is roughly 5% on a two leg parlay bet. A bet say that the Chiefs win and Patrick Mahomes throws for more than 300 yards. On that kind of parlay bet, average profit to DraftKings rises to 10%. On three legged parlays where for the better to win, the Chiefs need to win. Patrick Mahomes needs to pass for 300 yards and Travis Kelce needs to score at least one touchdown. DraftKings rakes in 15% or more. There's this useful rule of thumb. With each additional leg of a parlay, the bookies keep an extra 5%. And DraftKings and FanDuel have learned how to herd their customers into longer and stupider parlays. Their TV promotions are designed with this one goal in mind.

[Danny Moses]

This is you, and this is your.

[Jim Chanos]

First hunch of the season.

[Michael Lewis]

It's parlay time. Promotions like that are working. They're leading the American gambler to make different kinds of bets.

[Jim Chanos]

Those are really bad bets. Professional betters don't make those bets. Yep, but the public does. And that changes the economics dramatically because.

[Michael Lewis]

They'Re on the other side of the bad bets.

[Jim Chanos]

Well, and it's the same overhead costs. Right. But if you're raking off higher amounts of the beta, it's all gravy. The extra gross profit is all gravy. The bad news is, of course, is if you're the better, if the house is taking 10% of each bet, your, your bankroll begins to dissipate dramatically faster. And so they're going to need to find more and more, you know, suckers if you will, to keep making these bets. So far they have. So that tells you something.

[Michael Lewis]

It does tell you something. And it tells you that it's a different business from the old sports book at a casino.

[Jim Chanos]

Yes, absolutely. A different business. That change in behavior is everything.

[Michael Lewis]

FanDuel and DraftKings have all these competitors, Caesars and MGM and Circa and the other Las Vegas casinos have all launched Sports gambling apps. But Vegas for some reason can't compete. Neither can ESPN or the Fanatic sports apparel company or. Well, there's no end to the failed competition. After Colorado legalized sports Betting back in 2019, 20 companies launched sports gambling apps. Less than two years later, seven of those 20 apps are gone. In the end, there's really been no serious competition. All these other companies have been losing huge sums of money and making zero dent in DraftKings and FanDuel's market shares. FanDuel and DraftKings have remained something like 80% of the entire market.

[Sean Kelly]

Most of the questions I had were, is this going to be an Internet marketplace? Which is winner takes most?

[Michael Lewis]

That's Sean Kelly, an analyst at bank of America. He was covering the casino industry when along came these sports gambling companies. And he felt a professional obligation to follow them too, thinking that they were just like casinos. And so like Jim Chanos, like basically every Wall street person, he at first missed what was really going on.

[Sean Kelly]

The Internet has actually led to, you know, a handful of winner take. Most marketplaces rideshare, so Uber, Lyft, if you think about the consumer marketplace and home sharing, so Airbnb in all those.

[Michael Lewis]

Businesses, I can see what the network effects are.

[Sean Kelly]

So the reason it was a debate in this business was unlike those other places, those were two sided marketplaces. If you controlled supply and you had the most supply, you'd get the most customers, you'd have the demand.

[Michael Lewis]

In mobile sports gambling, there were no obvious network effects. FanDuel and DraftKings weren't like say Facebook, which everyone is on only because everyone else is on it. They weren't even like Uber, which people use because it has so many drivers and which has so many drivers because so many people use it. But these two companies were dominating their market in much the same way as Facebook and Uber had. It was like they had this moat around them that prevented anyone from invading their castles.

[Sean Kelly]

At the time we couldn't identify what the moat was, but here's what the moat was. The answer is $3 billion.

[Michael Lewis]

That's what it costs in marketing just to get people to know about you.

[Sean Kelly]

Actually, it's 2 billion in marketing and 1 billion in technology.

[Michael Lewis]

$3 billion to create a brand. But their brand names are just the start of the edge that these two companies have. Their deeper edge is what they know about the American sports gambler. Technology has allowed them to create something very different from casinos or old fashioned sports bookies. But what makes these two companies unbeatable is the data. They've acquired and it's basically impossible for anyone else to acquire.

[Sean Kelly]

Why do these companies win? The answer is the perfect seam for the American sports better was not, you know, commercial casino gambling. It was daily fantasy sports. You had customers who cared so deeply about sports that not only were they willing to gamble on real sports, they would gamble on fantasy sports. Right. So if you just take that at its simplest level, these are people that had money on deposit on the Internet to gamble on fantasy sports. They sure as heck couldn't wait for the real money alternative to come. And when and when it did, it was a perfect pivot to the exact customer set that wanted to do this.

[Michael Lewis]

Who still left? Who you think is a plausible competitor to FanDuel or DraftKings?

[Sean Kelly]

So the truth is, yeah, the game has largely been won.

[Michael Lewis]

I think we can safely say that it's totally been won. The sports gambling industrial complex will be dominated by two companies. Anyone who challenges them will have to spend $3 billion to get to where they are now, if they're lucky. But by then, FanDuel and DraftKings will have acquired more data on the American sports gambler and found craftier ways to both find and manipulate him. The capital markets will see that any attempt to challenge their dominance is a waste of money. Anyone willing to invest 3 billion in a sports gambling app would be nuts to invest at any place with FanDuel or DraftKings. What they did was they created a business model that is a lost leader for X number of years to gain market share and dominance. That's Jim Allen, CEO of Seminole Gaming. The Seminoles acquired the Hard Rock brand back in 2007 and used it to name their gambling app. It's the biggest and the baddest tribal gaming company. Going after FanDuel and DraftKings where they live online, then that creates profitability in a 5, 7, 10 year window versus trying to be profitable the first year. That was their business model and frankly, Wall street supported them in that. Hard Rock has managed to get sports gambling licenses in eight states and wants to be a threat to the duopoly. Very humbly. Our app is the number one app in the United States. DraftKings is second. Not just here in Florida, but in the United States. It's because the technology that we have is world class. You know, maybe. But if you want to know what I think, I think the Indian casinos are in basically the same position as the Vegas casinos. They're getting to the sports better too late with the wrong approach and they're hunting with inferior weapons.

[Danny Moses]

So the morning of January 2nd, I'm at my home in Florida, and I get a text from a high school friend of mine, Brian.

[Michael Lewis]

That's Danny Moses, a character in the Big Short, a book I wrote about the financial crisis. In the movie version, Danny was a short seller who had one swollen testicle, which on Wall street kind of counts as an advantage. Anyway, back to Danny and his friend.

[Danny Moses]

8:15 in the morning, he's on a flight from Europe, and he lives in Florida, and he's on the Hard Rock Gap. But he can't gamble, because you can't. You have to be in the state right, to do it. And he says, danny, you need to go check out something on the Hard Rock betting app called Specials under the NFL. And I go, what are you seeing? He goes, I'm seeing a crazy line that the Baltimore Ravens to beat the Detroit Lions in the Super bowl is 500 to 1. I said, well, it can't be. Let me go look. So literally, he's in the air. I'm looking around and I.

[Michael Lewis]

And I find it, and it's obviously a mistake. The playoffs are set. Detroit and Baltimore are both in them. Baltimore is better than Detroit and a favorite to make the Super Bowl.

[Danny Moses]

So both teams were locked in. And so I look at it, and I look at the reverse of it, which is Detroit to beat Baltimore, and that's 60 to 1. So you know inherently that Baltimore to beat Detroit has to be less than 60 to 1. So I'm texting with him, and I said, all right, I'm going to put it down. I'll put down as much as I can. Well, the max bet being offered was $50. And I found out that day that DraftKings and FanDuel had offered the same bet, roughly the odds of call it 30 to 40 to 1. So we knew we had found something.

[Michael Lewis]

Of course, it's not likely that both Detroit and Baltimore will make the super bowl, but the true odds are nothing like 500 to 1. The Seminoles have clearly screwed up.

[Danny Moses]

Call my friends in New Jersey. I'm like, you better jump on this quickly. I said, because it's probably going to go away. So they all put it down. It was like six or seven guys that made the bet.

[Michael Lewis]

Some huge number of gamblers have probably grabbed the 500 to 1 odds. Then Danny uses Twitter to tell a Seminoles how badly screwed they are. He's actually measured it using a company called Wagerwire. Wagerwire runs an entire market for secondhand sports bets. Yes, you can now buy and sell your sports bets with other gamblers so Wager Wire can tell you at any given moment what your bet is worth. And Wager Wire tells Danny that he could sell his $50 bet for $700.

[Danny Moses]

So I tweet out too. Hard Rock bet, by the way, which is probably run by a 20 something year old who just understands social media, but not gambling. Basically saying thanks so much for this opportunity.

[Michael Lewis]

Still, the Seminoles don't react. They must have algorithms. Everyone does. But the Seminoles algos are obviously not up to speed. Not until Danny takes a photo of the bet they're offering and tweets it to Hard Rock does the tribe react.

[Danny Moses]

Fast forward a couple days. I opened my Hard Rock app. I'm down here in Florida and the bet's gone. Can't find it and I search back through and I find it says void. Basically voided the $50 bet and credited my account back for 50. They canceled, didn't reach out to me, didn't call me. They, you know, they didn't honor it. So I call my friends in New Jersey and I said my bet's void. How about yours? Nope, not void. And they're. The reason is because in New Jersey, New Jersey Gaming Enforcement Division doesn't mess around.

[Michael Lewis]

The Seminole Tribe is apparently willing to treat their customers in Florida one way and their customers in New Jersey another. That's when it begins to dawn on Danny Moses that he shouldn't be placing sports bets in Florida, that he'd be better off using friends to place bets with FanDuel and DraftKings in New Jersey. But then the plot thickens. The Baltimore Ravens and Detroit Lions keep winning. Both get to their conference championships. The bet that Wager Wire said was worth $700 is now worth $2,783. And the Seminoles are just pretending that it doesn't exist. Danny goes nuclear. Or rather he goes onto television. More and more gamblers are beginning to share stories of how bets got voided by their sports books. Like from Danny Moses, an investor who.

[Danny Moses]

Was profiled in I went on CNBC with an interview with Contessa Brewer in the middle of all this. And Hard Rock was claiming that I didn't reach out to customer service, but I did. It's a 1 in 100 number and it just goes into the abyss. I tweeted at Hardrock help. I tweeted at Hard Rock bet. I could never get a response.

[Michael Lewis]

At the heart of the new sports gambling industrial complex is a predatory market. But the Seminoles don't seem cut out to be apex predators. The trick of the role is to coax Americans into voluntarily making dumber and dumber bets. But you need to do it in ways that people don't really notice.

[Danny Moses]

Even if I find something that I think is going to be great, how to know if I'm going to get paid out on it. And to be honest, that's a confidence issue for me.

[Michael Lewis]

Obviously this is just one story, but what I hear in it is that even the most powerful Indian tribe isn't close to ready to compete with FanDuel and DraftKings. If Dani could just short the Seminole tribe, he would. And I think maybe they sensed their bigger problem because just recently Seminole Gaming announced that they'd be open to forming a partnership with either FanDuel or DraftKings. And why would they do that if they thought they could compete with them? That's why these two companies make such great villains. Yes, they're dishonest with the public when they create their ballot propositions. Yes, they're targeting vulnerable people who have no real idea what they're doing. Yes, they're effectively mining addiction. But none of that is why they make for great villains. They make for great villains because they're so incredibly good at what they do. Preachers aren't going to stop them. Native Americans aren't going to stop them. Lord knows short sellers aren't going to stop them. The market power of these two companies will enable them to capture their regulators, seduce the media, and in general evade real scrutiny. History might not repeat itself here, but I'm betting it at least rhymes. Wingston tastes good like a cigarette. Whiskers taste good like a cigarette. Sh. This situation is obviously not exactly the same as that one. This sports gambling industrial complex will carve its own path through our society. The damage is already inflicting on athletes, on college sports, on how fans feel about the whole thing. That's where we're going next. But I'm not quite ready to leave Vegas yet because I met a lot of interesting people there. And I want you to hear more from the characters who populated this one time sports gambling empire. So in the coming weeks you're going to hear from gambling legend Billy Walters. As I got access to more money, I got invited to go to Las Vegas and clearly that was an eye opener. I mean it's like, you know, wild on a meathouse. You're also going to hear from some old school Vegas bookies. How's the legalization around the country changed your business?

[Danny Moses]

A lot of these guys came in from Europe. They were very corporate, British corporate. This is the legal, this is the marketing, this is the hr. This is blah, blah, blah. Why don't we have to adapt ourselves to these Brits? You know, it just showed up on.

[Michael Lewis]

Our doorstep a couple years ago.

[Danny Moses]

They got these English accents and everybody.

[Michael Lewis]

Thinks they're so brilliant. Against the Rules is written and hosted by me, Michael Lewis, and produced by Lydia Jean Cott, Catherine Girardeau, and Ariella Markowitz. Our editor is Julia Barton. Our engineer is Jake Gorski. Our music was composed by Matthias Bossy and John Evans of Stellwagen Symphonetta. Our fact checker is Lauren Vespoli. Special thanks to a few more folks who made this season of against the Rules possible. Jacob Weisberg, Greta Cohn, Sarah Nix, Christina Sullivan, Carrie Brody, Eric Sandler, Kira Posey, Jordan McMillan, Jake Flanagan, Owen Miller, Sarah Bruguer, Jacob Goldstein, and Sophie Crane. Against the Rules is a production of Pushkin Industries. To find more Pushkin podcasts, listen on the iHeartRadio app, Apple Podcasts or wherever you listen to podcasts. And if you'd like to listen to ad free and learn about other exclusive offerings, don't forget to sign up for a Pushkin plus subscription at Pushkin FM plus or on our Apple show page. How does it feel to have won a par life? Because we're not. We don't have a trusting relationship. I'm counting it. Yeah. Yeah. Wait, so it's actually $1,220.95. Oh, you keep the change. Well, you also. You also are the brains behind the operation. Yeah, the brains. There were no brains behind the operation. That's the amazing thing. And the really amazing thing is that the first thing you think when you saw it worked out is, I know something when all I did was purely Yes. I think the trick to this game is if that happens, you leave.

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