The week of August 30, 2015

Is the daily fantasy football revolution here to stay?

By Jonathan Ridewood

Is fantasy football headed for its own Black Friday?

On April 15, 2011, a day that lives on in infamy for online-poker enthusiasts, the U.S. Department of Justice shut down PokerStars, Full-Tilt Poker, and Absolute Poker. At the time, those three offshore websites were the biggest players in U.S. Internet poker, a developing industry that had millions of users and spent over $200 million in marketing and advertising money to sponsor poker shows on television and bring in new customers.

The principals of the three companies were indicted for violating the Unlawful Internet Gambling Enforcement Act (UIGEA), a federal law that prevents financial institutions from making transactions involved with Internet gambling operations, including online poker and sports betting. Congress passed the UIGEA in 2006 as a last-minute rider to the SAFE Port Act, 9/11-era counterterrorism legislation that no politician could vote against without being labeled soft on security a month before midterm elections.

While proponents on the Christian right supported the act on moral grounds and casinos saw it as a way to stifle competition, the National Football League had a unique interest in the bill.

The NFL wanted to protect what had become a valuable marketing resource: fantasy football.

The league had earlier found that fans who played fantasy football watched, on average, two more hours of football per week than fans who did not.

What the NFL and its lawyers could have never expected was how fantasy football would evolve into a vastly different game, one that began to look less like groups of friends battling for bragging rights and more like the big business that Internet poker had been.

Beginning in 2009, a number of entrepreneurs created websites for daily fantasy sports that revolutionized the game by making it faster. There was no longer a need for a season-long commitment; gone were the days when Kevin ruined your fantasy league because he stopped playing after losing the first four weeks. Everything could be consumed in a day or weekend. And faster meant more: more people playing, more opportunities to get your fantasy fix.

It’s a product perfect for the Internet age. Everything is controlled from a smartphone. There’s always more data coming in and more things to read and consider and play.

In the new souped-up version of fantasy sports, you choose a roster for a daily or weekly contest, which have predetermined prize amounts and capped number of participants. Each player has a salary, and your team has a salary cap. The statistics of each player in the real-life event determines how many points you score. The participant with the team that scores the most points takes home the cash, or, in the case of some publicity-grabbing prizes, all-expenses- paid trips to Vegas or courtside seats at the NBA Finals with NBA legend Bill Walton.

It’s a product perfect for the Internet age. Everything is controlled from a smartphone. There’s always more data coming in and more things to read and consider and play. There’s always going to be a quarterback tearing his Achilles tendon, a running back on the brink of a breakout performance, or a tight end finding more targets in an offense. This makes the dopamine fixes and financial returns (and individual losses) more immediate.

Money started to pour in from Silicon Valley and venture capitalists. FanDuel and DraftKings, the two sites that now dominate the market, have each received more than $350 million from investors and are now each valued at over $1 billion.

Despite so much cash being thrown around, neither DraftKings nor FanDuel have turned a profit. With nearly identical products and equally slick presentation (it’s nearly impossible to turn on ESPN or walk into a stadium or ballpark without seeing one of their ads), their immediate goals are to increase market share and to a lesser degree, to diversify their products. However, the long-term challenge for both companies is, as DraftKings CEO Jason Robins told Re/Code, “to make [daily fantasy companies] and the sports themselves attached at the hip.”

They’ve already had success doing so. FanDuel has agreements with or investments from the NBA and at least 16 NFL teams, and from corporate giants NBC, Time Warner, and Google. DraftKings has funding from or marketing partnerships with MLB, the NFL, NASCAR, UFC, MLS, and Fox Sports, along with specific marketing agreements with a number of NFL teams. DraftKings plans to open brick-and-mortar daily fantasy lounges at the Staples Center in Los Angeles and Madison Square Garden in Manhattan.

FanDuel and DraftKings are today’s dominant players, but the competition is heating up: Yahoo entered the market in June and will try to leverage its dominance of traditional fantasy sports in this lucrative new realm. And despite having a marketing agreement with FanDuel, CBS also recently started its own daily fantasy sports games and produces a live, five-days-a-week show devoted to online daily fantasy sports.

The NFL’s legal loophole could be closed at the federal level. It’d be online poker’s Black Friday all over again, with an entire gaming sector effectively eliminated.

These big players are betting that daily fantasy remains legal. But that’s not a sure thing, given two potential challenges. First, the NFL’s legal loophole could be closed at the federal level; it’d be online poker’s Black Friday all over again, with an entire gaming sector effectively eliminated. Or courts could decide that daily fantasy is, in fact, illegal gambling.

It seems unlikely that the UIGEA loophole will be closed in the foreseeable future, and FanDuel and DraftKings were designed specifically to exploit it. But the question of whether daily fantasy constitutes illegal gambling is a thornier issue. Courts at the state level could determine whether the contests are games of skill or games of luck. If they’re the latter, regulations on gambling, defined as games where luck is a key component, might apply.

There’s a growing divide at the state level in regards to online gambling and fantasy sports. In 2013, Nevada, New Jersey, and Delaware all passed laws to make Internet gambling legal, sparking a larger state-by-state movement. At the same time, some states have begun to determine the legality of fantasy sports based on different tests; Arizona, Iowa, Louisiana, Montana, and Washington all currently ban playing fantasy sports for money. Nigel Eccles, the CEO of FanDuel, has indicated that his company has lobbying efforts in each of those states.

Marc Edelman, an associate professor of law at Baruch College, consults with fantasy sporting companies and wrote a primer about the legal issues in play. He sees an opportunity but also counsels caution. “If we begin to see these companies do foolish things like the Internet poker companies, they could run into trouble with state attorneys general or the Department of Justice,” he told the Kernel.

His first concern is the game format. FanDuel and DraftKings use stats from major sports leagues to meet the guidelines that the NFL snuck into UIGEA. Deviating too far from those guidelines could pose problems: Fantasy golf, for example, where scoring is taken from just one, not multiple real-world events, could be legally suspect.

Edelman cautions against running these games and also points out the differences in state laws. “Arkansas and Tennessee are two states with huge liability issues” that disallow online contests that involve any amount of chance, he said.

It would be hard to detect a quarterback force-feeding the ball to a third-string receiver to win a daily fantasy sports pool.

He also points out that while DraftKings’ and FanDuel’s terms of service prevent minors from playing, it’s more difficult to prevent a minor from using a parent’s credit card than it is for a casino to check an ID at the entrance. That increases the risk for companies, though there may be technological solutions.

Legal issues aren’t the only potential stumbling blocks for daily fantasy. Sacha Feinman and Josh Israel of Think Progress note the lack of regulation against selling or using insider information. Leagues prohibit players from playing in games for money involving their own league, but team employees like trainers and doctors are not prohibited. There’s even been speculation, as absurd as it sounds, about the potential for a fantasy sports scandal, especially at the college level, where players and employees are not well compensated. Leagues worry about point shaving, but it would be a lot harder to detect, for example, if a quarterback was force-feeding the ball to a third-string receiver to win a daily fantasy sports pool.

A scandal would certainly damage daily fantasy, but a more probable and intractable challenge is the question of whether fantasy sports should be considered gambling, and stories of daily-sports addictions could add fuel to the fire. John Warren Kindt, professor of business and legal policy at the University of Illinois at Urbana-Champaign and a critic of Internet gambling, recently urged Congress to close the fantasy sports loophole in UIGEA. He argued that the American Psychiatric Association identifies gambling as an addiction that changes the neurochemistry of the brain, and Internet gambling, including daily fantasy sports, functions the same way as traditional gambling—only faster.

“Internet gambling is crack cocaine to addicting new gamblers and because the feeder market is every living room, work station, and school desk,” he wrote.

Those are strong words. For now, though, the daily fantasy industry is booming, backed by deep-pocketed venture capitalists, major media companies, and the nation’s most powerful sports leagues. That’s a powerful lineup of allies, but it’s no guarantee of success, either.

Years from now, maybe we’ll simply take daily fantasy for granted, as a seamlessly integrated part of the professional sports experience. Or maybe we’ll look at it like the Internet poker boom of the 2000s, a halcyon era that was quietly laid to rest on a solemn Black Friday.

Illustration by J. Longo