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By this point we, the sports-viewing public, have been beaten into submission. Months of non-stop concussive blows to the head with DraftKings and FanDuel advertising have left us battered and confused. Why so much so quickly? Why is this stuff even legal? What's this about insider trading? Can I really become a champagne-soaked millionaire big check recipient??
So many questions, so much controversy, yet still there are few signs the advertising onslaught will let up. Amidst the recent allegations of a DraftKings employee using company data to win big on rival daily fantasy sites, ESPN earlier this week vowed to scale back DraftKings-sponsored content from its shows. DraftKings even went as far as to pull it's commercials from The Worldwide Leader—at least for the time being. But just as one monkey doesn't stop the show, one network's shaky ground with DraftKings won't stop the daily fantasy behemoth. According to Fox Business, DraftKings is now valued at $1.2 billion and FanDuel a close second at $1 billion. The companies also likely combined to spend over $150 million on TV and internet advertising in one quarter!
And the scandal? Well, according to Bloomberg, both companies just managed to have their biggest weekend ever. So much for controversy.
So even as the lines between gambling and daily fantasy continue to blur, and even as they fight off congressional hearings and inquires from state attorney generals, both services continue to enjoy support from professional sports leagues and teams, support from major networks, and millions of dollars in revenue.
We wanted to know how all of this could happen.
So we reached out to Marc Edelman, an Associate Professor of Law at Baruch College Zicklin School of Business, who consults extensively on legal issues in the fantasy sports marketplace. Professor Edelman broke down for us the basics on why this is legal, how these companies grow so quickly, and if we're looking at a future "DraftDuel" merger.
Why Are Daily Fantasy Sports Legal?
The legality behind DraftKings and FanDuel is murky to say the least. The concept of daily fantasy sports is relatively new to the mainstream, but in fact has been around since as early as 2006. The newfound popularity has not only brought these companies millions of dollars, but also the attention of Congress as many are now viewing DFS as the wild west of gambling. According to Professor Marc Edelman, the distinction is in the question of “Skill” vs. “Chance”, as was spelled out in the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). Daily Fantasy Sports services use this slight differentiation to operate within the law, even though the original fantasy sports exemption in the UIGEA was written with the idea that these were year-long contests, not ones that could happen multiple times a day. All of this—as mentioned before—is starting to catch the eye of federal and state lawmakers.
Professor Edelman:
"There are still very real concerns and open questions as to what types of daily fantasy sports may be legal under federal law and which types are not.
"There are some lawyers out there who have been telling their clients and the media that daily fantasy sports are absolutely legal and now they are claiming these investigations change everything. The reality is that these investigations change nothing.
"Daily fantasy sports was never clearly legal in the United States. It was always a grey area under federal and state law with certain formats of these games being comparatively safer and operating in certain states being comparatively safer. All that has changed is that Congress and the state of Mass. are now looking at these very activities. It has always seemed to be only a matter of time before these were investigated.
"Anyone who would look carefully at this marketplace and carefully at the laws would have known for a long time that there were certain grey areas with respect to daily fantasy sports and that a challenge to these activities were inevitable. The question is only when and the answer seems to be now."
How Has It Grown So Quickly?
This exponential growth in popularity comes from large investments, which have been pumped back into an astronomical advertising campaign. Edelman explains:
"In the early days of daily fantasy sports—from 2006 to just a few years ago—the marketplace had limited funds. Large businesses did not enter due to risk under state and federal law. For the most part the laws governing fantasy sports have not changed. However, as companies like FanDuel have operated for many years without legal challenge, potential new entrants have become more confident that a criminal challenge to these contests is not forthcoming."
There is now no shortage of funds as we’ve seen FanDuel partner with the NBA and several NFL teams, while DraftKings has secured partnerships with the NHL, MLS, UFC, MLB and also several NFL teams. According to legalsportsreport.com, between the two of them they have secured over $780 million in investment funding since 2011 with the vast majority coming in within the past three years.
How can Major League Baseball possibly get into bed with these loosely legal services yet keep one of their all-time best players out of the Hall of Fame for gambling? Surely Pete Rose is wondering that very thing. If only he would've built a fantasy lineup featuring the Cincinnati Reds players instead of betting on the team itself, his bronze plaque might be in Canton, Ohio right now.
Do I Really Have a Chance of Winning?
We've previously explored how it's basically impossible to win big money on these sites, and the recent "insider trading" accusations where employees of the sites apparently used their data and knowledge advantage to win "boatloads of cash" only strengthens that point. In short—both services advertise as if us “regular guys” have a good chance to win when by and large this is not quite the case. Similarly to poker there are going to be “sharks,” only in the daily fantasy community they're called "grinders." Chances are you're not going to waltz into a tournament and beat these professionals. They are more knowledgeable and put in hundreds, if not thousands of entries into one tournament. Per Professor Edelman:
"The reality is that while there are probably regular people that win these contests on single entries, the overwhelming share of the winners are people who play as a part or full-time job.
"If it were true that 'Joe Schmo' [could] put in a random entry and win, this would support the notion that this is chance and not skill. Fantasy sports operators need to stop marketing themselves as 'all you need is a dollar and a dream.' That type of marketing leads one to believe that these contests are games of primarily chance like lotteries, and games of primarily chance are illegal in every state.”
Will We Ever See a "DraftDuel" Merger?
Not likely, according to Professor Edelman:
"One of the challenges in any marketplace with a merger between the largest and second largest competitor is that the antitrust regulators will see the merger to have a negative effect on overall market competition and not allow it. At present FanDuel and DraftKings combine for an estimated 90+ percent of the daily fantasy sports marketplace. Meaning that the merger of these companies would create a divine entity with an extraordinarily high Herfindahl index. It would be extraordinarily unlikely that regulators would allow for a merged company to form with over 90 percent market share. Unless they could show that the ease of new entry into the marketplace would lead to new competition in a relatively short period of time."
Where Do We Go From Here?
Are we in for rapid expansion or relegation to shady offshore websites a la poker? Professor Edelman says it all depends:
"A lot of the future of the marketplace depends upon how the congressional and Mass. investigation of DraftKings and others proceed. It is in the overwhelming interest of the fantasy lobby overall for companies such as DraftKings to present earnestly and transparently in the upcoming hearing. If these companies are able to present themselves as earnest, transparent, and promoting the American ideal it is possible that online sports gaming will be given a green light through legislation to expand rapidly in America. But, if these companies come across as dishonest, conniving, and placing the American public at risk of gambling addiction it is possible that the same red flag will emerge to shut down these businesses much as what happened in Poker right around 2000 in the United States."
Follow Marc Edelman on Twitter and check out his website for more information.