Daily Fantasy Conundrum
Lets start with two quick questions:
True or False?
I can legally wager $5,000 tonight, that I can choose 9 MLB players, who will score more fantasy points
than the 9 MLB players you choose.
Answer: True
But wait, I thought betting on sports was illegal outside of Nevada and a few states that offer football parlay
cards? This sounds a lot like online gambling. I thought the UIGEA Act of 2006 killed off most online
sportsbooks and online poker sites?
True or False?
You can enter a daily fantasy baseball contest for just $2 tonight and potentially win 1 of 50 seats in a 1day
$3.3 Million Championship contest in August.
Answer: True
DraftKings.com is offering their players a chance to win a trip to the Bahamas (expenses paid), to compete
for a shot at $3.3 million dollars in a one day fantasy baseball contest. 1st place wins $1,000,000 cash, and
the remaining prize money funnels down to the other 49 contestants.
Written by Trev Rogers
Welcome to the rapidly growing world of Daily Fantasy Sports contests!
DFS sites allow users to wager thousands of dollars on the performance of professional athletes each day
within large multiuser or head to head contests. Back in 2006, the National Football League, along with
other pro sports leagues, lobbied Congress to exempt fantasy sports from the UIGEA, which was intended
to crack down on illegal online gambling. They obviously had no idea that a few years later daily fantasy
sports sites would emerge to take advantage of a carveout fully intended for the traditional season long
format.
The Unlawful Internet Gambling Enforcement Act of 2006 carveout for fantasy sports businesses requires
they meet the following criteria:
(#1) The value of the prizes is not determined by the number of participants or the amount of fees
paid
(#2) All winning outcomes reflect the relative knowledge and skill of the participants
(#3) The fantasy game’s result is not based on the final score of any “realworld” games.
Simply put, Daily Fantasy Sports Contests are legal, because they are considered a game of SKILL, rather
than CHANCE. The legal exemption exists for wagering on games of skill in which the winners are not
determined by the outcome of a single game or the performance of a single player.
The skill aspect focuses on the user choosing “real life” players to win a contest based on his/her
knowledge or skill. When we compare the skill vs. chance ratio of 9 players (roster size varies) having to
perform, versus the virtual coin flip of choosing which team will win a game, we begin to see how the skill vs.
chance ratio is viewed by lawmakers. Also note, that there must be more than 1 game on the schedule for a
particular sport, in order for cash contest to take place in single day.
Based on this carveout, daily fantasy sports contests likely comply with federal regulations. This does not
mean that all contests available on daily fantasy sites are 100% in line with the regulations. “Pick 5” games
offered by some daily fantasy sites, are an example of the industry potentially pushing the boundaries of the
carveout too far. “Pick 5” contests are similar to a 5 team parlay where you can bet $11 on one set of 5
player vs. player matchups. If you correctly choose the player that scores more fantasy points in all 5
matchups, you just turned $11 into $200. The 3 largest daily fantasy sports (FanDuel, DraftKings,
DraftStreet) do not offer “Pick 5” games. We can only assume that their legal counsel has deemed this type
of game beyond the regulations of the fantasy sports carveout. I will take a closer look at these contests in
future posts examining how DFS sites make money.
Not all states allow daily fantasy sports contests. If you live the in following states, you are currently
prohibited from playing a “real money” game on daily fantasy sports sites; Arizona, Iowa, Louisiana,
Montana, Washington, and Quebec, Canada
Wall Street Support For DFS
It is no surprise that major media companies are beginning to see the huge potential of DFS. With an
estimated 36 million people playing fantasy sports in North America, the revenue that could be earned from
the average 10% rake on these daily contests is enormous.
Roughly four years into this rapidly growing industry, no major legal challenges have been brought against
the DFS trailblazers. In the past year, private equity and media companies such as Comcast Ventures ($11
million to FanDuel), Redpoint Ventures (led a $24 million round of funding to DraftKings), IAC (DraftStreet),
and MGT Capital (DraftDay), made investments in DFS sites. Involvement by publicly traded companies
continue to legitimize the industry, as we wait for the “big 3” of ESPN, CBS and YAHOO to dip their toes
into the daily fantasy sports niche.
*****
In my next article, we will examine just how difficult it is for a company to enter and survive within the daily
fantasy sports industry. The potential is great, but the process must be efficient. Just ask the ten DFS sites
that have already “closed their doors”.
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Trev Rogers was employed by a daily fantasy sports website for the past 2 years. He will be providing a unique perspective of the Daily Fantasy Sports industry, along with answering comments and questions over a series of blog posts.
