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What's Next For Daily Fantasy Sports?

October 15, 2015

To say the discussion of daily fantasy sports has heated up is an understatement. The conversation is white hot, and the sports world is currently ablaze with talk about DFS.

As I have written before in this space, if you were unaware of daily fantasy sports a year ago or a few months ago, you sure were going to hear about it soon. Like them or not, those DraftKings and FanDuel commercials are doing exactly what they are intended to do.

Even if you had some magical TV commercial-blocking technology, the logos for the major daily fantasy websites have been part of the backdrop for the actual content portions of sports shows, and, of course, DFS has been a main topic during pregame football shows.

Attention intensified when the news broke that a DraftKings employee won $350,000 on rival FanDuel during Week Three of the NFL season.

Fueling the controversy was the revelation that the DraftKings employee's jackpot win was accompanied by access to what could be considered advantageous insider information -- although it was reported he acquired access to that information after he submitted the FanDuel lineup that won the money.

However, any fancy parsing of whether this was an instance of something akin to insider trading or just an awkward confluence of events doesn't matter to most people. The perception was it all felt icky.

That optics have often driven the narrative of DFS has been an issue for the industry during its short history. Traditional media has been behind the curve on DFS since its inception and only recently -- because of the carpet-bombing advertising campaigns -- have larger news organizations begun to try to make sense of it all. And often, they've done it imprecisely.

The recent crisis certainly underscores the urgent need for strict standards and practices for daily fantasy, whether that oversight is self-imposed or is provided by an outside party. But the weighty issue of regulation aside, there are two fundamental questions DFS has any reasonable person asking -- and those questions have not always been adequately addressed in news articles.

I'll start with the most obvious question. 

Hey, this is gambling, right?

Gambling is defined by three component elements: consideration, chance and reward. "Consideration" is staking something of value. "Chance" is an uncertain or non-predetermined event. And "reward" is a return on the stake, depending on the results of the uncertain event.

Applying those criteria, DFS is certainly gambling in the broadest sense -- as are slot machines, lotteries and poker. But using the strict definition of gambling, so, too, are buying and selling equities and purchasing insurance. Certainly, those in the equity markets and insurance industry would quickly point out the differences between a slot machine and a life insurance policy. But the differences, substantial as they are, do not change the fact that both activities share the essential characteristics of gambling.

So, while realizing DFS, along with many other activities, shares defining elements of "gambling" in the strictest sense, it does not mean daily fantasy should be equated with all activities that fall under the definition, especially sports wagering.

The legality of any activity that has gambling components is a matter of legislated law. That's what makes the craps game in a licensed casino legal and a corner craps game illegal.

In some instances, such as traditional sports betting, federal law that severely limits wagering on athletic events has been the determining factor. In other cases, such as casino gambling, the state sets the law.

Fantasy sports, including the daily variety, has enjoyed its status of being considered generally legal in 45 states through interpretations of both federal and state laws. And more than just legal, DFS has been wholly unregulated. That has come back to haunt the industry, as evidenced by the recent crisis. A reasonable regulatory prohibition might have been to prohibit DFS employees from playing on any DFS website.

DFS operators have avoided regulatory scrutiny because they contend daily fantasy falls entirely outside gambling laws in the 45 states where it operates. The argument that DFS is "not gambling" has been predicated on the assertion that, in fantasy sports, skill predominates as opposed to chance or luck.

Granted, that's a lot of nuance, but to simply imply DFS is akin to betting with a bookie because of the optics is overly simplistic.

And that brings me to that very question.

Isn't daily fantasy sports really the same as sports betting?

Absolutely not.

True, you are staking money hoping to win more money. And true, the results involve an athletic event. But those are the optics, not the substance, and at that point, any comparison goes off the rails and the differences are huge.

Difference No. 1: Outcome Vs. Performance

Traditional sports betting is outcome-based. You are betting on who wins and loses. Even in multi-team parlays and individual prop bets, it is always a binary result. In contrast, DFS is based on individual performances and typically involves several athletes participating in multiple events. The complexity of daily fantasy sports has assuaged major sports organizations' concerns about game fixing. And it was concern over game fixing that was at the heart of federal law limiting even state-sponsored sports betting. In addition, that same complexity of play allows DFS to argue it is a game in which skill predominates, an argument that has allowed it to operate in most states so far.

Difference No. 2: House-Banked Vs. Peer-To-Peer

In traditional sports gambling (legal and illegal), you are betting against "the house." The bookmaker sets odds that, in the long run, help assure the house will make a profit. But in the short run, bookmakers are putting house money at risk when they accept a wager. That is not the case in daily fantasy sports. In contrast to house-banked sports wagering, daily fantasy is a peer-to-peer contest. The participants are trying to win each other's money, with the DFS company taking a fee for operating the contest. The peer-to-peer aspect of daily fantasy sports also bolsters the industry's argument that DFS is a skill game in which more accomplished players prevail against weaker competition in the long run.

All the attention DFS advertising has generated recently, plus the resultant reportage, may wind up being another example of that old bromide of "be careful what you wish for, because you may get it."

After raising hundreds of millions of dollars in venture capital earlier this year, FanDuel and DraftKings needed to get the public's attention to try out their product. Hence, there is the non-stop advertising that's been getting on a lot of viewers' nerves. However, along the way, the DFS business is also getting a lot of attention from folks who, for a variety of reasons, may not be happy with where daily fantasy may take sports and the fans.

Questions and concerns abound. Will daily fantasy corrupt the rooting interest of fans? Is it a dangerous activity for those with tendencies for addictive behaviors? Are there proper safeguards against underage participation? And, as has been the case lately, are there sufficient safeguards in place to assure the games are on the up-and-up?

Those are some of the many questions raised by DFS, and this is certainly a reasonable discussion to have. Let's just make it an informed one.

Issue 214: October 2015