By Will Sandman | email@example.com
Cody Manmiller has no doubt about it. Daily fantasy sports is all about luck, not skill.
“Based on how the laws are right now, it should be illegal,” said Manmiller, one of an estimated 56.8 million people who use of daily fantasy sports sites like DraftKings and FanDuel. “It’s gambling, end of story.”
New York authorities agree.
On Nov. 17, State Attorney General Eric Schneiderman filed an injunction to prevent New Yorkers from playing DraftKings and FanDuel. The two companies dominate a daily fantasy sports market worth billions of dollars.
Schneiderman said in a statement: “Daily fantasy sports is neither victimless nor harmless, and it is clear that DraftKings and FanDuel are the leaders of a massive, multi-billion-dollar scheme intended to evade the law and fleece sports fans across the country. “
The fantasy sports companies dispute that view.
“Fantasy sports is a game of skill and legal under New York State law,” FanDuel said in a statement. “This is a politician telling hundreds of thousands of New Yorkers they are not allowed to play a game they love and share with friends, family, coworkers and players across the country.”
A ruling on Schneiderman’s injunction is expected soon from New York State Supreme Court Judge Manuel Mendez.
New York is not the only state to declare that daily fantasy sports are illegal. The games have been banned in Washington, Louisiana, Montana, Iowa, New York and Nevada, the last which openly embraces sports gambling in its casinos.
Daily fantasy sports started in 2009 when Scotland-based prediction market game Hubdub launched a spin-off known as FanDuel. FanDuel, which blossomed into a business now valued at just over $1 billion, used a back door in order to establish its legality.
The Unlawful Internet Gambling Act of 2006 established guidelines for online wagers without mentioning fantasy sports. At the time, fantasy sports was limited to season-long leagues. Users typically paid entrance fees of $20 to $50. There were no daily fantasy leagues back then. FanDuel filled that niche three years later, drawing legions of players.
In 2012, former VistaPrint executives Jason Robins, Matthew Kalish and Paul Liberman founded DraftKings in Boston. Major companies quickly invested in the new venture, hoping for big profits.
Major League Baseball, which has banned players for life for throwing games, invested an undisclosed amount in DraftKings. In April 2015, MLB and DraftKings announced that DraftKings would be the official daily fantasy sports platform of MLB. “MLB has long been at the forefront of embracing new technologies to create superior fan experiences, and DraftKings couldn’t be happier to partner to continue that tradition of innovation,” the companies announced.
In November 2014, DraftKings entered in to a multi-year sponsorship deal with the National Hockey League. Days later, FanDuel announced it had reached a similar agreement with the National Basketball Association.
The NFL does not have a similar league sponsorship, but allows teams to broker deals individually. Currently 28 of the 32 NFL teams have deals with daily fantasy sports sites and Robert Kraft, the owner of the New England Patriots, has invested in DraftKings.
If you’ve watched a television in over the past year, chances are you’ve seen a commercial for daily fantasy sports. According to iSpot.tv, daily fantasy sports companies this fall were airing advertisements once every 90 seconds. Advertising experts say they could not have done that without help and investments from Disney, Time Warner Cable and Comcast.
FanDuel and DraftKings are using an advertising strategy called market saturation, according to Gary Goldsmith at North Beach Creative, an advertising agency in St. Augustine, Florida.
“Market saturation works really well for certain markets, but not for others,” said Goldsmith. “If you see things too many times, you can be numb to it.”
To truly saturate the market with ads, companies need enormous budgets, he said. Those budgets are typically outlined at the beginning of the year in the firms’ strategic marketing plan. Most ads are broadcast during peak seasons and new product launches.
To raise money for these ads, FanDuel and DraftKings went through several rounds of investments.
Comcast and NBC Sports contributed over $80 million to FanDuel alone in 2014. Then in June 2015, DraftKings entered into a three-year sponsorship deal with ESPN valued at $250 million. That contract included integration into ESPN’s television and digital content.
DraftKings also entered into a similar deal with Fox Sports, but it wasn’t exclusive. The company agreed to buy $250 million in advertising from Fox in return for a $150 million equity stake. Since the deal with Fox wasn’t exclusive, Fox also retains the right to make deals with other companies in the same market as DraftKings.
All of the money that DraftKings and FanDuel raised helped them inundate the market with advertisements. However, the future of the companies will more than likely be public. “This round of funding for FanDuel is expected to be the last capital raise for the company prior to their IPO,” states an April 2015 offering document.
Once these companies go public, stakeholders will have the opportunity to liquidate their shares or keep them, a decision that will be made on a case-by-case basis.
Daily fantasy sports had drawn little scrutiny until August when a class-action lawsuit accused DraftKings of false advertising.
DraftKings had offered to double players’ money when they deposited it on the site. In reality, the company would only credit the deposit bonus to players’ accounts if they fulfilled certain monetary and participation requirements within four months.
More trouble followed this fall.
In October, the New York Times and other outlets reported allegations that a DraftKings employee had used insider information to win $350,000 on a rival site, FanDuel.
DraftKings denied the accusations, saying that a law firm it hired investigated the claim and found no wrongdoing.
But the damage was done. The allegations drew scrutiny from Schneiderman, who quickly announced he was investigating both DraftKings and FanDuel. Among his questions: Did employees from the two sites use insider information to win money from each other? The FBI is also investigating.
After the news broke, more lawsuits followed alleging fraud, racketeering, negligence and false advertising.
Washington Redskins wide-receiver Pierre Garçon filed a lawsuit claiming the sites had used his name and likeness for monetary gain without his permission.
Daniel Ruppert, who plays daily fantasy sports, believes the scandal was the turning point for these two companies. “Yeah, I think it really did hurt them. The big thing is that it isn’t regulated. Anyone can join the leagues so you never know who you’re dealing with.”
Players typically don’t know who they’re competing against in daily fantasy sports. In one league, you could play against a high schooler who just turned 18 or a Harvard graduate with master’s degrees in comparative analysis and statistics. One of the best players is Corey Albertson, a former World Series of Poker participant. He uses advanced algorithms that not only take advanced statistics into account, but weather conditions and wind speed.
Such tactics can undermine one of the main pillars of these two companies, that anybody regardless of skill level can win money.
“Daily fantasy sports are effectively dominated by numbers nerds with sophisticated algorithms. Which is great news for anyone who wished Moneyball could be a bit more boring. But it’s not great news for the casual player, and it somewhat undercuts the key selling point in their ads,” said John Oliver during a November episode of HBO’s “Last Week Tonight.”
Manmiller said, “It’s a lot easier just to make money gambling than on DraftKings or FanDuel. You’ve got a 50/50 shot when you’re gambling. You definitely don’t in daily fantasy games.”
The statistics back that up. According to a study done by McKinsey and Company, a global management consulting firm, 91 percent of the two sites’ payouts through the first half of the MLB season this year went to just the top 1.3 percent of players. And 85 percent of daily fantasy players lose money, the company said.
Manmiller said he has sunk over $50 into DraftKings in the last few months and hasn’t won a penny.
After Schneiderman filed the injunction seeking to ban daily fantasy sports in New York, FanDuel and DraftKings sued to prevent Schneiderman from enforcing the ban.
DraftKings called Schneiderman’s order a “shocking overreach.”
“He has unleashed an irresponsible, irrational and illegal campaign to destroy a legitimate industry,” a court document said.
FanDuel had a similar response, stating: “The game has been played — legally — in New York for years and years, but after the Attorney General realized he could now get himself some press coverage, he decided a game that has been around for a long, long time is suddenly now not legal. We have operated openly and lawfully in New York for several years. The only thing that changed today is the Attorney General’s mind.”
On Nov. 11, fans gathered outside Schneiderman’s office to protest. They waved signs and chanted “game of skill!” But it turned out that about half of the 250 protestors that had gathered were actually employees of FanDuel.
While that undermined the credibility of the protest, one of the signs summed up daily fantasy players’ feeling: “Schneiderman should focus on real problems.”
That seems to be the prevailing attitude among many daily fantasy players. Said Alex Cattermole, a DraftKings participant: “I think it’s illegal, but it should be legal. Sports gambling should be legal.”
Some critics argue that legalized sports gambling would prompt some players to throw games.
Manmiller disputed that idea.
“They can throw games as it is, though. People are still gambling all the time.”
Cattermole said, “Now that athletes are paid so much I don’t think people are concerned with them throwing games. You could legalize gambling while making throwing games still illegal.”
Others say that wouldn’t change the nature of daily fantasy sports.
Hall of Fame quarterback Joe Namath told CNBC: “Do you pay to play? Yes. Do you win money? Yes. Then it’s gambling.”