Daily fantasy sports

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This article is about daily fantasy sports. For fantasy sports in general, see Fantasy sport.

Daily fantasy sports (DFS) are a subset of fantasy sport games. As with traditional fantasy sports games, players compete against others by building a team of professional athletes from a particular league or competition, and earn points based on the actual statistical performance of the players in real-world competitions. Daily fantasy sports are an accelerated variant of traditional fantasy sports that are conducted over short-term periods, such as a week or single day of competition, as opposed to those that are played across an entire season. Daily fantasy sports are structured in the form of competitions (typically referred to as a "contest"); users pay an entry fee in order to participate, and build a team of players in a certain sport while complying with a salary cap. Depending on their overall performance, players may win a share of a pre-determined pot. Entry fees help fund prizes, while a portion of the entry fee goes to the provider as rake-off revenue.[1][2]

In the United States, the daily fantasy sports industry is saturated by two competing services; the Edinburgh-based FanDuel, and the Boston-based DraftKings. Both companies were established as venture capital-backed startup companies, received funding from investment firms, sports broadcasters, leagues, and team owners, and became known for the aggressive marketing of their services. As of September 2015, both companies have an estimated value of at least US$1 billion, and control 95% of the DFS market in the United States.[3][4] The two primarily compete against smaller DFS services, such as Fantasy Aces and Yahoo! Sports.[5][6] The popularity of the daily fantasy format has been credited to its convenience in comparison to season-length games, as well as the focus on major cash prizes in the promotion of these services. Daily fantasy has also been credited with helping to improve television viewership and engagement with sports.

There is growing consensus surrounding whether daily fantasy games are considered gambling; although sharing similarities with the mechanics of season-length games, daily fantasy games can effectively be classified as a form of proposition betting, because players are wagering on the performance of individual athletes. The Unlawful Internet Gambling Enforcement Act, which does not consider fantasy sports games to be a form of unlawful internet wagering, has frequently been cited as evidence that daily fantasy games are legal. However, the law only prohibits the transfer of funds related to online gambling, and does not actually define unlawful online gambling or effect any other laws addressing gambling. Daily fantasy services are not allowed to operate in Arizona, Iowa, Louisiana, Montana, and Washington due to differences in local gambling laws, while the state of Nevada classified them as a sports pool that must be licensed, because they involve wagers on sporting events "by any system or method of wagering".

The daily fantasy industry began receiving increased scrutiny in October 2015, after it was alleged that an employee working for a DFS service had used inside information to win cash prizes from a competitor, prompting investigations by the New York Attorney General and the Federal Bureau of Investigation.

Gameplay[edit]

There are several main disciplines of daily fantasy sports competitions, divided into two categories: cash games, and guaranteed prize pool (GPP).[2][7][8] DFS contests typically utilize a salary cap format, in which players are allotted a maximum budget to spend on athletes for their team, represented as either play money or points. Each athlete has their own cost, and the more elite athletes have a higher cost value.[9]

In "Double-up" or "50/50" cash game competitions, the object is to finish with a point total within the top 50% of all participants; players who finish in the top half of the field all share an equal prize that is equal to double the entry fee, while the remainder lose their entry fee. Head-to-head competitions are similar, except that players choose an opponent they must beat to win the prize.[7] Guaranteed prize pool contests have higher stakes, using tiered payouts based on finishing in different percentiles or positions of the field of contestants.[10] Further variations of double-up games, including Triple-up, Quadruple-up, and Quintuple-up, may also be offered.[11]

Daily fantasy games exist in a variety of major sports, depending on service, including but not limited to American football (NFL and college football), association football, auto racing, baseball, basketball, cricket, golf, hockey, and rugby.[8][12] Daily fantasy contests have also been held in e-sports, particularly professional League of Legends.[13]

History[edit]

Early examples[edit]

Among the first sites to specialize in the format of daily fantasy was Instant Fantasy Sports, established in 2007; the service's co-founder Chris Fargis was influenced by the popularity of online poker. The site was later acquired by NBC Universal, who had acquired the fantasy sports-focused website Rotoworld in 2006. The service was also re-branded as SnapDraft.[14][15]

Growth[edit]

On July 21, 2009, Edinburgh, Scotland-based Hubdub launched FanDuel; the service attempted to market itself as a modern alternative to the fantasy sports services provided by other media companies (particularly, Yahoo! and CBS Sports) with the daily fantasy format, and integration with popular social networks.[16] Its founder, Nigel Eccles, was inspired to create the site after learning about the exceptions for fantasy sports in the U.S. Unlawful Internet Gambling Enforcement Act of 2006, and realizing that it did not specifically state that a legal, paid fantasy sports game had to last for an entire season.[2] In February 2012, the Boston-based DraftKings was established by former VistaPrint executives Jason Robins, Matthew Kalish, and Paul Liberman. DraftKings gained a local, Somerville-based competitor in StarStreet, when it introduced a daily fantasy game of its own.[17]

DraftKings and FanDuel in particular became the subjects of venture capital investments by various parties; in April 2013, Major League Baseball invested an undisclosed amount in DraftKings, becoming the first U.S. professional sports organization to invest in daily fantasy sports.[2][8] In 2014, DraftKings acquired DraftStreet, as well as StarStreet, and raised another $41 million in investment led by the Raine Group, bringing the company to a total of $75 million in outside funding.[18] FanDuel pursued investments as well, with an $11 million Series C funding round that included Comcast Ventures, a $70 million Series D round in September 2014 led by Shamrock Capital Advisors with participation from NBC Sports Ventures and KKR among others, and a Series E funding round of $275 million in July 2015, valuing the company at over $1 billion.[19][20]

DraftKings and FanDuel also pursued advertising and endorsement deals with sports teams and leagues; in November 2014, DraftKings entered into a multi-year sponsorship deal with the National Hockey League, complimenting team-level sponsorship deals it had reached with seven NHL franchises. The same month, the National Basketball Association reached a similar four-year deal with FanDuel, and acquired an equity stake in the company.[21][22] The company also planned to expand the scope of its MLB partnership.[23] In April 2015, after the National Football League began to allow daily fantasy providers to sign multi-year team sponsorship deals, with caveats, FanDuel reached deals with sixteen NFL teams for placements on team-oriented digital properties, radio, and in-stadium.[22] DraftKings had also received an investment by Robert Kraft—a local businessman whose holdings include the New England Patriots.[24] In October 2014, NBC Sports entered into a content sharing partnership with the DFS information website Rotogrinders, in which it would provide daily fantasy-oriented content for Rotoworld.[25]

Mainstream popularity[edit]

The mainstream growth of daily fantasy sports heading into 2015 was credited to several factors, including the convenience of the format in comparison to season-length fantasy sports, the prospective cash prizes (with some contests featuring advertised cash prices of up to $1 million), as well as their availability on mobile devices—which compliments technologically-oriented lifestyles.[8][26][27] The structure and payouts of daily fantasy games have been described as providing a feeling of "instant gratification" to its players, similar to that of online gambling.[26] The popularity of daily fantasy has also influenced fan engagement with sports; Fox Sports president Erik Shanks felt that daily fantasy sports help improve television viewership of sporting events, while FanDuel stated that users became more engaged with sports content after joining the service.[26]

In July 2015, Yahoo!, a historic provider of season-length fantasy sports, announced that it would begin to offer paid daily and weekly fantasy games as part of its Yahoo! Sports website.[6] In September 2015, both FanDuel and DraftKings also expanded their offerings into electronic sports; FanDuel acquired the e-sports focused DFS service AlphaDraft (which it planned to continue operating as an independent brand), while DraftKings added contests for the 2015 League of Legends World Championship.[13][28]

In October 2015, the state of Massachusetts tabled a bill exploring the possibility of allowing the Massachusetts Lottery to run online, skill-based games, such as daily fantasy sports.[29]

Increased scrutiny[edit]

In late-2015, daily fantasy sports began to face increased legal scrutiny. In August 2015, a class action lawsuit was filed against DraftKings, alleging that it engaged in false advertising in regards to a promotion in which the service claimed it would double a new user's first deposit. The suit alleged that DraftKings would only credit the deposit bonus to a player's account if they fulfill certain monetary and participation requirements within four months, causing them to "incur additional and substantial monetary obligations", rather than instantly receive the bonus as implied by advertising.[30]

On October 6, 2015, the New York Attorney General announced that it had opened an investigation of DraftKings and FanDuel, over whether employees from both websites won money on each other's site using inside information. The investigation started following reports that a DraftKings employee had used inside information to win $350,000 on FanDuel.[31][32] Both sites have since barred their employees from participating in daily fantasy games.[33] On October 14, 2015, the FBI launched an investigation of its own into the two services regarding the inside information scandal.[33]

In the wake of the scandal, multiple class-action lawsuits were filed against both DraftKings and FanDuel, with suits alleging charges such as fraud, racketeering, negligence, and false advertising, arguing that the employees' use of inside information had made the games unfair. One of the lawsuits were filed by a resident of New Orleans, despite paid fantasy games being illegal in the state.[34][35][36]

Marketing[edit]

The aggressive marketing tactics used by DraftKings and FanDuel have also had an impact on the growth of the daily fantasy industry. In June 2015, DraftKings entered into a three-year sponsorship deal with ESPN valued at $250 million, which also included "integration" within ESPN's television and digital content, and having exclusivity in advertising daily fantasy services on ESPN networks beginning January 2016. DraftKings entered into a similar deal with Fox Sports; in exchange for Fox acquiring a $150 million equity stake, DraftKings agreed to pay $250 million on advertising over the next three years.[37][38][39][40]

In October 2015, iSpot.tv estimated that DraftKings and FanDuel had collectively spent over $107 million on television advertising in September 2015 alone—with nearly half being spent on advertising during National Football League telecasts ($23.6 million by DraftKings, and $26.7 million spent by FanDuel). Of the total, $60.1 million was spent by DraftKings, with $7.95 million spent during college football games, $2.05 million during ESPN's sports news program SportsCenter, and $1.36 million during South Park episodes.[3]

Classification as gambling[edit]

There have been disputes over whether or not daily fantasy sports constitute gambling; although the process of preparing a fantasy team is one that requires a degree of skill, the mechanics and monetization of daily fantasy contests mean that players are essentially wagering on the performance on individual athletes.[41][42] This position is supported by the state of Nevada, which ruled in an October 2015 memorandum that daily fantasy services met the state's legal definition of "gambling game" and a sports pool under state law.[11] The United States' Unlawful Internet Gambling Enforcement Act (UIGEA), which generally prohibits the transfer of funds in connection to online wagering, has frequently been cited as having exempted daily fantasy games, as the law does not consider an online contest with pre-determined prizes, and an outcome based on skill that is "determined predominantly by accumulated statistical results of sporting events, including any non-participant's individual performances in such sporting events", to be unlawful wagering.[30][43][44][45]

The act itself does not define unlawful internet wagering, and expressly refrains from altering the legality of any underlying conduct other than funds transfers.[46] The UIGEA also depends on banks to act as enforcers of the prohibitions.[47] Federal criminal gambling statutes are found in Title 18 of the United States Code, such as the Federal Wire Act, which prohibits interstate sports wagering) and the Illegal Gambling Business Act (18 U.S.C. § 1955), which prohibits the interstate conduct of wagering activity prohibited under state law, and are thus, not changed by UIGEA. Congressman Jim Leach, who authored the act, explained that the exemptions were meant to relieve the burden of enforcement of the act by banks, and that "it is sheer chutzpah for a fantasy sports company to cite the law as a legal basis for existing".[43][48]

Daily fantasy services are not allowed to offer paid games in the states of Arizona, Iowa, Louisiana, Montana, and Washington due to local gambling laws.[30] In Nevada, daily fantasy services are classified as sports pool gambling, and must be licensed in order to offer paid games.[11] Louisiana, which has been was described as having the strictest prohibitions on online gambling in the country, attempted to pass a law that would exempt fantasy sports from its ban by using similar criteria to the UIGEA, but the bill was defeated as the result of lobbying by both the Louisiana Family Forum (which showed concerns that players could develop an addiction to the games), and the Louisiana Video Gaming Association (which felt that daily fantasy sports would cannibalize video poker, and needed to be highly regulated).[49]

The NCAA considers all paid fantasy games—including daily fantasy, to fall under its prohibition of sports wagering by student athletes, punishable by becoming ineligible to participate in NCAA-sanctioned athletics for one year.[50] In August 2015, the NCAA, along with ten athletic conferences, jointly discouraged the operation of daily fantasy games involving college sports, considering them to be inconsistent with the NCAA's values and policies. The NCAA has also prohibited commercials for daily fantasy games from being broadcast during telecasts of its tournaments. The SEC has had discussions with its broadcast partners in an attempt to discourage the advertising of daily fantasy games during its telecasts, while the Big Ten Network and Pac-12 Network, which are owned by and dedicated to the Big Ten Conference and Pac-12 respectively, have only allowed ads for daily fantasy games that focus upon professional sports.[51]

The NFL does not outright ban participation in paid and/or daily fantasy sports games by its players and staff, but does restrict how much one may win in such games.[52] DraftKings' sponsorship exclusivity deal with ESPN was also to include the acquisition of an equity stake in the company, but the deal was reportedly called off due to objections by ESPN's parent, The Walt Disney Company, over financially associating itself with gambling.[37][53][54]

Illinois lawsuit[edit]

In 2013, attorney Christopher Langone filed lawsuits against the daily fantasy services DraftDay and FanDuel, as well as customers who had won cash prizes from the two services, under the qui tam Illinois Loss Recovery Act. The act allows a third-party to sue the "winners" of an illegal gambling operation on behalf of their "losers", and take claim to their prizes as an act of recovery. Langone thus asserted that daily fantasy games were a form of illegal gambling because they involved a higher degree of luck than skill, and that he was entitled to receive the prizes from the targeted customer because no other "loser" of the games had come forward in a timely manner.[55][56]

The lawsuit against FanDuel was dismissed by a district court without addressing whether daily fantasy games were a game of skill, ruling that FanDuel was an operator and not the "winner" of an illegal gambling operation, and that Langone "failed to make even a bare assertion that he could recover more than [the Subject-matter jurisdiction minimum of] $75,000."[45][55][56]

On October 16, 2015, the Illinois Gaming Control Board stated that it planned to seek a legal opinion on whether daily fantasy sports constitute gambling.[57]

Nevada ruling[edit]

On October 15, 2015, the Nevada Gaming Control Board published a memorandum ruling that daily fantasy sports games were a form of sports pool gambling, and that DFS services must cease serving customers in the state of Nevada until they obtain a sports pool license.[11][24]

The Board felt that daily fantasy games were consistent with the legal definition of a sports pool under Nevada law, "accepting wagers on sporting events or other events by any system or method of wagering", because it is broadly worded to cover wagers on outcomes of a sporting event, wagers on events occurring within a sporting event (props), and wagers involving a combination of multiple props (parlays). The Board also found that daily fantasy games fell under legal definitions of a "gambling game", as they are played "for money [..] or any representative of value" using "any electromechanical or electronic device or machine", and that players wager against the performance of other players, with a "rake-off" taken by the operator on each wager (defined as a "percentage game" under Nevada law).[11]

In further support of its argument, the memorandum cited comments in a Reddit "IAmA" thread by DraftKings CEO Jason Robins, in which he described the service using gambling-oriented terminology, such as describing the site as being "almost identical to a casino", comparing the concept of DFS to being a cross between fantasy sports and online poker, and repeatedly using terms such as "wager" and "betting" in reference to the nature of the service.[11] The board thus argued that its decision was "consistent with how operators of certain daily fantasy sports describe themselves".[30][41][42][57][58]

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