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The Scrutiny of Daily Fantasy Sports

Navigate Research - Thursday, November 12, 2015

Written by: Chris Miller

They are everywhere you look… TV commercials, online banners, newspapers, train stations, shopping malls, and sports arenas have all been flooded with advertisements of the two major daily fantasy sites- DraftKings and FanDuel.  As a matter of fact, this morning’s Mike and Mike radio broadcast featured two FanDuel commercials and if you take a look outside our office window in Chicago, you will see one of their billboards.  Even if you’ve never played on either of these sites, chances are you have noticed the barrage of advertisements over the last three months, the effort of a combined spend of over $200 million in TV advertising this NFL season. 

Much to their credit, the attempt to spread awareness by the two major players in the industry has worked pretty remarkably.  It is estimated that daily fantasy games will generate around $2.6 billion in entry fees this year.  Both FanDuel and DraftKings have raised over $300 million in investments from the likes of major media companies such as NBC Sports and ESPN, as well as each of the 5 major U.S. sports leagues.  These major media networks and leagues are obvious beneficiaries of daily fantasy play, with the inevitable growth of viewership and interest in sports that comes from those who participate.  For all of those who have entered a lineup on one of these sites, you know how important it is to monitor your players’ performances that night.  That’s likely why Adam Silver, the commissioner of the NBA, embraces the idea of daily fantasy sports betting and publicly declared his support for it.

All that said, could the rapid growth and in-your-face promotional efforts be to blame for the increased scrutiny and uncertain future that lies ahead for these daily fantasy companies?  Though FanDuel has been around since 2009 and DraftKings since 2012, it was just Tuesday that New York attorney general, Eric Schneiderman, ordered the two major daily fantasy companies to stop taking bets from New York residents.  Schneiderman was quoted saying “Today we have sent a clear message: not in New York, and not on my watch.”  Pending an appeal, this cease-and-desist order would result in a loss of more than 1.1 million users and a combined $384 million in revenue per year. 

FanDuel and DraftKings’ legal teams vow to fight the decision made by the New York attorney general.  The passage of the Unlawful Internet Gambling Enforcement Act of 2006 left room for “games of skill,” and that is the main point of argument for these daily fantasy companies.  FanDuel CEO Nigel Eccles states "If you don't know football, you don't know basketball, you will quickly find out it's a game of skill."  Some would liken it to horse betting, which is legal in the state of New York and is perceived to have an aspect of skill involved.  Are there any major differences in analyzing information to choose a horse to win a race and analyzing information to select athletes for an optimal daily fantasy lineup?

With the decision of the attorney general in New York, you have to wonder what sort of domino effect might lie ahead for DraftKings and FanDuel.  Regardless, stricter regulations are certainly to come for these companies, and they could jeopardize their future altogether.  The puzzling part is how they’ve grown to be multi-billion dollar businesses right before the very eyes that are now challenging their legality.         

Perhaps the best approach for DraftKings and FanDuel would be to spend less money competing with each other, and join forces for a unified legal battle.