Are Daily Fantasy Sports Gambling?

DraftKings has risen to power in the daily fantasy sports industry since its launch in 2012—and it is writing the rules of the legal game

Sports fans have fantasized about “dream teams” and matchups since the 1950s, but few could predict that sixty years later, fantasy sports leagues would be a major facet of the professional sports environment.

Fantasy baseball leagues were formed in the 1960s, and in the next decade, they were formalized with rosters and point systems. The 1980s saw a surge of popularity for fantasy sports. Experts began to write articles and analyses that major news publications picked up. The Internet allowed this snowball effect to continue to grow, as interconnectedness created new methods of creating, tracking, and reading about fantasy teams.

By the early 2000s, the concept of fantasy sports had grown to unprecedented popularity with a new sort of game: daily fantasy sports. By that time, millions of people played fantasy football, and what was once a simple hobby had grown into a multibillion-dollar industry.

With this rise in popularity—and revenue—Jason Robins, Matthew Kalish, and Paul Liberman saw an opportunity. In 2012, they founded a small startup out of Liberman’s house near Boston, Massachusetts. They called it DraftKings, and the concept was simple: create an online platform in which anyone could easily participate. Players could compete in a variety of online, sports-based contests to win cash and prizes on a daily or weekly basis.

DraftKings began with baseball, strategically launching on opening day of Major League Baseball that year, and expanded in the months following. Today, DraftKings players can compete via professional baseball, football, basketball, golf, soccer, NASCAR, hockey, ultimate fighting, and college basketball and football. In less than four years, DraftKings has become one of the leading daily fantasy sports companies in North America.

UNLAWFUL INTERNET GAMBLING ENFORCEMENT
ACT OF 2006

The act was signed into law by President George W. Bush on October 13, 2006. It prohibits gambling businesses from knowingly accepting payment from another person in a bet on the Internet. It requires federal regulators to create and enforce policies and procedures to identify and prohibit processing of these restricted transactions.

The goal of DraftKings’ leaders was to create an experience that engaged the user on a new level, attract more viewers to the sports industry, and—most of all—to provide entertainment.

The process is designed to be fun, easy, and commitment-free.

But in the last several months, regulators have asked whether participating in daily fantasy sports contests is legal.

In 2006, President George W. Bush signed into law the Unlawful Internet Gambling Enforcement Act, which prohibits websites from accepting payment from a bet on the Internet. It also requires federal regulators to monitor these sites and be given the ability to block restricted transactions.

Many websites, including online poker tournaments, were fined or shut down as a result of the law, but seasonal fantasy sports sites were exempt because regulators determined they didn’t meet the criteria of gambling websites. Daily fantasy sports, however, hadn’t been invented yet, so no one could consider whether the law applied to them.

When FanDuel, another daily sports fantasy website, launched in 2009, and DraftKings a few years after that, regulators took notice. These companies collected fees and offered cash prizes but weren’t yet considered gambling. They accepted payment from people who appeared to have been betting—yet no one classified them as falling under the law that prohibited unlawful Internet gambling. State attorneys began to ask how these web-based platforms could or should be regulated according to gambling laws, which vary from state to state.

DraftKings says its users are not gambling, but are playing an online sport. DraftKings considers professional athletes the users’ proverbial game pieces.

DraftKings argues that what sets it apart from online gambling sites is that its contests are not based on luck, but—as with an athlete— on skill.

An argument in favor of this stance is the degree to which some players study athletes, teams, games, and even weather conditions to develop their strategies, much as one does in a physical game.

As DraftKings company leaders were making this argument publicly in fall 2015, the company was also pursuing new markets. In November 2015, the company applied for, and was granted, a license from the United Kingdom’s Gambling Commission. The United Kingdom, which allows sports betting, considers all fantasy sports a form of sports betting.

DraftKings’ application sought compliance with UK regulators, but it might have hurt the company’s arguments at home. Applying for a gambling license overseas while adamantly insisting that DraftKings is not a gambling website did not sit will with lawmakers in the United States.

DraftKings By the Numbers

$250M
value of exclusive advertising contract with ESPN

$250M
value of nonexclusive advertising deal with Fox Sports

5
partnerships with National Football League

8
partnerships with National Basketball Association teams

25
partnerships with Major League Baseball teams

7
partnerships with National Hockey League teams

10
states that block players from DraftKings (Arizona, Hawaii, Idaho, Iowa, Louisiana, New York, Mississippi, Montana, Nevada, Washington) as of May 2015

11
states in which DrafKings does not accept customers (Alabama, Arizona, Hawaii, Idaho, Iowa, Louisiana, New York, Mississippi, Montana, Nevada, New York, Washington) as of May 2015

In March 2016, Virginia became the first state to regulate daily fantasy companies, requiring them to register and pay a $50,000 fee to do so, as well as agree to be audited on an annual basis. This regulation prohibited certain people from playing DraftKings or FanDuel, including individuals younger than eighteen years old and employees of the daily fantasy companies and their families.

Indiana followed suit a few weeks later with many of the same regulations, adding the prohibition of contests based on amateur events like high school and college games. That same week, New York Attorney General Eric Schneiderman reached a settlement with DraftKings and FanDuel in which both companies agreed to stop doing business in the state. Four days later, DraftKings’ home state of Massachusetts also filed regulations that increased the age limit of participants to twenty-one years old.

As more states have enacted regulations of daily fantasy sports, DraftKings has been supportive and eager to comply, thanks in part to the legal guidance of its associate general counsel, Faisal Hasan. In April, the company’s website stated, “Legal residents physically located in any of the fifty states and Washington DC, excluding Arizona, Hawaii, Iowa, Louisiana, Mississippi, Montana, Nevada, and Washington, are eligible to open an account and participate in contests offered by the website.” It added that residents of excluded states may participate only in contests that do not offer prizes.

Still, with fifty states come fifty different opinions. There seems to be general agreement that fantasy sports should follow guidelines for the age of players and the protection of players’ identities and funds. Other considerations involve taxes, how to categorize the winnings and investments of players, and the fees of the daily fantasy companies themselves.

The question of taxation for companies like DraftKings has already been answered abroad. In 2012-13, the United Kingdom government generated £1.7 billion in tax revenue from gambling, and more than 100,000 people work in the industry.

With those numbers backing the practice, US critics have raised the possibility of legalizing online gambling, which could change the arena for companies like DraftKings.

Perhaps DraftKings is guilty only of seizing an opportunity created by a legal loophole. Perhaps daily fantasy sports is purely entertainment and based entirely on skill. Regardless, the company’s success has highlighted a number of changes that could be made both in the United States and abroad—and it’s unlikely to let up soon.