major blow to the fast-growing fantasy sports


Hard Yards Ahead For Well-Funded Fantasy Sports

 
New York state attorney general has dealt a major blow to the fast-growing fantasy sports business, telling the two largest players, FanDuel and DraftKings, to cease operations after being ruled as illegal under the state’s gambling laws. It comes shortly after Nevada ordered the sites to close in its state and in California state officials are also investigating their legality. All this comes not long after the industry was rocked by an insider trading scandal, where a DraftKings employee won a USD350,000 contest. Suddenly this multi-billion dollar business is looking very vulnerable.
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Skills
The daily fantasy sports industry is dominated by FanDuel and DraftKings, which together have raised more than USD700m. Both argue their sites are skill-based games. Users build their own online sports teams and then compete against each depending on how their real-world counterparts do. The practise has existed for a long time in the US, but it’s only recently become a massive money spinner. FanDuel and DraftKings have secured the backing of many of the biggest names in sports, making deals with 28 of the 32 teams in the NFL. DraftKings also secured an equity investment from the MLB. The two are ambitious, advertising heavily, with DraftKings spending as much as USD24m a week on TV ads.
The importance of being games of skill and not chance is important to the firms, as the former is permitted under the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA). This though is disputed by former congressman Jim Leach who drafted the law, who told the Associated Press that what the two sites are doing as “sheer chutzpah”, adding that it was never his intention that fantasy sports would “morph into today’s cauldron of daily betting”.
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Poker
The main problem is daily fantasy sports resembles poker, in that while there is some skill the winnings mostly go to only a handful of players. This is borne out by a study of daily fantasy sports for baseball by McKinsey that showed 91% of winning go to the top 1.3% of players, and 85% of players made a net loss. This is a somewhat worrying result for FanDuel and DraftKings as the UIGEA was used to shut down many online poker and gambling sites.
State By State
US rules on gambling differ greatly from state to state, but losing California and New York, the first and fourth-most populous states in the country, would be a major blow. Worryingly, these bans coincide with investigations from the Department of Justice and the FBI over the legality of daily fantasy operations. It all adds up to a rather worrying picture for fantasy sports sites that could see them disappear entirely. This is all a big change for an industry that was just last month expected to reach USD14bn in the US by 2020.
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