Off to the Races: Why Fantasy Sports Should be Regulated

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Image found on slate.com

Jasjit Goraya

When one hears about fantasy sports, the first thing that comes to mind is usually a flashy website, a behemoth stadium, or a chiselled basketball player. Last month, comedian John Oliver changed that image when he described the fantasy sports industry—and the lack of regulation surrounding it. Oliver claimed that fantasy sports companies “air[] an ad on national television every ninety seconds! …at this point there is no show that isn’t financially compromised by a relationship with Daily Fantasy, in fact, just so you know, HBO is a subsidiary of Time Warner (which owns a stake in Fan Duel) so my comment about being compromised is in a sense brought to you by Fan Duel”.

If you own a TV and get access to any channel that is remotely related to North American sports, chances are you have seen a fantasy sports ad. At the peak of American football season this year, two of the industry’s biggest brands, Drafkings and Fanduel, aired a combined 1,285 ads. The nascent industry is referred to as the “unicorn” of start-ups, a term employed by entrepreneurs to describe companies that are valued at more than a billion dollars. Fantasy sports is just the new “unicorn” on the block, joining the likes of Uber and Airbnb, as a company that shot to fame quickly but is now facing controversy.

What are fantasy sports? Fantasy sports are online games in which participants assemble virtual teams of real players along with fellow online participants. These teams compete based on the statistical performance of the professional players in actual games. The more touchdowns professional players make in actual games, the higher the payoff for online participants who have placed high bets on those players. Many tournaments offer cash rewards that stretch into the millions of dollars. This industry was initially founded through informal fantasy games in which groups of fans played against one another over the course of a season—and there was no betting, no money involved, no gambling, hence, no need for regulation.

When companies such as Draftkings and Fanduel were born, they set up online daily and weekly games with a similar concept, but this time fans had to register and pay an entry fee anywhere between 25 cents to $1000 (depending on what website they signed up for) to play a few dozen to hundreds of participants. With prize pools of up to $2 million, critics claim they are not surprised that information manipulation, cheating, worsened gambling addictions, and insider trading are real problems for the industry. While this is clearly gambling, many are surprised to find out that this multi-billion-dollar industry still remains unregulated.

The saga of fantasy sports began in 2006, when American lawmakers enacted the Unlawful Internet Gambling Enforcement Act, a federal statute that banned all internet gambling, which included online bingo, online casinos, and others alike. When a proposal went up for fantasy sports, professional leagues argued that an exemption had to be made for fantasy sports as the online games boost consumer interest, increase game viewership, and generate greater overall revenue for the leagues. After much lobbying, an exemption issued by the federal government deemed fantasy sports to be “games of skill and not chance”, which set the games apart from traditional gambling practices. Today Draftkings reigns in $426 million in total revenue, while its competitor Fanduel hauls a respectable $363 million. Time Warner Investments, Google Capital, NBC Sports Ventures, and Comcast Ventures have invested stakes in FanDuel, while the NBA owns an equal stake. The industry has also partnered with 16 NFL teams, 14 NBA teams, along with Major League Baseball. Given these high profile stakeholders and partners it is definitely not a surprise to many regulators that fantasy sports are turning into a behemoth regulatory task, with layers of legal complications, lawsuits, and corporate cheating allegations.

In the second week of October, Fanduel and Draftkings were forced to issue statements defending their businesses’ integrity after insider data was released and used by a Draftkings employee, Ethan Haskell on the Fanduel site. This data detailed which players were most used in the lineups within all entries received by the site. This is vital information that is not released until the lineups for games have been decided; getting this data early is a great advantage when making tactical decisions, given the fact that opponents will not have this information when making their decisions. Ethan Haskell ended up winning $350,000 at his company’s rival site, Fanduel.

Both companies responded to the scandal by stating that they take employee misuse of information seriously, adding that employees are consistently monitored by internal fraud control teams. As a short term response to the scandal, both companies have temporarily barred all employees from participating in current running games until further notice. But this example shows how easy-to-manipulate the novel industry is, and how insider trading—much like the heady excesses of Wall Street—could herald new scandals for fantasy sports.

Aside from insider trading and information manipulation, the industry also faces the challenge of operating in American states where fantasy sports that operate for gambling purposes are deemed illegal. Such a case was recently brought forward by the state of Louisiana. Recent class action lawsuits against Draftkings and Fanduel suggest that fantasy league players who were based in Louisiana were able to deposit money into contests – an action legally prohibited under state law. The scandal continued to worsen as news reports indicated that Jon Aguiar, an executive of Draftkings, publicly advised daily fantasy sports customers on how to deposit funds and how to participate in contests in both states and countries around the world where the games are prohibited by law.

While some users and players argue that the level of skill and tactical decision-making required for fantasy sports clearly sets it apart from conventional gambling, others argue that fantasy sports is a combination of both skill and luck. “This is largely about statistics, probability, trends, analysis and patterns,” says Seth Young, chief operating officer of Star Fantasy Leagues, a smaller daily fantasy sports site. “But it’s also about feel—who you want to pick, who you want to root for. You can play the game effectively if you’re just a huge fan, and you know everything there is to know about the sport.”

Regulators state that the single greatest threat to the new industry is the misuse of insider information, which could potentially imperil the nascent industry unless the necessary safeguards and checks and balances are put in place. Some insiders state that the banning of online gambling was an arbitrary decision and should not be applied to the world of fantasy sports, as winning big is often unlikely. The prizes in contests go disproportionately to the top 5-10 players in a competition. The prizes of these competitions can be substantial, such as one won by player Saahil Sud, a top ranked player who won a whopping $2 million. To garner this success, Sud employed custom-built predictive models and statistical software to generate numbers that would increase his odds of winning. What is clear from all this is that fantasy sport is gambling and until a regulatory framework is not enacted, the lawsuits and cheating allegations will continue to arise.

Following the scandal, the Canadian Gaming Association released a statement indicating that fantasy sports are illegal under the Criminal Code of Canada. Parallel to the United States regulatory dilemma, even though the games are illegal under federal law, each province will asses their gambling laws and determined the legality of fantasy sports under provincial jurisdiction. As of right now, Canadian citizens can participate in fantasy sports websites, take part in contests, and place bets on line-ups. The former general counsel for the Alcohol and Gaming Commission of Ontario is further examining the legal standing of DraftKings and FanDuel in Ontario and other provinces will be following the same path.

Although fantasy sports are gaining popularity rapidly both globally and in the U.S., it would be naïve to believe that operators in the marketplace would be considered ‘too big to fail’ by congress and regulators. The youth of the industry has allowed it to stay clear of regulation—but it would be a mistake to think that the industry will be without regulation for long.

Jasjit Goraya is a 2016 Master of Public Policy candidate at the University of Toronto and a Compliance Analyst with the G20 Group at the Munk School of Global Affairs. She previously completed an Honours Bachelor of Arts Degree in Political Science and Criminology at the University of Toronto. Jasjit’s main areas of interest include Canadian youth justice policy, foreign affairs, and immigration policy.

 

 

Image found on Slate.Com

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