By Akash Pradhan, Harvard Business School Class of 2017
Over the last three to four years, a plethora of daily fantasy sports (DFS) companies have emerged, offering avid and casual fans a chance to play shorter-term fantasy games for money. The two leaders in the industry, FanDuel and DraftKings, offer players a chance to “re-draft” their player lineups on a weekly basis and pay out hundreds of thousands, if not millions, of dollars in cash prizes every week. With the popularity of these companies rising (as well as their valuations), there has been significant debate in the media as to whether DFS counts as online gambling and thus should be illegal. While the courts so far have upheld the legality of these companies, the FBI recently announced a probe into the business models of both FanDuel and DraftKings. This article seeks to argue not only that these businesses are legal on the grounds that they are very different from online gambling, but also to contend that DFS as an industry is incredibly valuable to the major sports leagues.
A common argument against DFS is that sports events, including the performance of players, are subject to significant chance and therefore earning or losing money on DFS games counts as sports gambling. In the NFL for instance, seemingly random events such as injuries, weather, etc. can affect the outcome of a game and the statistics a player generates. However, the mere presence of chance is not enough to qualify something as gambling – after all, we do not consider golfers competing for prize money as gambling despite the fact that the outcome of a golf tournament is subject to similar random external events. Beyond chance, DFS players actually have a large amount of data at their fingertips to inform and improve their gaming decisions (prior week statistics, match-up information, etc.) which implies that players are using skill to succeed in DFS. Additionally, DFS players are subject to salary caps, similar to the salary cap that a General Manager of a team is subject to, further suggesting that players are utilizing their roster management skills in order to win at DFS. And statistical evidence of the skill required in DFS is mounting as well; Star Fantasy Leagues recently commissioned a report that showed “skilled players” (those who performed well the prior week) beat random computer generated lineups the following week over 69% of the time.
Another common misconception is that DFS is no different than online sports gambling where bettors wager money on the outcomes of games. In these situations, gamblers are typically betting on a team’s ability to win and to cover a “spread” (win by a certain amount of points). DFS is very different in that players choose lineups of various athletes, across teams. This is a key difference for two reasons: first, choosing a winner or loser of a game overall involves less data and therefore the argument that this activity is more subject to chance rather than skill is stronger. Not only that, because picking overall winners is easier than picking detailed lineups, the common fan might be more drawn to this form of gaming and get addicted to it over time (which is a big concern for the government). The second reason why the format of DFS vs. traditional sports gambling matters relates to game-fixing. If there is a significant amount of money riding on the overall outcome of a game, players might be incented to “throw” games depending on what their betting positions are. DFS is much less subject to game fixing since prize money is awarded based on the performance of many players across many teams.
The next several months will be critical to the DFS industry as regulators make decisions on the legality of their business models. While regulators certainly understand the difference between DFS and traditional sports gambling, they may still require these businesses to adjust their models in order to prevent the average consumer from developing an addiction to this form of gaming, which is very accessible and potentially lucrative. On the other hand, DFS leagues are generating new fans and strengthening the engagement of existing fans for the sports leagues as players pay closer to attention to games that could win them prize money. The leagues will likely work closely with regulators to find a path forward that satisfies both sides. What the outcome is, only time will tell.
