Showdown for fantasy sports

What a difference five days make.   

On Oct. 1, the two major daily fantasy sports giants, FanDuel and DraftKings, stood on a launch pad many expected would blast the two international sports gaming enterprises into stellar success and profitability.  

Advertising like free-spending politicians, gaining new paying customers by the millions and flooding the airwaves and front pages with come-ons, the companies seemed destined for world domination of a sports gambling industry worth an estimated US$41.4 billion in 2015. That’s the staggering projection Statista, a statistical compilation company in Hamburg, Germany, came to about the scope of online gaming this year.  

But just days later, National Football League fans especially, but also global enthusiasts of all sports wagering, got news that there could be a rat in the playpen, threatening the clean image the fantasy sports brands sought. Some customers would wonder whether trying to win money via their skill running imaginary teams was a good bet after all. 

At first a trickle, then more daily fantasy players began withholding their interactions with the companies when they learned that a DraftKings employee apparently used his access to valuable data to win $350,000 from FanDuel. It was just what every would-be gambler fears, that someone with insider information is making big bucks while the everyday schlub struggles to field a losing team.  

It quickly became clear that the revelation, which blanketed the news, could hasten the demise of whatever trust players might have had in the companies’ integrity. Just as their hard-earned momentum was carrying FanDuel and DraftKings into the big time, issues of trust conspired to scare off customers. Both companies announced they would ban employees from playing fantasy sports for cash and agreed they would set higher standards – no need for government regulations, thank-you-very-much.  

At the same time, U.S. state and federal regulators who closely control casino and pari-mutuel gambling began questioning what they could do to rein in the rapidly expanding fantasy sports industry.  

Several states began issuing subpoenas and holding hearings on what “fantasy” teams are, who is making money off of them, and whether they should fall under the strict rules other gambling models abide by. But there is more. 

 

Potential scandal unfolds  

On Oct. 5, readers of the New York Times online – and, very quickly, consumers of many other media – learned that a spokesman for DraftKings revealed that its own employees as well as some from FanDuel had scored big playing fantasy sports.  

A statement said company rules already barred employees from competing on their own company’s platform. But these were workers who had intimate access to gambling meta-statistics, including how many of the companies’ customers draft which pro players based on what statistics. Knowing such information in advance of other gamers provides the opportunity for careful analyses of customer preferences. And that, clearly, can give these insiders a big advantage over ordinary fantasy gamers.  

Meanwhile, financial arrangements and sponsorships that DraftKings and FanDuel had forged with sportscasting television networks, some NFL teams and the league itself certainly embarrassed those enterprises, which wanted no connection with an insider scam.  

At the same time, networks like Fox and ESPN have many reasons to wish fantasy sports a happy, smooth and profitable future. The industry practically demands that its customers watch more sports on TV. Any additional viewers networks draw increase their rate base – the viewership totals that pull more money from advertisers.  

The bubble began to deflate on Oct. 14 when the New York Times reported that the Federal Bureau of Investigation had begun an inquiry into the practices of daily fantasy sports sites after players and lawmakers made allegations of predatory tactics and questioned the use of inside information.  

“The FBI began contacting several prominent competitors in the contests shortly after an employee of DraftKings, one of the two major companies, admitted to inadvertently releasing data before lineups for the start of the third week of NFL games were locked in,” The New York Times reported. “The employee, a midlevel content manager, then won $350,000 at a rival site, although DraftKings said he did not have an advantage.” 

Then, on Oct. 15, the New York Times reported that Nevada regulators had ruled that playing daily fantasy sports should be considered gambling, not merely a game of chance, and ordered websites like DraftKings and FanDuel to stop operating immediately in that state until the companies and their employees receive state gaming licenses. 

“The decision by the Nevada Gaming Commission was the latest blow to a booming yet unregulated industry that has faced intense scrutiny in recent days, including federal and state inquiries into the business practices of the two major companies,” the Times reported. 

Big networks and sports teams have become financial investors, too, committing hundreds of millions of dollars to the fantasy companies. The NFL as well as other sports leagues, including Major League Baseball, the National Basketball Association and FIFA all stand to benefit from fantasy sports’ success. 

In short, a lot is riding on fans’ belief that fantasy sports is on the up and up. The two major companies have jumped revenues from $800 million in 2008 just on their NFL competitions to $1.67 billion in 2012, according to California gaming consultant Eilers Research. It was on track to record $2.6 billion this year – before the scandal hit the news.  

And the FSTA had predicted double-digit financial growth for the foreseeable future, again before fans worldwide learned that people inside the growing companies might put their own gain ahead of the integrity of their enterprise. 

By every expert’s prediction, 2015 was to have been when fantasy sports broke through to become the new way the world confronts sports. Online technology and computer wizardry had matured and gelled, and young sports fans trust that technology. It’s the insiders of whom they are wary. 

When news coverage, talk broadcast media and office water-fountain chat suddenly snaps from how many more fans are jumping on DraftKings and FanDuel to how fundamentally untrustworthy these companies seem to be, it’s a dark day in fantasy land. 

 

What now?  

Fans now wonder where the fantasy sports rocket will take them next. This right at the point when FanDuel and DraftKings had spent more than $150 million on national U.S. TV and Internet commercials in the three months ending Sept. 30. And they dropped $206 million from Jan. 1 to Oct. 5 to draw in more paying customers.  

In one oft-aired FanDuel commercial, a series of ordinary-looking talking heads appear, telling about their winnings. They’re guys in their 20s or 30s. One said he put up $75 to register online and has won “more than $2 million.” Another says, “I’m just a regular guy.” He, too, made big money fielding fantasy sports teams and scoring high point totals. The narrator boasts that FanDuel has paid $75 million a week to such winners. 

How could such testimonials not appeal to the sports-team owner-wanna-be, the companies’ targets? One of the keys that make fantasy sports legal, even in conservative societies that don’t embrace gambling, is that the industry and customers characterize this gaming as a skill competition, not an activity dependent upon chance. 

So when fans closely review the on-field statistics of professional players and then, juggling their draft picks against a fantasy salary budget the company provides them (depending on customer fees), they can boast that luck has nothing to do with how they built a team. “Their choices result from skill,” said Joe Maschino, a Florida sports fan enamored of daily fantasy sports. 

Maschino, who gives over his Sundays to fantasy NFL, studies the stats of players he scarcely knows, watches games he otherwise would not be interested in and tunes in every Sunday morning to TV shows especially geared to fans like him, cluing them to the latest about individual pro players who don’t get star coverage. 

“I make changes in my team’s lineup right up to game time,” he says. He relies on a lifetime of watching games and the bits of information he picks up. “It’s a game of skill, for sure,” he says. Winning is a gift to the ego. 

The Fantasy Sports Trade Association, which has represented the industry in North America since 1999, keeps its eyes on legislation in Canada and the U.S. that might affect gaming and on the demographics of its customers.  

The trade association knows a lot about fans, too: average age (37), household income (47 percent over $60,000), full-time employment (66 percent). What the FSTA does not say is that its fans also display strong faith in technology. It’s not just that they play their games, create their teams and place the bets online. The whole paradigm of how a fantasy team “wins” against another “team” of pro players resides within elaborate algorithms that run on remote computers.  

The software interprets each team’s and real-life pro athlete’s successes and failures right up to kickoff and scores competitions with mathematical precision. The companies use proprietary formulas to assign points to teams in accordance with how each athlete plays in a game. They don’t actually chase, block and tackle one another, but these statistical androids seem to compete on the bases of how they have played in similar situations in past games during closely watched careers.  

If pass defender A is pursuing wide receiver B, while quarterback C throws a pass, software roars through a thousand past match-ups and decides who prevails and how. A completed pass? An interception? A sacked passer? Fantasy sports will identify a plausible conclusion to the play based on past performance of all the pro players on the field. Fans believe in the technology and that its responses have integrity. It is greedy insiders who challenge their trust in fantasy sports. 

Some 60 million participants in Canada and the U.S. now match their wits against the computers. “Why?” Maschino says. “It’s fun. And there’s the chance you could make money.”  

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The state of Nevada has shut down daily fantasy sports Web sites, including FanDuel and DraftKings. – Photo: Andrew Harrer/Bloomberg

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– Photo: Andrew Harrer/Bloomberg

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A DraftKings employee walks past screens displaying the company’s online system stats in Boston. – Photo: Stephan Savoia/AP

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