Daily Fantasy Sports

Daily Fantasy Sports is a relatively new addition to the American gaming landscape, rising from relative obscurity to a place atop the consciousness of the fantasy sports consumer in short order. Although forms of daily fantasy sports date back to as early as 1990, DFS as it is known today was pioneered by several smaller websites in 2007 that were attempting to replicate the success of online poker. Credit for being the “Godfather of DFS” has largely gone to Nigel Eccles, who is the founder of FanDuel.

The DFS market is currently largely a duopoly after an early shakeout in the marketplace. The current market leaders are DraftKings and FanDuel, who are largely close to each other in terms of market share, with several very small players well behind them in the marketplace. DFS allows a player to draft a new lineup every day from a large variety of sports subject to a salary cap. Players then compete against other players in either cash games or tournaments. The format has achieved enduring popularity and has been replicated among many sports, both domestically and internationally.

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UIGEA Loophole

DFS was created in response to a loophole that existed in the Unlawful Internet Gaming Enforcement Act. This legislation, enacted in 2006, treated fantasy sports as a carve-out from the prohibition on internet gaming, accepting the fact that it was a “game of skill” and not a game of chance. The drafters of UIGEA were not focusing on daily activities, but rather clearly had in mind the season-long fantasy leagues that had become a large part of the national vernacular. There were several stipulations in the UIGEA that permitted DFS. First, participation in a contest could not be based on current participation by an actual team. In other words, drafted teams had to features players from across professional sports teams. Another major consideration was that tournaments had to feature guaranteed purses that would be distributed no matter whether the tournament filled or not.

DFS operated in what was considered to be a legal gray area, premised on a loophole in major legislation. Whether DFS operated in a state was dependent on its interpretation of state gambling laws. There were certain states in which the DFS operators were not willing to assume the risk of operation since it believed that those particular states made it illegal to run DFS games there. Eventually, the industry’s skyrocketing notoriety drew the attention of regulators. DraftKings and FanDuel, flush with cash after raising large amounts of venture capital, embarked on large-scale advertising campaigns. Soon, it was virtually impossible to tune into to any sports game any not see at least one commercial for one of the two operators. This ad campaign, while successful in increasing the operators’ attention among players, also served to increase the scrutiny that they received from law enforcement. The heightened awareness also resulted in legal challenges as the operators faced class action lawsuits alleging that they were engaging in false advertising.

DFS Scandals

In 2015, the DFS industry was rocked by a series of scandals that achieved unwanted notoriety for the operators. Employees of the DFS sites, while forbidden from entering games on their won company’s platform, were allowed to participate in games on rival platforms. This yielded an informational advantage for these players. Knowing which players were going to prove popular among DFS gamers for a given contest is a key piece of information to have. In some instances, the key to success in a DFS contest is finding an under-owned player who represents a value play. Often, values persist across DFS platforms so having access to DraftKings player information could help win a FanDuel contest. On this occasion, a DraftKings employee won a $350,000 jackpot on FanDuel. Although the employee did nothing illegal, nevertheless, there was a perception of wrongdoing.

This sparked an investigation by the New York Attorney General Eric Schneiderman. It was Schneiderman’s belief that DFS operators were offering an illegal gambling pool. Schneiderman issued a cease-and-desist letter to DraftKings and FanDuel, ordering them to cease operations in the state. Including in Schneiderman’s letter was his opinion on the legality of DFS and the two companies’ business practices. As a result, DFS was temporarily forced out of New York. However, the operators launched an immediate lawsuit and a lobbying campaign in order to regain access to the critical New York market. In addition, to the challenge faced from New York, other states began to ratchet up the pressure on the DFS industry too and the industry was launched into a fight for its survival. Although the operators received a stay of Schneiderman’s order in court, the legal pressure caused various payment processors to stop accepting monies from New York residents.

Types of Games

Historically, DFS platforms have operated three different primary types of games. These games involve either direct competition with another player or competition in a tournament that can include as many as a million entries.

Head-to-Head

These contests allow participant to compete directly against other players in a winner-take-all match. Each contestant is free to draft any player regardless of which players are on the opponent’s team. A subset of this category is three player games, which are also winner-take-all. After various reforms, players can now see the skill of the players against which they are competing so they can avoid competing against professional DFS players. Head-to-head contests are considered to be “cash games.”

50/50

These contests involve a defined pool of players. For example, ten players can enter into a 50/50 pool. The top half of the players by finish are winners and the bottom half lose their entries. For example, if the entry fee is $10, the winners receive $18, which reflects the DFS operator’s “rake.” 50/50 contests have become rarer as the industry matures and have largely given way to other types of contests. These games have morphed into “double ups” and “triple ups” where a certain number of players double or triple their winnings. These pools are guaranteed and the number of winners does not change regardless of the number of entrants.

Tournaments (GPP)

This type of DFS contest is the one that has drawn the most attention and has helped DFS achieve its position in the lore of gamers. These pools award prizes to usually roughly the top quarter of finishers. It is the top prizes that help DFS draw the attention. Both FanDuel and DraftKings have tournaments during football season (and to a lesser extent for golf) that have top prizes of $1 million or more. The size of these jackpots naturally leads to media attention which becomes free advertising for the operators. It is not uncommon for professional players to have dozens, if not hundreds of entries into these contests. Tournament entries are found at all different price points and skill levels. In addition, FanDuel and DraftKings run championships for which players can either win or purchase entries.

DFS Revenues

According to filings with New York, total DFS revenue currently stands at $335 million. Although there are no firm numbers for revenue by state, it is thought that California, Texas and New York are the largest markets for DFS. The growth in the industry has leveled off as the companies have faced operational challenges forcing the operators to look elsewhere for growth potential.

FanDuel Merger

FanDuel had attempted a merger with DraftKings which failed due to antitrust concerns. In the wake of that, FanDuel needed to shift focuses and it did so when it was acquired by European sportsbook operator Paddy Power. For FanDuel, this represents an attempt to move beyond its DFS beginnings into sportsbook and other offerings. For Paddy Power, the acquisition of FanDuel allows it to leverage FanDuel’s large existing customer base to enter the rapidly expanding U.S. sports gaming market.

Both FanDuel and DraftKings have begun to diversify their offerings to take advantage of the liberalized sports gaming environment. For example, FanDuel has begun the offer its version of the popular “Survivor Pool,” where entrants have to pick one game correctly each week to stay alive in the pool. DraftKings is offering similar season-long products. In fact, the two operators can no longer be thought of as strictly DFS operators. Instead, they are morphing into hybrid DFS and sportsbook operators.

The Next Evolution of DFS Games

Although DFS legality ultimately depends on state law, the Supreme Court’s decision in Murphy has given the operators a new lease on life. DraftKings and FanDuel have expanded their offerings because the traditional types of games that are listed above. Here are some of the newer DFS games that are offered.

Flash Draft – DraftKings allows players to draft a team based on how they think a player will perform in a specific quarter of a football game. The draft is held immediately after the prior quarter ends and players have 15 seconds to make their draft decisions.

Texas Pick ’em – DraftKings has a new contest that allows players to win prizes based on how many games they pick correctly. These picks are outright and not versus the spread. This is a traditional game that is now available online.

FanDuel Guru – This is a draft wizard that assists more inexperienced players and prompts their decision-making by providing them with advice and metrics. In essence, this game becomes a free version of a lineup optimizer.

Both fantasy operators have offered games where players can pick players from a range of players as opposed to from a larger pool based on a salary cap. This game is intended to provide a “quick draft” option that will allow players to assemble a team in a shorter time with less research necessary.

Online Sportsbooks

In fact, DraftKings recently made its first full-scale foray into sports betting. The company entered into a partnership in New Jersey with Resorts Casino to offer an online sportsbook which went live in August. DraftKings had been preparing for legalized sports gaming and was ready to hit the market quickly soon after New Jersey legalized sports gaming. DraftKings offers both mobile and web-based betting and has introduced novel in-game betting opportunities. As more states legalize sports betting, like West Virginia just did, DraftKings will be at the forefront; they will leverage the experience that gained in New Jersey.

FanDuel also promises to be a viable player in the mobile sports gaming market. FanDuel had entered New Jersey as the operator of the physical sportsbook at Meadowlands Racetrack. In September, it opened its online sportsbook and mobile app. The expertise of its new parent company should help FanDuel establish and grow its national sportsbook brand.