The Justice Department and FBI have opened an investigation into whether the business model of daily fantasy sports sites violates federal law. Two of the industry's leaders, FanDuel and DraftKings, advertise heavily for their games.

The Justice Department and FBI have opened an investigation into whether the business model of daily fantasy sports sites violates federal law. Two of the industry's leaders, FanDuel and DraftKings, advertise heavily for their games.

Betting on sports teams is illegal but not so if the team you’re betting on is an imaginary one: Daily fantasy sports is an industry largely dominated by two companies, Draft kings and FanDuel. The two companies are expected to draw in more nearly 60 million of players – each hoping to snag some of the more than $3 billion in cash prizes. A 2006 law which made online poker and sports betting illegal specifically excluded fantasy sports teams, but now many are questioning the logic of that exemption. Join us to discuss the booming business of fantasy sports and why some say it’s an industry that needs more oversight

Guests

  • Devlin Barrett Reporter, security and law enforcement, The Wall Street Journal
  • Daniel Wallach Attorney, Becker and Poliakoff specializing in sports and gaming law
  • Seth Young Chief operating officer, Star Fantasy Leagues
  • Kevin Cochran Legal analyst, GamblingCompliance

Transcript

  • 10:06:53

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. It takes skill, not luck to win cash with daily fantasy sports. At least, that's the rationale that exempts these sites from the ban on online gambling. The two companies that dominate the market are each valued in excess of the billion dollars and some say they should be subject to regulation.

  • 10:07:19

    MS. DIANE REHMJoining me to talk about new questions being raised about daily fantasy sports, Devlin Barrett of The Wall Street Journal, Kevin Cochran of GamblingCompliance. Joining us by phone from Ft. Lauderdale, Florida, Daniel Wallach, an attorney in private practice specializing in sports and gaming law. I know many of you are interested. Indeed, you may be involved in fantasy sports.

  • 10:07:49

    MS. DIANE REHMGive us a call, 800-433-8850. Send your email to drshow@wamu.org. Follow us on Facebook or send us a tweet. And thank you all for joining us.

  • 10:08:05

    MR. DEVLIN BARRETTThank you, Diane.

  • 10:08:06

    MR. KEVIN COCHRANThank you.

  • 10:08:07

    MR. DANIEL WALLACHThank you.

  • 10:08:08

    REHMAnd to you, Devlin Barrett, explain to us what daily fantasy sports actually is.

  • 10:08:16

    BARRETTWell, to understand what daily fantasy sports is, first, you have to understand what fantasy sports is. And fantasy sports, traditionally, was just a little game you'd play with our friends where, at the beginning of a season, you'd all pick your -- the players you wanted and then each of you would earn points based on how those players performed game to game.

  • 10:08:35

    BARRETTAnd at the end of the season, you know, you'd split up the pot and the winner would either, you know, you can do it different ways. You can either have a weekly win plus an end-of-the-season pot or just an end-of-the-season pot and that's sort of the way, you know, as a kid, I grew up around people playing, you know, fantasy sports and that's how you learned to play it then. And what's...

  • 10:08:54

    REHMAnd just help me understand. The fantasy part of it is that you pick players from any teams that you choose.

  • 10:09:03

    BARRETTRight. Right. You sit around -- I mean, the traditional version is you sit around in a circle and you have a draft where you each pick the player you want. And you go in order so, you know, if it's baseball, you know, you take Daniel Murphy and someone else takes, you know, any other player and you just go down the road.

  • 10:09:21

    REHMOkay.

  • 10:09:21

    BARRETTAnd then, in your -- how your team does is based not on how a specific team does, but how your collection of players do individually when you add up the points.

  • 10:09:32

    REHMOkay. So is it mostly one sport or is it all sports?

  • 10:09:40

    BARRETTWell, now it's all sports. I think there was a time when it was pretty much just baseball and football or at least that's the people I know who did the most. It's expanded to basically be every sport at this point, in one form or another. And so, you know, I think -- but it's also within a sport. Obviously, you don't sit around picking, like, a football player and then a baseball player. Like, you have a football fantasy league.

  • 10:10:04

    REHMOf course.

  • 10:10:04

    BARRETTA baseball fantasy league, that sort of thing.

  • 10:10:05

    REHMOkay. So when you were a kid, you all sat around in a circle. How does it operate now?

  • 10:10:13

    BARRETTWell, what's mainly different now is the daily fantasy sports is a different dynamic in that you are picking just for the day. You are picking -- or sometimes, you know, essentially, the Sunday of that NFL set of games. And so you pick a bunch of players and you're just basing that on how everyone does that particular day of competition. So, you know, fantasy sports used to be this long nerdy, march to mathematical defeat or loss -- or victory.

  • 10:10:46

    BARRETTNow, your payoff is much more immediate. It's more of an instant gratification game, the daily fantasy sports.

  • 10:10:54

    REHMAll right. Now, tell me about the state laws that make this legal. What's the difference between online betting that had been outlawed and now fantasy sports that has been exempt from that?

  • 10:11:19

    BARRETTWell, a lot of states are looking at this and wrestling with this problem now. Earlier this week, you saw -- or it might have been last week, I forget -- the state of Nevada weighed in and said that daily fantasy sports was just flat out gambling and therefore banned in that state. You know, Nevada has a very particular interest. Obviously, it's a casino state so that matters a great deal.

  • 10:11:42

    BARRETTAnd at the end of the day, I think, you know, all these states are wrestling with this in different ways and the federal government is also wrestling with it.

  • 10:11:51

    REHMDevlin Barrett, he's a reporter for security and law enforcement at The Wall Street Journal. Turning to you, Kevin Cochran, what's the difference between luck and skill in the law?

  • 10:12:11

    COCHRANSure. When it comes to gambling, there are usually two tests that are used to determine if a game is gambling or not. This is your any-chance test versus your predominant factor test. Predominant factor test essentially says if skill outweighs luck, than therefore, the game is one of skill. However, in some of the states, the way the gambling laws are written, it is an any-chance test so if any chance is used to determine the outcome of a bet or wager, then therefore, it is gambling.

  • 10:12:41

    REHMSo if you are saying that what's going on with fantasy sports is luck, then you're exempt from any laws, any regulation.

  • 10:12:59

    COCHRANSo if you're believing that the game is solely based on luck, then it's most likely going to be deemed gambling in a lot more of the states. If you're saying that skill outweighs chance, then you're more likely to believe that it does not fall within the state's traditional definition of gambling.

  • 10:13:22

    REHMYou know, this seems like such a complicated situation for states to decide, for companies to get into. Go on.

  • 10:13:39

    COCHRANWell, it is complicated, but, you know, the companies say that they have very clear, you know, in the companies' minds, they are on very solid legal ground. I think the challenge for regulators and the government is if you look at what it is, it looks, walks, acts and talks like a duck, right? It feels and looks and, you know, and you just sort of intrinsically feel that this is gambling. Now, I will say that one of the things that's sort of funny to me about this debate is, you know, there's this big regulator and government argument about what's legal or not legal.

  • 10:14:17

    COCHRANAnd is this legal or is it not legal? Well, sports betting has gone on my entire life. I assume it existed long before I showed up and it's always been viewed as sort of like, well, it's illegal, but I mean, come on. And everyone I grew up with did some form of sports gambling.

  • 10:14:34

    REHMBut Daniel Wallach, tell us what happened in 2006.

  • 10:14:40

    WALLACHIn 2006, at the urging and lobbying of the National Football League, Congress enacted a federal law known as the Unlawful Internet Gaming Enforcement Act, which was a comprehensive scheme designed to prohibit online gambling. But at the last minute, tacked onto the bill was an exemption for fantasy sports. And at the time that law was enacted, the concept of daily fantasy sport hadn't even been invented.

  • 10:15:17

    WALLACHIt was -- fantasy sports was a season long contest played by friends in offices for de minimis amounts so it flew under the radar and did not begin to attract attention until years later when daily fantasy sports emerged and became a billion dollar industry. And now, many have questioned whether the exemption for fantasy sports should apply to daily fantasy sports, and more critically, whether it provides any legal comfort at all for any form of fantasy sports because part of that law recognizes that states have the primary role in determining what forms of gambling are legal or illegal in the state.

  • 10:16:01

    WALLACHSo this debate has emerged to question whether the UIGEA statute gives any legal comfort at all to fantasy sports operators. And last week, the Nevada Gaming Commission concluded that it does not, that it does not impact or pre-empt the rights of states to make their own determinations and Congress is going to revisit this.

  • 10:16:24

    REHMOkay. One more question, Daniel Wallach. Tell me what the logic is for arguing that fantasy sports are a game of skill as opposed to gambling.

  • 10:16:41

    WALLACHThe proof is in the pudding. And first, let me start out by saying it doesn't matter whether it's skill or chance for purposes of characterizing it as gambling. There are many forms of gambling in this country which are legal and regulated which are skill-based, chief among them are poker and sports betting. But what makes -- what persuades many that daily fantasy sports is predominantly skill are the results of who wins and who loses.

  • 10:17:12

    WALLACHThere's an expert who conducted an analysis of the Major League Baseball season and how daily fantasy sports contest interacted with that and approximately 1.3 percent of the contestants won almost 80 percent of the profits. The questions isn't whether it's luck, skill or chance, but whether it's too much skill involved that it creates an unlevel playing field and sharks are gobbling up minnows. That's the question. Not whether it's luck or chance.

  • 10:17:42

    WALLACHIt is a gambling product. There's no question it's a gambling product. The ultimate question down the road is what are we going to do about it? Are states going to regulate it? Is it going to be prohibited in certain states? So we've moved past the skills versus chance debate and it's a question of how are we going to regulate.

  • 10:18:00

    REHMDaniel Wallach, he's an attorney specializing in sports and gaming law. Short break here. When we come back, your calls, your comments. Stay with us.

  • 10:20:02

    REHMAnd welcome back. We're talking in this hour about fantasy sports gambling. And joining us now is Seth Young. He's chief operating officer for Star Fantasy Leagues. Seth, tell us about your company.

  • 10:20:23

    MR. SETH YOUNGGood morning, Diane. Good morning, gentlemen.

  • 10:20:24

    REHMHi.

  • 10:20:24

    YOUNGSo our company, Star Fantasy Leagues, the best way to think about us is as a fantasy sports technology company that operates its flagship brand at starfantasyleagues.com. We've taken a very different approach than most other fantasy sports groups in our market in that our focus has been on strong technology and compliance. And all the issues that we're seeing come up now are issues that we decided we want to address and effectively walk before we run in a market that's fraught with legal ambiguity.

  • 10:20:51

    REHMSo what does that mean as far as how you operate your company as opposed perhaps to how others do?

  • 10:21:02

    YOUNGSo our focus has always been on building technology to address concerns of gaming regulators, not just in the United States but in jurisdictions worldwide. We didn't push for a regulated fantasy sports market but we certainly did prepare for it in deciding how we were going to approach the market, where we were going to operate, the kinds of games we were going to run. And all of those questions we effectively tried to answer before the -- this sort of watershed moment came up where this amount of scrutiny was being put on the fantasy sports market.

  • 10:21:32

    REHMAnd do we all agree that the reason this kind of focus is being put on it is what's happened in Nevada? Or is it simply more and more attention being paid, Kevin?

  • 10:21:48

    COCHRANI think the point that brought a lot of eye toward fantasy sports was these allegations of insider trading at DraftKings. What had happened is there was an employee who posted on a DraftKings blog a player-ownage percentership -- or percentage. And basically it's more beneficial, in these large contests, to own players that have a lower ownage percent -- percentage because you have a better way of differentiating yourself from these massive player pools. So they believed that, if this person had access to the information, player-ownage, it gave him a leg up in the competition and could theoretically then be in a better position to win these pools. And that player ended up winning $350,000 that weekend.

  • 10:22:36

    COCHRANBut there was also an internal investigation that was released yesterday that said he did no wrongdoing. His lineup was locked before he posted the information.

  • 10:22:44

    BARRETTAnd I completely agree with that, although I would add there's more that's creating that scrutiny than just that case, although that case is very important. If you -- you cannot watch ESPN right now without being inundated with ads for this stuff. The media presence, the advertising presence of this is really incredible. I was in a cab the other day and the in-cab television was giving me tips on who to pick in my next daily fantasy draft. And, you know, if you've reached that level of saturation, you're just going to draw more scrutiny to yourselves. And I think the government, if anything, has been a little slow off the mark to start looking at this, compared to the growth rate of these companies.

  • 10:23:25

    BARRETTSo the government is now coming in with -- and by government, I mean both the feds and the states -- are now coming in and taking a hard look at this stuff. But, look, each of these -- the two main companies is valued at more than a billion dollars right now and their growth rates are spectacular. So anything you do now comes with the caveat of your effecting large companies, whatever you decide.

  • 10:23:47

    REHMSo, Seth, how are you putting in place consumer safeguards?

  • 10:23:54

    YOUNGYeah, this is something we looked at from day zero, when it comes down to consumer protections. I think things like age verification, ID verification, are very important, not just to prevent underage play on the site but to know your customer and prevent fraud. Besides addressing these basic consumer protections, it's good business sense. The more you know about your customers, the more you can accomplish when operating your platform. And some of the other things that are really important, besides separating player funds from operating expenses, as we saw with Black Friday and poker, this is a very important thing.

  • 10:24:25

    YOUNGIt's also -- it also comes down to the structure of your games and what is okay to run and what is not. So we took a very conservative approach in structuring our contests so that they would be based in skill and they couldn't really be questioned as games of chance. And to that point, we actually commissioned a skill-gaming study with a company called Gaming Laboratories International, which showed, with actual empirical evidence, that our games are dominated by skill and not chance, which is very important when you're looking at where you can operate your product on a state-by-state basis.

  • 10:24:55

    YOUNGSo you've had -- I think we had here, Kevin and Dan both mentioned that the dominant factor test is important in many states when you look at gambling law. And so we wanted to be sure, without a shadow of a doubt, that our games were based in skill. So this is why we commissioned that study and this is why we feel legally comfortable in a lot of different jurisdictions.

  • 10:25:12

    REHMSo, Daniel Wallach, what about the possibility of insider trading, as we alleged in that earlier case?

  • 10:25:26

    WALLACHWell, Diane, the report -- or the summary of the internal investigation that was released yesterday by DraftKings focused on the actions of one employee. And while he was presumably vindicated, it does point to a larger issue throughout the industry, in that, employees throughout both of the major companies -- FanDuel and DraftKings -- may have unfretted access -- unfettered access to the kind of information that would benefit them if they played daily fantasy sports on the other sites.

  • 10:25:56

    REHMOkay. Give me the -- give me that kind of information they may have access to which would give them a benefit.

  • 10:26:08

    WALLACHOkay. As Kevin alluded to earlier, knowing how your opponents have structured their lineups is the ultimate inside information. If you could get a peek as to how thousands of other contestants are structuring their lineups, what percentage or the percentage ownerships associated with the real-life NFL players, you could differentiate your lineup sufficiently by having undervalued and underowned players populate your lineup.

  • 10:26:38

    WALLACHNow, these are salary-cap leagues. You can't just stock your lineup with the best-in-class players. You have to have a mix of high level players as well as players who are undervalued. And the more you could differentiate your lineup, the better the chances that you can win a six-figure or seven-figure guaranteed price pool. It guarantees you nothing but it may or it could give you an upper hand in those contests.

  • 10:27:04

    REHMHmm.

  • 10:27:05

    WALLACHAnd the CEO of DraftKings went on television last week or two weeks ago and admitted that that kind of information could give employees an edge. And that's why it needs...

  • 10:27:13

    REHMInteresting.

  • 10:27:14

    WALLACH...to be limited and controlled.

  • 10:27:16

    REHMKevin.

  • 10:27:16

    COCHRANI also just want to make the quick point that I haven't heard talked about a lot before, people that are working at these daily fantasy sports companies, also most likely have an edge and are better than the common player because they eat and sleep daily fantasy sports every day. If someone were to look at gambling law and regulation and talk to me about it, I'd have the leg-up in the understanding about that. Now I'm not saying that there is no insider trading or anything like that going on. There clearly, I mean, the reports say that there hasn't been. But I just want to say that, you know, these people are eating and sleeping fantasy sports as well. So they may be more likely to be better players.

  • 10:27:53

    REHMSo, Seth Young, how do you respond to that?

  • 10:27:57

    YOUNGWell, I think Kevin hit the nail on the head. You've got people in these companies who live and breathe this. I believe, the first day after this came out, I went over on Twitter and said that, you know, it's very possible these things are mutually exclusive. Ethan Haskell is just a good player. He wouldn't have the job that he has if he wasn't good at fantasy sports. So I think that this, you know, the investigation by DraftKings and the subsequent external investigation was great to clear their name of having any integrity issues. And, look, no operator is going to want to say, hey, look at us. We've been having our employees have privatory practices and accessing insider information. Optically, that's bad. That would ruin your business.

  • 10:28:36

    YOUNGSo, you know, it was also -- it was all the time very possible that this sort of stuff is mutually exclusive. So, you know, it's just -- it's one of those things. You get through it. But this is one of those things that have come up and put an increased level of scrutiny on fantasy sports. And this is why I think the conversation about regulation is moving forward on a state-by-state basis, why you're seeing states become more active and the government becoming more active and taking a look here.

  • 10:29:01

    REHMWhy does it have to move forward state by state, Kevin, as opposed to simply a ruling from the federal government?

  • 10:29:12

    COCHRANSo if you look at Nevada, it was ruled gambling by the Gaming Control Board. And gambling has traditionally been something that has been regulated on a state-by-state basis. An important thing to note about Nevada as well, while the operators were told to stop operating their websites, they were allowed to apply for a gaming license and operate their product. With Nevada ruling it a sports pool, it was in a unique position because that is the only state in the country that could allow and license a full sports pool. So therefore, DraftKings or FanDuel, if they wanted to enter the market again, could do so with a license.

  • 10:29:52

    COCHRANBut the issue you see with state by state is how are the regulations going to vary? How are they going to work together? And how can you get players operating in one state to play with op -- or play with players in another state? You've seen, as Internet poker has rolled out over the past two or three years, you only have an agreement between two of the states, Delaware and Nevada. And so far, the player numbers have been a lot lower than had been expected.

  • 10:30:17

    BARRETTAnd, on top of that...

  • 10:30:19

    REHMHold on.

  • 10:30:20

    BARRETTSure.

  • 10:30:20

    REHMI think that Dan Wallach wants to jump in.

  • 10:30:24

    WALLACHYeah. Proceeding on the same track as the question of regulation are the actions taken by certain states to inquire into the legality of the business model. The Department of Justice and the FBI are proceeding on one line of investigation but the focus of the industry should be on the state of Florida, where a grand jury has been convened to determine whether several of the operators have violated the Illegal Gambling Business Act by operating an illegal-gambling enterprise. And that situation bears a lot of watching. So before we can talk about regulation, the question of whether it's legal is ultimately going to come down to a decision by the federal government or by prosecutors.

  • 10:31:08

    REHMYou know, it's interesting. I read a story the other day about a young man who quit his full-time job because he was making so much money. In the first week, he was participating in this sports fantasy league, he made something like $79,000, Devlin.

  • 10:31:34

    BARRETTWell, right. And that's not unique to the daily fantasy world. I mean, you see that in poker, you see that frankly in day trading to some degree. There are all sorts of iterations of, well, I quit my job to stare at a computer screen because I think I understand what I see on a computer screen a little better than the sort of the average player in this space and, therefore, I can use that advantage to make money. And I'd rather do that than work at my regular job. And maybe I'll make more money doing that. I mean, that's essentially what professional card players do. They, you know, they either do it online or at tables.

  • 10:32:09

    BARRETTI think, you know, what worries people about -- I think part of the nervousness about Daily Fantasy is, it's an app on your phone, it's an accessible way of essentially gambling that, you know, in the wrong hands, could lead to bad results for those people's personal lives. But that's an argument that has existed about gambling, you know, forever.

  • 10:32:30

    REHMBut, you know, Seth, when I asked you about protections in place for consumers, you talked about checking the age and making sure that people are who they say they are. But how do you protect against somebody operating insider trading within your own firm?

  • 10:33:00

    YOUNGYeah. So this is actually a nonstarter for us. And this goes back to the approach that we've taken in the market. For one, you know, we're out of 12 states right now, which is almost double most of the other companies. We've taken a very conservative approach. And as operators, we also made the choice, since our inception, that providing content -- Star Fantasy Leagues' specific content to our players was not our place. If you're looking at this as a skill game, basically the amount of skill involved in creating an optimal lineup is amalgamating as much information as you can from various sources that you trust.

  • 10:33:27

    REHMHmm.

  • 10:33:29

    YOUNGAnd then applying that knowledge to make the best lineup that you can. So, for us, we were content in providing the platform and providing a safe experience...

  • 10:33:36

    REHMAll right.

  • 10:33:36

    YOUNG...for people to play, but not in providing that kind of content. So to this end, we can't even see this kind of data in our back office...

  • 10:33:44

    REHMAll right.

  • 10:33:44

    YOUNG...so things like the ownership percentages.

  • 10:33:46

    REHMAnd you're listening to "The Diane Rehm Show." I want to open the phones now, 800-433-8850. First, let's go to Ann Arbor, Mich. Andrew, you're on the air.

  • 10:34:08

    ANDREWThank you, Diane. Big fan of your show. I had a brief question for your guests. So I'm a computer programmer and I could hypothetically -- I mean, what is to prevent me from -- instead of doing $50 buy-in with my friends in a private league that I do through Yahoo Sports, what if I created my own league with 12 of us and the buy-in was instead $5,000. Is there anything that the government, at a state or federal level, could do in order to prevent us from doing that, as long as it stays amongst us? And I'll take my answer off the air.

  • 10:34:40

    REHMAll right. Dan Wallach.

  • 10:34:42

    WALLACHYeah. The one flaw I see in that approach is that you don't have a preset prize pool. You simply aggregate your entry fees and the winner takes all. That would take you out of the UIGEA, which requires as one of the preconditions to legality under federal law that there be no correlation between the entry fees and the prizes. And certainly, under the laws of certain states -- in particular, Florida -- where the entry fees constitute the prize pool, it is an illegal bet or wager under state law. So that's one of the -- that's one of the workarounds or one of the ways that the fantasy sports industry can stay on the right side of federal and state law by having preset prized amounts, regardless of the number of participants.

  • 10:35:27

    REHMBut that always, then, requires that you put -- you pay to get in, just to get in. Is that right?

  • 10:35:39

    COCHRANWell, yeah. I mean, it works like a pool. Most of these...

  • 10:35:43

    REHMNo, but how about an application?

  • 10:35:46

    COCHRANAn application to...

  • 10:35:47

    REHMYeah. Just to participate. Do you have to pay anything just to...

  • 10:35:55

    COCHRAN...to play?

  • 10:35:56

    REHM...say, I want to play?

  • 10:35:58

    COCHRANI mean, you can play games where there's no real prize money. But I don't -- I mean, that seems to be beside the point. The point is to play for money.

  • 10:36:06

    WALLACHYeah. Diane, the lead -- the focus of all the inquiries is on real-money fantasy sports. Free rolls or free play doesn't implicate any of the state gambling laws because it lacks the element of prize. You have three elements for illegal gambling: prize, chance and consideration. A free entry is the equivalent of no gambling. So what we're largely talking about here is real-money fantasy sports and whether those kinds of games are, you know, comport with federal law and state law. And the problem is that each state has somewhat of a different test. You have a variety of states that follow the skill versus chance analysis and then states like Florida that evaluate whether it constitutes a bet or a wager, regardless of how much skill is involved.

  • 10:36:58

    COCHRANI think stepping back, looking at the question itself, I think the $5,000 was a sticking point, with these huge prize pools. Some of these daily fantasy sports sites you can play for upwards of like $3,400, something like that, to enter into a competition. To show how big the industry has gotten, if you're doing a home league, there are services now you can use where you sign up and everyone in your league has to pay to this certain website that'll hold your money for you, kind of as a lockbox for them. And essentially you need to pay for the money for you to receive it at the end.

  • 10:37:33

    REHMAll right. Short break here. And when we come back, more of your calls, your questions. I look forward to speaking with you.

  • 10:40:02

    REHMAnd welcome back. We've got lots of emails, lots of callers. Here's Tom, who says a quick explanation of how the individual players are scored would be worthwhile.

  • 10:40:20

    BARRETTSure, so if you think about the Monday night game last night, I'm an Eagles fan, quick shout-out, we beat the New York Giants. If you think about DeMarco Murray last night, he ended up with over 100 yards rushing. So generally you get one point for every 10 yards. That's also with receiving yards. You could also get a point for every catch they have, if you're playing in what is called a point-per-reception league, and then you get six points for a touchdown.

  • 10:40:47

    BARRETTSo DeMarco Murray had over 100 yards last night and a touchdown. Therefore I think he scored something like 17 points. Quarterbacks usually get about four points for a touchdown pass and one point for every 25 yards passing they have. You also have kickers that are awarded points for field goals that they kick and extra points and defenses that accumulate stats for sacks, interceptions, touchdowns, fumble recoveries. They also lose points if they let up a lot of points.

  • 10:41:16

    REHMHere's an email from Charles in Houston. How much money is involved in this business? One company advertises $75 million in prizes per week. How much money are they making in order to afford awarding prizes like that? Devlin?

  • 10:41:37

    BARRETTGenerally they take about 10 percent of that. So if they give out $75 million, which remember is just the players' money that's awarded to the players who win, they'll take -- they'll hold on to $7.5 million of that. And, you know, this is -- so for an example if you play in a -- if you play in a group, what they sometimes call a 50-50, where everyone who is in the top 50 percent of the points essentially doubles their money, so say you play, you pay $10, you're in the top 50, you double your money, but instead of getting 20 bucks, you actually get $18 because $2 goes to the company.

  • 10:42:13

    REHMDo we have any idea how many people are participating in fantasy sports, Kevin?

  • 10:42:22

    COCHRANI think the most recent estimate was something about 45 million. Dan, is that correct?

  • 10:42:29

    WALLACHNo, that was last year, but the number has spiked up. It changes every week. The most recent estimate from the Fantasy Sports Trade Association, which is the industry's trade organization, is close to 56 million players in North America that play both season-long leagues and daily leagues. But the vast majority of players are still in season-long leagues. So the biggest growth segment of the industry is in daily fantasy sports. And currently it's -- it's under a $4 billion industry, if you aggregate, add up all of the entry fees, but it's projected to rise to the neighborhood of $20 billion by the year 2020.

  • 10:43:13

    REHMAnd here's a question from Greta. Please explain why the state has an interest in regulating gambling at all. Whether fantasy leagues are more chance or skill seems beside the point to me. Dan?

  • 10:43:32

    WALLACHWell, that's what I've said earlier. The question isn't skill versus chance, it is the extent to which it may be considered gambling, and that is a determination that has historically been made at the state level, not by the federal government. So what we're likely to see spring up is a state-by-state determination of, A, whether the activity is legal, whether it is gambling and then, assuming it is legal, and it is gambling, the extent to which it should be regulated at the state level.

  • 10:44:05

    WALLACHBut watch out for Congress. There are going to be hearings in November that were requested by New Jersey Congressman Frank Pallone, and Congress is going to enter the fray and perhaps at the same time consider the issue of legalizing sports betting, which is the 800-pound gorilla in the room, and that is a $200 billion industry, and these two industries are basically doing this delicate dance, side by side, and we're in an environment that is about to change dramatically over the next five years. And I believe when the dust settles, all of it will be legal, all of it will be regulated, and all of it will be taxed.

  • 10:44:44

    BARRETTAnd there's a good example of that. Like, we already see -- look at the lottery. The lottery used to be an illegal thing, and, you know, it again, like sports betting, it was illegal, but it was about the most gentile version of crime that existed. And essentially state governments slowly created their own lotteries, and, while, you know, in the old days you'd call it the idiots' tax, it's a thriving business, and it brings in a lot of revenue for states.

  • 10:45:09

    REHMFor the states, yeah.

  • 10:45:11

    BARRETTRight, exactly, and so I think, you know, sports betting to me also feels like a very socially acceptable thing that is not considered criminal yet technically is criminal in many parts of the country.

  • 10:45:23

    REHMNow what about the major sports leagues themselves? How involved are they, Kevin?

  • 10:45:30

    COCHRANThey appear to be pretty involved. You can go to a lots of sports stadiums around the country, and they have what are called fantasy lounges in them now. So you can sit there, sponsored by some of the big operators, and say, well, I want to watch the game, but you know what I really want to do is make sure my fantasy football team is doing okay.

  • 10:45:45

    COCHRANThere are also leagues that have taken partnerships. I believe MLB has partnered with DraftKings. The NFL does not allow its team technically to partner with the operators. However, you have Robert Kraft, who is the owner of the Patriots, and he owns a partial stake in DraftKings. So there are definitely a lot of involvement with the leagues and fantasy sports operators.

  • 10:46:08

    REHMAll right, let's go back to the phones, to Steven in Birmingham, Alabama. Hi, you're on the air.

  • 10:46:14

    STEVENHi, thank you. Two questions. One is I heard Seth say that there's age verification for participation, and since I registered recently on both FanDuel and DraftKings, I -- nothing on the front end suggests that there was a verification of my age. So I'd be curious if that's actually happening, or if it's blind.

  • 10:46:30

    REHMAll right, Seth is still with us. Let's let him respond.

  • 10:46:34

    YOUNGYeah, so not all fantasy sports sites are created equal. Like I said, we put this in place from the get go. This is one thing we wanted to nip in the bud. We work with a company called Ideology (PH) that works with a lot of major, major business for know-your-customer procedures, and they're also recognized in regulated gambling markets in New Jersey and Nevada to provide age verification services. So we can, with pinpoint accuracy or very close, effectively verify the age of our end users.

  • 10:47:01

    YOUNGSo our signup process on our sites, our fantasy leagues, has always been a lot more stringent than that of our competitors.

  • 10:47:08

    REHMAll right.

  • 10:47:08

    YOUNGAnd we never actually thought it would be a competitive advantage but really something that should be standard.

  • 10:47:14

    REHMOkay, and your second question, Steven?

  • 10:47:16

    STEVENBasically, there was an article in Bloomberg Business saying that -- reporting the number of signings of people who are basically the sharks of fantasy sports dominate in the winnings. So they are people who are able to operate 500 or 1,000 teams at once, using plug-ins and some of these websites, and even a survey showing that only 1.3 percent of players actually finish in the green, meaning finished ahead, with 99 or 98.7 percent losing. Is that something that you think is -- characterizes the industry as a whole, that most people are basically losing on that, and maybe just one or two percent are winning?

  • 10:47:52

    REHMDevlin?

  • 10:47:52

    BARRETTI...

  • 10:47:52

    YOUNGI'd like to take this one, if that's all right.

  • 10:47:55

    BARRETTOf course.

  • 10:47:56

    YOUNGSo this scripting stuff is definitely a concern, and we're talking about the economy of the games and creating a fun environment for recreational players to join in. Instead of jumping in shark-infested waters, where you have people who can effectively enter thousands and thousands of lineups across thousands of contests automatically, why not limit the amount of entries that somebody can be put into a game? Well, that would limit your revenue, for one thing.

  • 10:48:17

    YOUNGThis is one of the -- again, the opposite approaches that we've taken as a business. And we limit the amount of times that somebody can be entering lineups into our contests.

  • 10:48:26

    REHMInteresting.

  • 10:48:27

    YOUNGAnd that's specifically to encourage growth in the game economy with recreational players.

  • 10:48:27

    REHMAll right, Devlin?

  • 10:48:29

    BARRETTI think one of the great unanswered questions so far of the industry is who are the whales. You hear different terms used, whales and sharks. They both mean who are the big winners. And I think a lot of judgments will be made about the industry depending on, over time, what you see as the big winners. Are they, in fact, essentially people who are applying honest effort to, you know, following sports, or are they people who write good code or good scripts or people who work at those companies, who know what the inside track is?

  • 10:48:58

    REHMHere's a tweet from Sara. How do the players feel about fantasy sports? Are they able to participate, and if so, do they? Kevin?

  • 10:49:14

    WALLACHYeah, I'll...

  • 10:49:15

    COCHRANYeah, some of them seem to like it. Some of them seem to hate it. You see every week players are getting threats on Twitter and everything else if they have a bad performance because people have a lot of money on them. You see other players, they play in their locker rooms. A lot of professional athletes are not allowed to play for money, but they still have fantasy sports teams because there's a camaraderie behind the whole game. You get to...

  • 10:49:37

    REHMBut how do we know they're not playing for money?

  • 10:49:40

    COCHRANWell, hopefully like Seth talked about, there are verifications so you can see who is actually playing, who's registered on these websites, and you would think that they can pretty easily point out and say you play for the Jacksonville Jaguars, you shouldn't be doing this.

  • 10:49:52

    REHMOkay.

  • 10:49:53

    BARRETTAnd Diane, the leagues also have their own gambling policies that apply to the players, and I believe the players are limited, you know, to certain dollar thresholds. So, you know, a player for the Eagles or the Redskins can't, you know, play in these, you know, big money prize pools. I believe to the extent they're allowed, it's a very limited or reasonably low threshold.

  • 10:50:14

    REHMSo Dan Wallach, you're talking about regulation. What kind of regulation do you think is needed now?

  • 10:50:25

    WALLACHOkay, the two -- the three biggest issues that are affecting the public perception of the industry and public confidence in the industry are the shark-versus-minnows issue. Yeah, we can talk about age verification, we can talk about all that, but until we can, you know, create a level playing field, where the sharks aren't gobbling up the minnows, and those reports vary as to the percentages, but the most reliable ones show a major disproportion between the winners, and the losers and the professional-type players and the sponsored players are doing disproportionately well compared to the, you know, average Joe.

  • 10:51:04

    REHMAll right.

  • 10:51:04

    WALLACHAnd that's not accurately portrayed by the advertising. So the advertising needs to be tempered down a little bit.

  • 10:51:09

    REHMAll right, let me pause and just remind you, you're listening to the Diane Rehm Show. So you believe the advertising needs to be scaled back?

  • 10:51:23

    WALLACHYeah, in a regulated environment, casinos and racetracks can't make the kinds of, you know, promises and -- you know, what's being portrayed here in this advertising is that, you know, anybody can become a millionaire. Well, if anybody is 1.3 percent of the professional players, whales or sharks, what's being put out there for public consumption varies significantly from the reality.

  • 10:51:47

    BARRETTBut frankly, how does that differ from the lottery? I mean, you know, all you need is a dollar and a dream. That's a government, you know, advertisement.

  • 10:51:54

    WALLACHBut it's all chance. You're not playing against other participants. The problem with daily fantasy, the only -- one of the problems is the, you know, sharks versus minnows, and it may be too much skill involved. With a lottery, everybody has an equal chance. In daily fantasy sports, that -- nothing could be further from the truth. So I think there needs to be more of a level playing field. This is collectable and remediable, but right now there are, you know, problems existing in these pools in which professional players can put in hundreds of entries, change their lineups automatically.

  • 10:52:27

    REHMInteresting.

  • 10:52:27

    WALLACHSo we need to level that.

  • 10:52:28

    REHMAnd what about college sports teams? Are they getting involve here, Seth?

  • 10:52:34

    YOUNGWell, we don't run college sports on Star Fantasy Leagues, but I do know, I am aware that the college -- I think it was the NCAA fired off emails or letters to DraftKings and FanDuel to ask them to stop play on their sites. And somebody can correct me if I'm wrong, but I believe that's the case. You know, it's something that I think they want to protect their amateur players against, and quite frankly that's their choice to make. So I can -- I'm a little out of my depth on this one. So this is something that's probably better to be answered by somebody else.

  • 10:53:03

    REHMAll right, and Dan Wallach?

  • 10:53:05

    WALLACHOh, well, you know, the problem with the NCAA and all the -- each of the other leagues is one of hypocrisy. They may -- they may not want their players' images to be displayed, you know, in the fantasy sports contests, but the industry as a whole profits immeasurably from its association with daily fantasy sports.

  • 10:53:24

    REHMOkay, and you've got a number of states that have already banned fantasy sports. Is that correct, Kevin?

  • 10:53:34

    YOUNGYes, so traditionally there are, I believe, six states now with Nevada that are not operating fantasy sports through their general definition of gambling. They believe it's caught under there, including Washington, Louisiana, Iowa, Montana, Nevada.

  • 10:53:48

    REHMOkay, but is there software to determine exactly where that participant actually is?

  • 10:53:56

    COCHRANYeah, so Seth touched on that. If you look from an Internet gaming standpoint, too, in the United States, Internet gaming operators are held to a higher standard than they around the rest of the world. They have these companies that can ping you ever five seconds, every three seconds, to figure out exactly where you are, and there could be a giant map, and you'll ping and show up as red if you're not in the state boundary you're supposed to be in, and you'll show up green if you are. And they block those red players instantaneously.

  • 10:54:21

    REHMWhat about other countries? Are they participating in this sports fantasy?

  • 10:54:29

    BARRETTWell, I think we've already seen, DraftKings, I believe, is operating in the UK where they have a gambling license, if I understand that correct.

  • 10:54:35

    YOUNGThe Draftkings is not actually operating in the UK yet. They had a gambling license approved, but there was a member of parliament that had called for a review of that license, given what's happening in the United States now. But also back to your statement about this being illegal in six states, we're out of 12. I mean, taking a look at the market, there's no symmetry between operators and what states are okay and what states are not. It's just a matter of the risk tolerance of companies that are operating in this market.

  • 10:54:57

    YOUNGAnd I think it's fair to say that different companies have a different risk tolerance with regard to the law and their operation. So I think, you know, this is something that needs a closer look. This is what's spurring government inquiry and regulatory inquiry about this. I mean again, there's just no symmetry across competitive lines.

  • 10:55:15

    REHMSure, Kevin?

  • 10:55:15

    COCHRANSeth, what do you think about Amaya operating only in four states now? Is that something that's kind of an overkill, or...

  • 10:55:22

    YOUNGI think that -- no, look, I think Amaya is, again, like in a different position than Nevada is. And I don't want to speculate on their reasoning, but I do know that they have other gaming products behind them, like poker casino and sports book.

  • 10:55:31

    REHMExplain Amaya.

  • 10:55:34

    WALLACHJust a quick understanding is Amaya is a online gaming provider, generally, and they own the brands PokerStars and Full Tilt that have just been approved to operate in the New Jersey online poker market.

  • 10:55:46

    REHMSo where is all this headed, Devlin?

  • 10:55:48

    BARRETTWell, I think -- I think it's been raised before that, you know, Congress is going to have to revisit this, most likely, because when that 2006 law was written, and it had an exemption for fantasy sports, no one envisioned fantasy sports this way. They were most -- almost certainly thinking about office pools, you know, pools among friends, you know, that traditional understanding of what fantasy sports betting is. That's -- obviously this is a -- I would argue a very different animal.

  • 10:56:15

    REHMTotally different.

  • 10:56:15

    BARRETTAnd, you know, it's -- I expect Congress will have to wade into this. Now Congress doesn't do simple things well these days. So the notion that they are going to act quickly, though, is -- is a stretch.

  • 10:56:29

    REHMDevlin Barrett of The Wall Street Journal, Kevin Cochran, a legal analyst for GamblingCompliance, Daniel Wallach, an attorney specializing in sports and gaming law, and Seth Young, chief operating officer for Star Fantasy Leagues, thank you all so much.

  • 10:56:50

    BARRETTThank you.

  • 10:56:50

    WALLACHThank you.

  • 10:56:52

    COCHRANThank you.

  • 10:56:52

    YOUNGThank you very much.

  • 10:56:52

    REHMAnd thanks for listening, all. I'm Diane Rehm.

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