Daily fantasy sports: skill or luck?

It’s an iconic American pastime: kicking back on the couch with junk food, beer, and friends to watch your team play on a weekend afternoon. But like most things, the internet has added a new dimension to this hobby. One hand holds a brewski, while the other holds a smartphone, as fans constantly check stats, apps, and social media about the game playing on a much bigger screen behind their devices.

One of the most involved virtual spectator experiences is daily fantasy sports, or DFS. Sports fans draft teams of their favorite players and pit them against their friends’. The participants then accumulate points based on how the players in their draft performed that week. What started as a seasonal pastime in offices around America has morphed into a daily, multibillion-dollar business, fueled by national TV advertising and the internet. Unlike the traditional office pool, DFS offers same-day cash rewards to winners – a big incentive.

The booming daily fantasy industry is now using that carve-out to operate as a ‘game of skill’ rather than gambling.

Assemblymember Marc Levine, D-San Rafael, is one of the many thousands of Californians who play fantasy sports. But Levine is alarmed by the rapid growth of this newer variety of the industry.

“I’ve been playing fantasy sports for over a decade, and I’m an avid fan of playing fantasy sports,” Levine said. “But these sports betting websites are gambling…We need to make sure that people who engage in daily fantasy sports betting have the protections to ensure that it’s a positive experience for them as well.”

The federal gaming law, the Unlawful Internet Gambling and Enforcement Act of 2006, defined and regulated online gambling. But UIGEA (pronounced “you-GEE-uh”) exempted fantasy leagues like Levine’s — season-long fantasy leagues. The booming daily fantasy industry is now using that carve-out to operate as a ‘game of skill’ rather than gambling.

But that status is being questioned, as fantasy sports leagues — led by the companies FanDuel and DraftKings, and to a lesser extent Yahoo Sports — are embroiled in legal battles in several states, including New York and Nevada.  The companies say they provide entertainment that requires skill, and thus do not involve gambling. Their critics contend that daily fantasy sports is straight-up gambling.

In Nevada, the fantasy sports businesses have only been asked to stop until they have gambling licenses.

But in New York, Attorney General Eric Schneiderman has ordered the companies to cease activities in the state. Court hearings about the issue begin tomorrow.

Daily fantasy sports are not regulated in California, but Assemblymember Adam Gray, D-Merced, introduced a bill, AB 1437, to do just that.

The population of New York alone constitutes a significant chunk of the money the industry brings in nationwide. California may provide a similar amount, although it is uncertain which state generates the largest source of fantasy cash flow, according to Chris Grove, editor of the website Legal Sports Report.  California’s population, however, is nearly double New York’s 19.7 million

That question may be moot soon, as Levine has requested that California Attorney General Kamala Harris consider taking action similar to New York’s — at least until the fantasy sports games can be regulated.

Estimates vary on the exact size of the market, but one thing is certain: it’s huge.

According to Grove, the industry handled between $3 billion and $4 billion dollars in plays this year. The companies realize about 10 percent in revenue from fees and transactional costs, meaning that the industry giants walked away with about $400 million.

Daily fantasy sports are not regulated in California, but Assemblymember Adam Gray, D-Merced, introduced a bill, AB 1437, to do just that. He hopes to move forward on the legislation early next year.

The fate of Gray’s bill rides on whether Harris’ decides that the game of daily fantasy sports is, as operators like FanDuel and DraftKings claim, a “game of skill.”

Gray’s bill would license operators, assure data security, provide consumer protections and make sure no underage players can sneak in, among other things.

Levine told Capitol Weekly that he wrote his letter to Harris prior to Schneiderman’s action in New York.

But opponents, like Cheryl Schmit, director of Stand Up for California and a long-time foe of online gaming, argue that because daily fantasy sports have not yet been ruled legal gaming, any regulations are premature. She added that based on the California Supreme Court’s ruling in a 1999 case on tribal gaming, the statute that defines daily fantasy sports as illegal gambling could only be overturned by a constitutional amendment.

“Chairman Gray has jumped the gun because first I think he needs to decide or discern if the activity is legal in the state,” Schmit said. “If it isn’t legal, he needs to figure out how to legalize it before he regulates it.”

But the question of legality always circles back to the crux of the argument: whether or not daily fantasy sports is gambling.

Gray himself sees it as a game of skill and says that what’s happened in New York is no indication of how things will turn out in California, despite Levine’s request for a similar action from the attorney general.

“[Levine] didn’t understand the nuances in game of skill versus game of chance state law, the letter didn’t suggest he had a firm grasp of that,” Gray said. “Perhaps he just saw the New York thing and decided to get some media attention.”

Levine told Capitol Weekly that he wrote his letter to Harris prior to Schneiderman’s action in New York.

“It’s clear to me that betting on a bunch of athletes and their performance during a game is gambling,” he said. He added that FanDuel and DraftKings had applied for gambling licenses in the U.K., supporting his position that daily fantasy sports are games of chance.

Brett Abarbanel, a scholar in the UCLA Gambling studies department, described the nuance that the industry has used to justify continued use of the UIGEA exemption.

According to Grove, who closely follows the gaming industry, the skill-versus-gambling debate is actually two separate questions.

While there is some chance involved in the unpredictability of how a given athlete might play on a given day, fantasy sports players use statistics and sports knowledge to pick the athletes that are on their paid tournament entry, Abarbanel noted.

“You have a variety of different components that are coming in, and again that contributes to the skill argument,” she said.

That complexity gives advantage to the people who have the greatest understanding of statistical algorithms, meaning that a very small percentage of daily fantasy players take the vast majority of the winnings.

Opponents argue that this is just another reason the industry needs regulation. But Abarbanel says the fact that people with statistical skills dominate, while not great for marketing the games to potential players, bolsters the argument that daily fantasy is a game of skill.

According to Grove, who closely follows the gaming industry, the skill-versus-gambling debate is actually two separate questions.

The first one, which Grove described as the ‘colloquial’ form of the question, depends entirely on personal opinion: Do these games share the same basic features that — in the public’s mind — define other gambling activities?

“The answer to that question, at least for me, is relatively clear,” Grove said. “Daily fantasy sports shares more in common with [gambling] products than there are things that separate it from those products…that leaves me with the opinion that yeah, it’s gambling”

The second question, which is being addressed by attorneys general across the country, is far more technical and nuanced: Do daily fantasy sports games fit the same legal criteria that other gambling activities such as lotteries, poker, or horse racing do?

If Harris decides to take action on the daily fantasy issue, she’ll be looking at the same basic issue that Schneiderman considered in New York,

But just as personal definitions of gambling vary depending on who you ask, so do legal definitions: what could be considered gambling in one state might not be in another.

“It’s not quite a line of dominos stacked up and waiting to be tipped once — and if — New York or California goes,” Grove said. “It’s a little less linear than that.”

If Harris decides to take action on the daily fantasy issue, she’ll be looking at the same basic issue that Schneiderman considered in New York.

Though the decision process may be different, New York and California are still compared in terms of their population size and consequently the amount of money they bring to the industry.

The exact numbers aren’t clear, but some estimates say that Californians make up 10 percent of daily fantasy users, and New York players are a comparable number. As a result, DraftKings and FanDuel have made highly-publicized lobbying efforts, largely through social media, against legal challenges. But the rulings in these states alone will not be the bottom line for the daily fantasy sports industry.

“The way [gambling activities are] defined are different in California than they are in New York,” Gray said. “It’s like apples and oranges.”

Abarbanel pointed out that the gambling arguments surrounding daily fantasy sports parallel poker — a betting game that ostensibly requires some skill. In many ways the comparison is apt, but in terms of magnitude, according to Grove, the online poker business actually brings in a lot more money than daily fantasy.

While that $400 million in revenue daily fantasy sports operators made this year isn’t insignificant, it still pales in comparison to the magnitude of regulated online gambling games, such as poker. According to Grove, online gambling operators bring in $150 million to $200 million annually in New Jersey alone, which is nearly half of what DFS made in the 44 states where they operate.

Grove added that the current business conditions for daily fantasy sports in the states where they remain legal are favorable to those of the online gambling sites, such as poker. “That gives you kind of an idea this (fantasy sports) is not necessarily as big of a product as it appears,” he said.

While there is still some time for the industry—it’s not clear that action from Harris is imminent, the publicity surrounding events in New York has turned the tide against daily fantasy companies like DraftKings and FanDuel. But when it comes to policy, the public opinion about what constitutes gambling doesn’t matter—it’s the complex and technical legal definitions, which vary state to state, that will seal the fate of daily fantasy sports operators.

“The way [gambling activities are] defined are different in California than they are in New York,” Gray said. “It’s like apples and oranges.”

While Levine doesn’t disagree that the states are different, he believes California will still reach the same conclusion that New York did.

“[The industry is] grasping at straws,” Levine said. “They’re clearly engaged in gambling. They will need to come to the table to negotiate regulations that will protect California consumers.”