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Under fire, daily fantasy sports continue on

Meanwhile, a lawmaker wants to probe sports leagues' ties to the industry

Despite New York Attorney General Eric Schneiderman's declaration this week that daily fantasy sports (DFS) is illegal gambling, millions of consumers will field their fantasy NFL teams this weekend.

The battle over DFS and whether it is a game of skill or chance will likely go on for some time. In the meantime, millions – maybe billions – of dollars will change hands.

Money may, in fact, be the root of the controversy.

The two major DFS enterprises, DraftKings and FanDuel, bring in an enormous amount of money from players, and they spread it around. The two companies have inked deals with professional sports leagues and this year they became the largest advertisers on network television, eclipsing even brewers.

Too many ads?

After Schneiderman's broadside this week, ADWEEK speculated that DFS enterprises may have made themselves a target by spending too much on advertising.

“DFS companies have been launching ads at sports fans from every direction,” ADWEEK reported. “Basically, every major American sports venue is covered in signage. Segments are sponsored on ESPN, the NFL's RedZone Channel, and anywhere else sports is discussed on TV. There are also podcasts, radio shows and digital banners promising 'real money' for winners. DraftKings even plasters the PATH train that connects New Jersey and New York."

But is it a case of states seeing all that money and cynically reaching for their cut, or has the extremely high profile DFS has achieved awakened regulators who are suddenly asking, “Hey, why isn't this considered gambling?”

Simple question

What happens next will likely depend on whether DFS' current exemption under gambling laws as “games of skill” holds up. Recently interviewed by CNBC on the subject, Hall of Fame quarterback Joe Namath wasn't buying the "game of skill" argument.

“Do they have to pay something to play?” Namath asked. “And do they win something? It's gambling.”

Let's take Namath's questions and apply it to professional golf. A pro golfer pays a small fee to enter a tournament, in hopes of winning a large cash prize.

But no one thinks that's gambling because the pro golfer is counting on his skill to put him in the money. So the question should be asked – are people who play DFS in the same league, in terms of skill, as professional golfers?

How about poker players? Winning at poker inarguably requires a large amount of skill, yet it is classified as gambling. More than likely, these questions will be decided in court.

Congressional interest

Meanwhile, Congress is about to get involved. Rep. Frank Pallone (D-NJ) says the Energy and Commerce Committee will hold hearings, especially since the Federal Trade Commission (FTC) has said it has the authority to investigate the industry. And Pallone says he thinks any probe should go beyond DraftKings and FanDuel.

“The legal ambiguity surrounding the industry and its relationship with professional sports makes this issue ripe for Congressional review,” Pallone said. “As we prepare for a hearing, it will be important to hear from the FTC about what it would need to enact regulations on the industry.”

Pallone suggests any regulations also cover the conduct of the major professional sports leagues and their personnel, many of whom, he says, have financial interests in DFS.

Pallone and Sen. Robert Menendez (D-NJ) held a news conference last month outside MetLife Stadium to call attention to what they called “the hypocrisy of the professional sports leagues” in opposing sports betting while supporting daily fantasy sports.

Despite New York Attorney General Eric Schneiderman's declaration this week that daily fantasy sports (DFS) is illegal gambling, millions of consumers will...

New York classifies daily fantasy sports as illegal gambling

Move may lead to regulation of massive new industry

Just like Nevada, the state of New York has found daily fantasy sports (DFS) to be illegal gambling and ordered a halt within the state.

But unlike Nevada, with its much smaller population of players, New York makes up a significant source of players, pumping money into major DFS enterprises like FanDuel and Draft Kings.

In letters to the two companies, obtained by ESPN, New York Attorney General Eric Schneiderman said his office's review of DraftKings' and FanDuels' games found them to constitute illegal gambling.

Disappointed

“We are very disappointed that New York Attorney General Eric Schneiderman took such hasty action today, particularly since he did not take any time to understand our business or why daily fantasy sports are clearly a game of skill,” DraftKings said in a statement. “We strongly disagree with the reasoning in his opinion and will examine and vigorously pursue all legal options available to ensure our over half a million customers in New York State can continue to play the fantasy sports games they love.”

DFS was determined to be a “game of skill” under a 2006 law regulating gambling, shielding it from regulation under the law. But Schneiderman says the facts suggest otherwise – people wager things of value on outcomes they cannot control. That, he says, is gambling.

A month ago, the Nevada gaming commission reached the same conclusion. In a memorandum, Nevada Gaming Control Board Chairman A.G. Burnett said he asked the state attorney general's office and others to examine enterprises like DraftKings and FanDuel to determine if they were gambling operations.

“Based on these analyses, I, along with staff, have concluded that DFS constitutes gambling under Nevada law,” Burnett wrote. “More specifically, DFS meets the definition of a game, or gambling game pursuant to Chapter 463 of the Nevada Revised Statutes.”

Compromise?

In it's reaction to Scneiderman's latest action, DraftKings said other regulators, including the Federal Trade Commission (FTC), have taken what it calls “a reasoned, informed and measured approach to the daily fantasy sports business.”

“We hope this trend continues along with due consideration for over 56 million sports fans across the country who enjoy playing fantasy sports,” the statement said. “We remain committed to working with all relevant authorities to ensure that our industry operates in a manner that is transparent and fair for all consumers.”

That seems to suggest the way may be open to reclassify DFS so that governments can regulate it, and perhaps get a piece of the action. With its association with major media and sports leagues, DFS generates billions of dollars -- enough for everyone, it would seem.

Just like Nevada, the state of New York has found daily fantasy sports (DFS) to be illegal gambling and ordered a halt within the state.But unlike Neva...

Is daily fantasy sports cutting into state lotteries?

A research firm says states have a right to be worried

It's been an eventful few weeks for daily fantasy sports enterprises like DraftKings and FanDuel.

First, there was an uproar over concerns that employees of the two fast-growing companies were unfairly profiting from inside information when they played games on competing sites.

That concern resulted in the launch of a formal investigation by New York Attorney General Eric Schneiderman.

Next, the Nevada Gaming Commission ruled that daily fantasy sports games constitute gambling, and therefore need to be licensed if they want to operate in Nevada.

Now, there's concern that these highly popular games could be cutting into the revenue consumers spend on state-sponsored gambling – lotteries.

A survey by research group Leger asked people who play daily fantasy games – where they can win money by forming teams of actual players and get points based on how well the players perform.

Buying fewer lottery tickets

Among the 15% of U.S. adults who claim to have played daily fantasy sports this season, 61% said what they spend on fantasy games has reduced what they wager on lottery games such as Powerball, Mega Millions, Scratch, or Instant Games.

It turns out the people who play fantasy sports games are typically gamblers. In fact, 84% of fantasy sports players said they played a lottery game in the last month. Leger says that's more than twice the level of all American adults.

"Specific to state lotteries, this is an external factor contributing to a perfect storm," said Lance Henik, Senior Account Manager at Leger.

Smaller jackpots

First, he says, you have to consider the reduction in blockbuster jackpots from Powerball or Mega Millions that may have impacted cross-play for other games in many state lotteries.

Then, there's the preference among younger players for online gaming, especially for those platforms that allow players to put their “skin in the game.”

The bottom line, he says, is daily fantasy sports may pose a long-term threat to state lotteries, which the states depend on for revenue.

Incidentally, the Leger data shows that daily fantasy sports is cutting into the casinos. Leger says that could well explain why the state of Nevada ruled that daily fantasy sports games constitute gambling and should be licensed.

"It appears Daily Fantasy Sports is serving up a double economic whammy for state governments right now." said Simon Jaworski, Senior Vice President at Leger. "These fantasy behemoths are not currently filling the local coffers with tax, due to their private ownership, which when coupled with potentially lower tax revenue from the DFS player's reduced lottery and casino spending, it is certainly a situation worth monitoring."

It's been an eventful few weeks for daily fantasy sports enterprises like DraftKings and FanDuel.First, there was an uproar over concerns that employee...

Nevada orders halt to one-week fantasy sports games

Regulators conclude that the games constitute unlicensed gambling

If anyone knows gambling when they see it, you would expect it to be Nevada gaming regulators. So it might be significant that the Nevada Gaming Commission has declared one-week fantasy sports games to be unregulated gambling.

In a memorandum, Nevada Gaming Control Board Chairman A.G. Burnett said he asked the state attorney general's office and others to examine enterprises like DraftKings and FanDuel to determine if they were gambling operations.

“Based on these analyses, I, along with staff, have concluded that DFS (daily fantasy sports) constitutes gambling under Nevada law,” Burnett wrote. “More specifically, DFS meets the definition of a game, or gambling game pursuant to Chapter 463 of the Nevada Revised Statutes.”

Game of skill

DFS has been considered legal because it had been judged to be a game of skill, rather than a game of chance. But Burnett says the games involve wagering on the collective performance of individuals participating in sporting events.

Under current law, Burnett says, if you are going to operate such games – as DraftKings and FanDuel do – then you must be licensed.

As a result, all unlicensed daily fantasy sports games – and that's all of them – must cease and desist operating in Nevada – meaning consumers in Nevada can't play.

FBI inquiry

Meanwhile, The New York Times reports the FBI has made inquiries into the operations of daily fantasy sports websites after players of the games and lawmakers leveled charges of insider trading and predatory practices.

At least one state attorney general, New York's Eric Schneiderman, has also launched an investigation. Schneiderman has sent letters to the executives of both DraftKings and FanDuel seeking information about company policies when it comes to employees participating in DFS.

“It’s something we’re taking a look at,” Schneiderman said in a brief statement last week.” Fraud is fraud. And, consumers of any product – whether you want to buy a car, participate in fantasy football – our laws are very strong in New York and other states that you can’t commit fraud.”

In a letter to DraftKings CEO Jason Robbins, Schneiderman expressed concern over reports that company employees or agents may have gained an unfair financial advantage in the contests by accessing non-public data.

“These allegations, and your company’s subsequent statement, raise legal questions relating to the fairness, transparency, and security of DraftKings and the reliability of representations your company has made to customers,” Schneiderman wrote.

Both DraftKings and FanDuel, which are among the biggest advertisers on television, have denied employees unfairly benefited from insider information. But both companies have altered policy to bar employees from participating in DFS games on rival websites.

If anyone knows gambling when they see it, you would expect it to be Nevada gaming regulators. So it might be significant that the Nevada Gaming Commission...

Ad Week: don't bet against one-week fantasy enterprises

Madison Avenue says the industry is too big to fail

As we reported last week, the scrutiny on one-week fantasy sports enterprises has intensified amid allegations of insider trading.

After New York Attorney General Eric Schneiderman announced he would investigate the two largest one-week fantasy enterprises, DraftKings and FanDuel, USA Today sports columnist Nate Scott predicted the scandal is “the beginning of the end” for one-week fantasy sports games, saying they're gambling that is legal only because of a loophole in the law. That loophole, he predicts, is about to be closed.

But the obituaries may be premature. AdWeek delved into the issue, since the new industry is spending record amounts of ad dollars. The publication says the experts it has consulted all agree – fantasy sports is already too big to fail.

Too big to fail

In other words, there is too much money at stake. No one is going to be willing to pull the plug on that.

"The problem is that everybody has a partnership with these companies; the media, the league, the teams – it's incredible," executive vice president/executive creative director Bob Dorfman of Baker Street Advertising, told AdWeek.

By Adweek's counting, there have been more than 60,000 network TV ads for these companies so far this year. It's hard to turn on the TV without seeing one – and the frequency has only increased with the kick-off of the NFL season.

Congressional attention

Now Congress is showing signs of getting involved. Sen. Bob Menendez (D-NJ) and Rep. Frank Pallone (D-NJ) have asked Federal Trade Commission (FTC) Chairwoman Edith Ramirez to explore and implement safeguards to ensure a fair playing field for fantasy sports enthusiasts who participate in daily or weekly games.

The two lawmakers point out they aren't advocating outlawing the wildly popular games, just trying to provide some regulation.

“We believe that fantasy sports should be legal and subject to appropriate consumer and competitive protections,” Menendez and Pallone wrote in a letter to the FTC Chairwoman. “Consumers also expect companies to hold online contests in a fair, transparent manner.”

Fantasy games are not considered gambling, and in fact are embraced and encouraged by professional sports leagues, because it has been determined they are games of skill, not chance. Participants choose actual players for their fantasy teams and get points – and huge potential payouts – when their team performs well.

But critics like USA Today's Scott see it differently.

“You give someone money, and based on outcomes outside your control, you can win more money,” Scott wrote. “That is gambling.”

As we reported last week, the scrutiny on one-week fantasy sports enterprises has intensified amid allegations of insider trading.After New York Attorn...

Fantasy sports sites deny insider trading charges

Employees are barred from playing on their own sites but not on rivals'

The two major fantasy sports enterprises are under fire after a DraftKings employee admitted last week that he accidentally released information that he wasn't supposed to. But it turns out the same employee won $350,000 on rival FanDuel the previous week.

That raised the question – was this a case of insider trading? The data was the line-ups of players selected by participants. Critics charged that having access to that information before anyone else would give a player an advantage in fielding a team and thus increase the chance of winning.

“The majority of people in the community take umbrage with the lack of regulations and the sheer number of DK (Draft Kings) players using data that’s not publicly available,” Mike, a fantasy player, posted on the fantasy blog site Rotogrinders.

Denied wrongdoing

Both DraftKings and FanDuel denied that any of their employees did anything wrong or unethical. But the issue for players like Mike is whether someone with insider knowledge of who other players were picking for their fantasy teams would give the insider an unfair advantage.

As we reported last week, DraftKings and FanDuel are highly profitable and unregulated examples of one-week fantasy sports leagues, and a way for people who are knowledgeable about a sport to make a lot of money.

Instead of picking a particular team to beat another team, fantasy players assemble a “team” of actual players, winning points for how well those athletes perform in a particular game. In the case of football, participants “draft” a quarterback, two running backs, three wide receivers, a tight end, a kicker, and a team defense.

There is a fairly complicated formula that assigns points based on how each player performs in a game. For example, a player is awarded points for every touchdown their quarterback throws and for their total passing yards, but points are deducted for each interception.

Recent development

People have been playing informal fantasy sports for years, mostly for fun. It has only been recently that DraftKings and FanDuel has established weekly “seasons,” allowing players to compete for one set of games.

Players pony up an entry fee and can win huge sums if they happen to be in a large pool and win.

While the joint statement from DraftKings and FanDuel declared “nothing is more important than the integrity of the games,” The New York Times reports a DraftKings spokesman has acknowledged that employees of both companies had won big jackpots playing at other daily fantasy sites. Company policies prevent employees from playing on their own sites.

The two major fantasy sports enterprises are under fire after a DraftKings employee admitted last week that he accidentally released information that he wa...

One-week fantasy sports walks a fine line as its popularity explodes

Why regulators and sports leagues don't consider it illegal gambling

If you watched any NFL games over the weekend – or any television for that matter – you no doubt were bombarded with commercials for the two major one-week fantasy sports enterprises, DraftKings and FanDuel.

Fantasy sports – particularly fantasy football – has been around for years. One-week fantasy sports is a relatively new phenomenon and has enjoyed explosive growth. Instead of picking your fantasy team for an entire season and getting a small cash prize at the end if you win, DraftKings and FanDuel allow players to choose different teams each week, earning sometimes significant cash prizes if their teams compile the most points. Players may play one week or every week.

Wait a minute, I know what you're probably thinking. Isn't this illegal gambling?

It might seem like it, but, so far, no one who enforces laws thinks so. The difference between betting $50 on the Cincinnati Bengals to cover the spread against the Oakland Raiders and putting up $50 to play your fantasy team is that fantasy football is considered a game of skill, not chance.

Murky distinction

According to FanDuel, as long as your are at least 18 years old and live in either the U.S. or Canada, you can legally pick your teams and place your bets. Pete Rose may have been banned from Major League Baseball for betting on baseball games, but for other sports leagues, whether professional athletes should be allowed to play one week fantasy games remains a murky subject.

The leagues, meanwhile, are all in, as are sports media.

“We've even partnered up with companies like NBC, Sports Illustrated, Comcast, Sporting News, and plenty of others,” FanDuel says on its website.

How to play

Instead of picking a particular team to beat another team, fantasy players assemble a “team” of actual players, winning points for how well those athletes perform in a particular game. In the case of football, participants “draft” a quarterback, two running backs, three wide receivers, a tight end, a kicker, and a team defense.

There is a fairly complicated formula that assigns points based on how each player performs in a game. For example, if Tom Brady was your quarterback Sunday, you would have done quite well, earning eight points for Brady's two TD passes and 14.32 points for his 358 passing yards and no interceptions.

Highest points win

Each position has a similar formula to produce points. The highest point total in the league – the players in a particular group – wins the money put up by the rest of the participants, with FanDuel or DraftKings taking a small cut.

To prevent participants from “drafting” the best players at every position, professional players are assigned a contract value, with the best-performing players having the highest values. Fantasy players have a budget, or salary cap, of $60,000 to assemble a team. If you want to draft Tom Brady at quarterback, you'll probably have to choose a lesser known, or sleeper player at one or two of the other positions to stay under the cap.

If it all sounds like a male sports geek obsession, it isn't. Leger, The Research Intelligence Group, estimates nearly one-quarter of this year's NFL Fantasy Football players are women, a steady climb over the past few years.

Women players

"We're seeing a small, steady trend showing the rate that women are playing Fantasy Football is growing faster than that among Fantasy Football players in general," said Lance Henik, Senior Account Manager at Leger. "According to the Fantasy Sports Trade association, approximately 20% of all fantasy players in 2011/2012 season were women. The results from our 2013 poll showed 23% of Fantasy Football players were women, with our latest poll results currently showing that 25% of them are women."

As the 2015 NFL season kicked off earlier this month, both DraftKings and FanDuel saturated the airwaves, competing for even more participants. According to iSpot.TV, Draft Kings spent $81 million in ads between August 1 and mid September, more than the traditional sponsors of NFL games, beer companies, carmakers, and athletic shoe companies.

Season-long fantasy football leagues are mostly played for fun, a way for sports fans to enjoy the season. As the commercials make clear, one week leagues are all about the money – and there's a lot of it. In its TV commercials over the weekend, DraftKings boasted it would pay out more than $1 billion for the season.

It can cost as little as $1 to field a team for the week, but the potential payout for that amount is very small. Players who pay more can potentially earn more – but can lose more as well.  

If you watched any NFL games over the weekend – or any television for that matter – you no doubt were bombarded with commercials for the two major one-week...