The Business of Soccer
MLS and the Stark Realities of Daily Fantasy Sports
July 30, 2015
DAILY FANTASY SPORTS are taking off, and Major League Soccer is officially on board.
On Friday, MLS announced that DraftKings is now the league’s exclusive daily fantasy partner. And on Monday, it was reported that MLS was one of several prominent investors, also including Major League Baseball and the National Hockey League, in a new round of funding for the Boston startup.
To be sure, these moves have significant potential upside. As such, it seems excitement abounds at the moment. However, involvement in this very young, very unique industry demands some care and some caution from MLS.
In the fantasy sports market, where there are 56.8 million active players in the United States and Canada according to trade estimates, the daily fantasy segment—“think of it as ‘one-night stand’ fantasy sports,” as TechCrunch put it (if the metaphor makes you at least a little uncomfortable, then it’s probably appropriate)—is relatively new and relatively small, but growing at a dizzying rate.
FanDuel, a six-year-old company, and DraftKings, a three-year-old company, are the dominant players in the daily fantasy space, with a combined 96 percent market share. In 2014, FanDuel had $57 million in revenue (up from $14 million in 2013) with 1.1 million paid active users, while DraftKings had $30 million in revenue (up from $4 million in 2013) with 414,000 paid active users. This year, FanDuel and DraftKings are projecting roughly $200 million and $150 million in revenue, respectively. The companies bring in revenue via the “rake”—a cut, around 10 percent or less, of user entry fees.
Neither company is profitable (mostly because money is being poured into marketing and advertising), but FanDuel co-founder and CEO Nigel Eccles says that daily fantasy will be a billion-dollar business in just five years, and major investors are lining up.
Two weeks ago, FanDuel announced a $275 million Series E round of funding that values the company at $1.3 billion. This week, DraftKings announced a $300 million Series D round of funding that values the company at more than $1 billion. The valuations make both companies, in finance-speak, “unicorns.”
Eric Shanks, president and CEO of Fox Sports, which led the DraftKings funding round, said “There already has been exponential growth in this category, and we certainly believe there is a lot more to come.”
The embrace of major professional sports leagues has been a game changer for these two businesses. In 2013, MLB signed the first league deal in daily fantasy history with DraftKings. In 2014, the NBA and the NHL signed deals with FanDuel and DraftKings, respectively. And now there’s the partnership between MLS and DraftKings.
All four leagues have also acquired a stake in their respective partners’ companies. Like MLS, the NHL is a new investor in DraftKings through the latest funding round; MLB was an existing investor and increased its stake.
For daily fantasy, these partnerships build legitimacy and awareness and open channels to new customers. For sports leagues, they generate new revenue, of course, but they’re also seen as an opportunity to attract new fans and push engagement among existing fans, especially among young people.
“Season-long fantasy is a war of attrition,” explains Robert Bowman, MLB Advanced Media president and CEO. “The cleverness here is that it’s over quickly, and for a younger generation, it’s more appropriate. It’s where the people are. It drives traffic.”
“It keeps people interested in the games,” Bowman says.
Gary Stevenson, MLS Business Ventures president and managing director, says that daily fantasy is “a proven fan development tool.”
Sounds great, right? Well, it does, to a point.
FIRST, LET’S BE CLEAR: daily fantasy is a form of gambling.
Whether or not it actually violates federal and/or state gambling laws (more on that in a moment) is a separate issue.
“Are daily fantasy sports sites gambling? Yes; it isn’t even a debate,” said Dr. Timothy Fong, co-director of the UCLA Gambling Studies Program, recently to ThinkProgress. “You’re putting money up on an event of uncertain outcome in expectation or hope of winning a larger reward. That’s the definition of gambling.”
DraftKings and FanDuel insist that daily fantasy is a “game of skill” and thus distinct from conventional sports betting. But, generally, the influence of chance on outcomes—from injuries to random bounces—should seem strikingly similar in both activities. As Ryan Rodenberg, a professor of sports law at Florida State University, said to The New York Times, “It’s tough to make an intellectually honest distinction between the two.”
In the same piece, MLBAM’s Bowman said that he perceived daily fantasy as “akin to a flip of the coin, which is the definition of gambling.” That was in 2013. But in 2014, Bowman told the Times, “We have spent a lot of time inside here and talking to other outside experts and have concluded that these are games of skill and adhere to federal law.”
Sacha Feinman and Josh Israel, authors of the above-mentioned ThinkProgress piece, are correct in stating, “The façade that daily fantasy sports are something apart from gambling is maintained because the law requires it.”
FOR A PRIMER in daily fantasy’s legal status in light of federal and state gambling laws, see this paper recently written by Marc Edelman, a law professor at Baruch College and an attorney and consultant specializing in fantasy sports and gaming. (Don’t be intimidated—it’s actually a very easy read.) We’ll cover some of the basics here.
In 2006, President George W. Bush signed into law the Unlawful Internet Gambling Enforcement Act (UIGEA), pronounced you-EE-juh, which held payment processors liable for funding gambling websites that served U.S. customers, effectively stamping out online gaming activity to a great extent. However, the law included an exemption, or “carve-out”, as it’s usually called, for fantasy sports, so long as three criteria are met: (1) prizes and awards are established in advance; (2) all outcomes “reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals” in multiple events; and (3) no outcome is based on any single score, point-spread, team performance, or individual performance.
The author of UIGEA, former Rep. Jim Leach (R-Iowa), told ThinkProgress: “My intent in initiating the law was to constrain a growing gambling ethos in America that could bring the casino to the home, the work station, college dorm, even the treadmill. My concern was that a savings and investing country could too easily become a country where too many would bet wantonly on unrealistic hopes of obtaining a big payoff.”
Under state law, the legality of any daily fantasy contest generally depends on whether a court would find the contest to involve skill or chance. The threshold level of skill varies by state. In a majority of states, courts will determine legality based on whether the contest involves more skill than chance.
“When balancing the skill-based elements of ‘daily fantasy sports’ against these various elements of chance, it is difficult to predict with certainty whether a court would find skill or chance to predominate,” says Edelman. “This is because such an inquiry would rely heavily upon expert testimony and a fact-intensive investigation.”
He continues, “In addition, the factual findings pertaining to whether skill or chance predominates in ‘daily fantasy sports’ may vary based on the specific nature of each individual contest. Thus, a court may find skill to predominate in one format of “daily fantasy sports” but yet find chance to predominate in a different format.”
DraftKings and FanDuel both prohibit participation in five states where they perceive gambling law risks to be most elevated: Arizona, Louisiana, Iowa, Montana, and Washington.
“The legality of ‘daily fantasy sports’ is very much unsettled,” Edelman concludes, “and the ultimate issue of legality seems to depend on each individual contest’s game rules and states of operation.”
But even if FanDuel and DraftKings are for the sake of argument operating beyond the scope of most federal and state laws, that doesn’t mean that we should suspend further examination. Legal status aside, daily fantasy, by its nature, gives rise to a problem that has not received enough attention: addiction.
“With any form of online gaming (including daily fantasy)… it seems inevitable that a small segment of the participant base will suffer from a form of gambling addiction,” Edelman noted in a recent piece for Forbes.
Dr. Fong also believes that as daily fantasy grows it’s only a matter of time until more people with this addiction come forward. “We didn’t see a lot of addiction to Internet gambling at first,” he says. “It took a while for losses to accumulate, for people to come to light and admit to having a problem.”
What’s especially troublesome is the lack of evidence that anybody cares, from FanDuel and DraftKings to their partners in professional sports.
Even if those affected represent a small segment, their existence absolutely should condition the manner in which daily fantasy is marketed and managed, considering the addiction can be terribly destructive.
It’s worth emphasizing just how easy it is to be lured in. It’s available right on your phone. And you can start with free or low-cost games. And you’re constantly being sold the chance to win big. A recent DraftKings commercial dangles the potential for “life-changing amounts of cash.”
For its part, MLS has developed a reputation for being socially responsible and progressive, and this must extend into the daily fantasy space. MLS owes this to the people who support the league. It must not be willfully blind.
Until this year, “pathological gambling” was the term used by the American Psychiatric Association in the Diagnostic and Statistical Manual of Mental Disorders (DSM), a key reference book for mental health professionals, to describe the most severe form of disorder related to gambling. The fourth edition of the DSM (DSM-IV) defined pathological gambling as “a persistent and recurrent maladaptive gambling behavior” as indicated by at least five of 10 diagnostic criteria.
Subclinical pathological gamblers, commonly referred to as “problem gamblers,” have been defined as experiencing difficulties or adverse consequences as a result of gambling but meet less than five criteria. This group has also been called “at risk” or “probable pathological.” Subclinical instances are more prevalent.
According to various prevalence studies, about 2 million Americans suffer from pathological gambling, and another 4 to 6 million from “problem gambling.”
The fifth edition of the DSM (DSM-5), published this year, renamed PG as “gambling disorder”, lowered the threshold from five symptoms to four, and, interestingly, moved it from the category of “Impulse Control Disorders” to “Substance-Related and Addictive Disorders.” A white paper from the National Center for Responsible Gaming explains:
Many scientists and clinicians have long believed that problem gamblers closely resemble alcoholics and drug addicts, not only from the external consequences of problem finances and destruction of relationships, but, increasingly, on the inside as well. According to Dr. Charles O’Brien, chair of the Substance-Related Disorders Work Group for DSM-5, brain imaging studies and neurochemical tests have made a “strong case that [gambling] activates the reward system in much the same way that a drug does.” Pathological gamblers report cravings and highs in response to their stimulus of choice; it also runs in families, often alongside other addictions.
The paper goes on to ask two important questions: Will the reclassification increase public health awareness of gambling disorders? Will the reduced threshold for a diagnosis alter the rate of gambling disorders substantially in future studies?
The rate of disorder could also be affected by the increasing availability and popularity of various forms of gambling.
And here’s one major dilemma in the daily fantasy space: If the operators can’t acknowledge that it’s gambling, and, by extension, their partners can’t acknowledge that it’s gambling, then how can anyone take steps to address gambling-related addiction?
Ideally, the answer would be as simple as phrasing. Paul Charchian, president of the Fantasy Sports Trade Association, the industry’s largest advocacy organization, told ThinkProgress that while he’s not aware of any studies tying fantasy sports to addiction, he believes that “there is an awareness that there could be compulsive behavior tied to fantasy sports contests.”
Wonderful. “Compulsive behavior” will do. That’s really all that needs to be acknowledged at this point.
The solution may be more complicated than that. But, one way or another, a socially responsible league that is involved in daily fantasy must ask and demand satisfying answers to these questions:
- Is every reasonable effort being made to provide education about responsible use?
- Is every reasonable effort being made to identify and exclude problem users?
- Is every reasonable effort being made to help problem users?
- What ratio of responsible use to problem use is acceptable?
- Is every reasonable effort being made to exclude minors?
Being proactive is the right thing to do.
Moreover, if problem use goes unmanaged and grows beyond expected or acceptable levels, league partners could very well see damage to their brand image and to fan engagement to some extent.
THERE IS AN ENTIRELY different risk to consider. The writer Daniel Okrent is credited as the father of fantasy sports. In the winter of 1979 he created the original version of fantasy baseball, which came to be known as “Rotisserie baseball” (named after La Rotisserie Française, a Manhattan bistro where he first pitched the idea to his friends). Earlier this year, Okrent spoke to Ben McGrath for a New Yorker piece on the rise of fantasy sports. He had this to say:
In the first year or two you’re playing, you are much more engaged with baseball than you’ve been since you were seven years old. And then, by your fourth or fifth year, the actual game has lost meaning for you. You’re engaged in the numbers that the game spins out and engaged with millions of others in the same way. It has no relationship not just to the fan attachment that you may have had to a particular team but to the physical thing that’s taking place on the field. It’s the representation of it in a number that’s what’s important. I’m thinking of our original group. A couple of them really don’t give a shit about baseball at all anymore.
When people say, ‘How do you feel, having invented this?’ I say, ‘I feel the way that J. Robert Oppenheimer felt having invented the atomic bomb.’ I really do. I mean, pretty terrible!”
McGrath also spoke to several daily fantasy players who believed that “Okrent’s initial concern about a weakening of ties between fans and their favorite teams was being borne out.”
This feels like it’s correct. But there doesn’t seem to be any hard evidence that it’s the case. In the last several years, major professional sports leagues’ big consumption metrics—e.g., attendance, television ratings—have generally been solid, and within that consumption it’s not easy to identify a cooling of intensity.
But, over time, could daily fantasy, something altogether different from traditional fantasy, possibly create (or further) this effect?
More specifically, could daily fantasy attachment or negative experiences, ranging from exhaustion to frustration to financial distress, alter or erode fan engagement? And could this outweigh positive experiences ramping up engagement?
Daily fantasy is still so new and has so few users—less than 10 percent of the overall fantasy market—that nobody should be sure at this point. It’s something to watch.
If FanDuel and DraftKings have their way, though, things are going to be, for better or worse, different.
According to McGrath, FanDuel’s mission is “to transform the way we watch sports in the United States.”
DraftKings CEO Jason Robins told Sports Illustrated’s Grant Wahl, “We’re trying to transform from something typically viewed as a second-screen experience to more of a sole sporting experience for people.”
If you’re a traditional sports fan, this may make you shudder.
As Gary Vaynerchuck likes to say, “marketers ruin everything.” As professional sports turn to daily fantasy, hopefully that won’t apply here.
Ted Philipakos is a professor of sports marketing at New York University’s Tisch Institute for Sports Management, Media, and Business. He is the author of On Level Terms: 10 Legal Battles That Tested and Shaped Soccer in the Modern Era. He can be found on Twitter at @tphilipakos.