Over the past few years there has been an explosion in the popularity of Daily Fantasy Sports (DFS) in North America. There are currently around 57 million players across the USA and Canada and, after some hefty investments from top sports teams and sports media, the two leaders in the industry, FanDuel and DraftKings, have been valued at nearly $1 billion each. All in all, it is an extremely popular and profitable industry.
However, with allegations of insider trading having been thrown at DraftKings and FanDuel, and an FBI investigation underway, there is a huge question mark hanging over the unmonitored operations of DFS companies and their dealings with the sports leagues and media. It looks like the brief, but fruitful honeymoon could soon be over.
A scandal that’s spoiling the fantasy
Several employees of DraftKings allegedly used insider knowledge of the top players’ ownership data for their own financial benefit. They are accused of copying the top players fantasy team lists and using the information to select their own fantasy teams on their rival’s website, FanDuel.
The alleged foul play was uncovered on a fantasy sports forum, when it was pointed out that Ethan Haskell, a DraftKings employee, had accidentally leaked supposedly confidential player ownership data before the NFL games had started.
To make matters worse, choosing a winning team has proven to be extremely complex for the average DFS player, with very few actually coming out on top. Due to the high level of skill required to win the game, studies have shown that it only the top 1.3% of players win 91% of the profits.
It’s not time to forgive and forget
To really understand the scope of the problem, it is necessary to understand just how inextricably intertwined DFS has become with sports leagues and media. According to the New York Times, DraftKings received $300 million from investors such as the NHL, MLS, MLB, and the New York Yankees, among others. DraftKings also has a physical presence, with its own exclusive suites inside of the Cowboys, Patriots and Chiefs stadiums.
It’s not just the major sports leagues financially backing the two industry leaders; sports media companies have also decided to take part. ESPN, for example, has agreed to an advertising exclusivity deal with DraftKings, which – all being well – will run from 2015-2018.
ESPN reacted to the allegations of fraud by immediately withdrawing all DraftKings advertising. Unfortunately, the response didn’t last very long. After only 3 days, the network was back running DraftKings ads again. Even children get grounded for longer than that – but then again, they probably don’t make their parents quite so much money. (Editor’s Note: The ESPN deal has been terminated at the request of DraftKings)
What we need to do to turn it around
Whether the case against the two DFS companies is proven or not, the scandal has raised some very serious questions about the nature of the DFS industry as a whole.
We need to ask whether the industry should be regulated by the government in the same way as regular gambling. It’s a legitimate question, but in my view, we should avoid knee-jerk reactions. I would argue that government regulation is more likely to harm the industry than to help it. To see what I mean, we have to look at states where online gambling has been legalized.
New Jersey, for example, passed a bill in 2011 that superseded the UIGEA act and made online gambling legal in the state. Although that sounds great, the truth is gaming licenses come in at $250K. This is perfectly acceptable for major casinos, which already have massive bankrolls, but it would certainly destroy the chances of any startup DFS company from getting off the ground. These high licensing fees are in place simply to protect those casinos, who have the ability to make generous campaign contributions, from new competition, while crowding out new businesses. In reality, the licensing fee each state charges would effectively destroy all new DFS startups and crush innovation, as it has done to the gambling industry.
The irony behind the scandal is that DFS could be an excellent vehicle for snuffing out corruption in sports all over the world. There is a current and growing problem with match fixing in sports today. According to the International Center for Sport Security (ICSS), an organization that monitors security and corruption in sports, organized crime is using match fixing and illegal gambling to launder money. In 2014, there were 380 reports of match fixing in soccer matches according to Europol, and the ICSS suggests in a whitepaper that this could just be a tiny fraction of the problem.
If DFS gets back on its feet and becomes an ethical leader in fantasy sports competition, it could well be part of the solution. Where traditional sports betting is usually based on the outcome of one game, race or bout, DFS contests are based on many results and individual performances over several games during the course of the day, making coercion of an outcome for financial gain virtually impossible. If DFS was more widely adopted (and became more popular than illegal gambling) we would likely see a big drop in instances of match fixing across all sports.
Of course, it is extremely important that scandal does not define DFS and we have to be sure that this does not happen again. The key instead is careful and independent monitoring of the industry, including regular auditing of employee and company accounts. In the wake of the crisis, the Fantasy Sports Trade Association (FSTA) has formed Fantasy Sports Control Agency (FSCA) to provide oversight for fantasy sports organizations. It will be headed by former acting U.S. Secretary of Labor Seth D. Harris. But the FSTA needs to go a step further and do more due diligence when evaluating potential new members and proactively expel members that are found to be in violation of this industry’s ethical standards.
Going forward, there also needs to be very real consequences for violating users’ trust – not a perfunctory (and cynical) 3 day ban that leads to massive profits for the offending companies. It is in both the interest of the public and of the industry to enforce real penalties for bad behavior so that the industry can grow and be an ethical leader, especially considering the potential DFS has for doing good.
This is the reason why it is essential that we encourage innovation and the emergence of new startups. This could be the dawn of a new era in sporting competition, without fear of match fixing and giving fans what they are looking for: passion for their team and excellent entertainment, without fear that they’re watching a foregone conclusion.
It is a young industry and there is still a lot to learn. We have to lead from the front; the industry needs strong voice to lead the way to the future. If we’re going to invest so much time and money in developing an innovative and profitable industry, let’s make sure it is done right and it is done ethically. If it is, it will benefit everyone.
Bob Reisenweber is the, COO of Betiply, a soon-to-be-launched platform that will “revolutionize” the way you play daily fantasy sports, talks about the scandal in the industry and the way forward from here.