By Sean Glendon
If you haven’t heard of FanDuel and DraftKings, you’re lying. The number of commercials they air is ridiculous, and recently they’ve been making headlines for all the wrong reasons. While there were early forms, the creation of FanDuel in 2009 was the true beginning of the the trend known as daily fantasy sports. DraftKings was later founded in 2012, and the two combine to control 95% of the daily fantasy sports market.
The rise of daily fantasy sports became a possibility with the rise of the internet, but the inspiration came in 2006, with the passage of the Unlawful Internet Gambling Enforcement Act. The UIGEA was passed to limit online payments related to bets and wagers. The term “game subject to chance” was included to limit online poker, but the act specifically does not include fantasy sports. Nigel Eccles realized that the UIGEA didn’t specify that a fantasy game had to last an entire sports season, and created FanDuel to allow people to participate in shorter term fantasy games.
Since the creation of these services, there has been a constant increase in popularity with an all time high as the 2015 NFL Season began. This comes from strong marketing and huge investments from venture capitalists. As part of these strong venture capital investments, Major League Baseball became the first professional sports organization to invest in daily fantasy sports when they invested in DraftKings in 2013. Following the MLB deal, DraftKings entered into a deal with the National Hockey league on top of its seven team-level deals. FanDuel entered into a four-year deal with the National Basketball Association, in which equity was acquired by the NBA. FanDuel investors included Comcast Ventures and NBC Sports. After their Series E funding round, FanDuel was valued at over $1 billion. On top of these, DraftKings entering into a 3 year, $250 million deal with ESPN that included integration with their programming and had a clause making them the only daily fantasy service that could be advertised on ESPN starting in 2016. DraftKings also entered a deal with Fox that involved fox acquiring $150 million in equity, in exchange for $250 million in advertising over the next 3 years.
As the market for daily fantasy sports increased, the government began to question the industry. The government probe began in October as a result of a DraftKings employee winning $350,000 on FanDuel. The employee had access to data about what players were being chosen by DraftKings users and at what percentages, and used this information to create his winning FanDuel lineup. If an individual used information not available to the public to make transactions on the stock market, her actions would be illegal due insider trading laws. While there have been cases where the roles were reversed, in this particular instance DraftKings is where the majority of the fault lies as DraftKings does not have preventative measures in place to protect confidential information from its employees. As a result of this occurrence, there have been questions about the accessibility of information that employees have, and what protections exist to prevent employees from using this type of insider information if they have access to it. FanDuel and DraftKings released a joint statement regarding the issue, and DraftKings’ website includes a section about its updated employee participation policy – DraftKings employees are not allowed to participate in public daily fantasy sports tournaments on any DFS site, and DraftKings will take swift action if an employee of another DFS site is caught using DraftKings with insider information. As an interesting side note, in December of 2013, a woman named Justine Sacco caused controversy when she tweeted “Going to Africa. Hope I don’t get AIDS. Just Kidding. I’m white!” and was fired by IAC before her flight landed after a hashtag about the tweet began trending – after months of job searching Sacco became the Director of Communications for FanDuel.
I was interested in the news surrounding daily fantasy sports, but didn’t know how relevant it would be. Sure, people see the commercials all the time, but does anybody partake in daily fantasy sports? Maybe not, but I figured that I had to do my due diligence if I wanted to cover the topic – I had to participate in daily fantasy sports. I had no idea what to expect, or which service I would choose, but I was a man on a mission. Upon mentioning my idea to a housemate, he said he had always wanted to participate in them, and this would give him a reason to. And with that, we were on our way. I went with DraftKings and he went with FanDuel. We set up our accounts, and got our credit cards out. Initially, I intended to deposit $10 to DraftKings, but $25 was somehow added to my account. I blame myself, as I typed $10 into the custom field, but didn’t click on it afterwards… I think. DraftKings’ promotion offered to match your first deposit, after your money filtered through system enough. Another incentive offered by DraftKings was a free $3 entry to a tournament upon your first deposit. So with that, I entered the free tournament. It featured around 380,000 people, with the top 84,950 players profiting. The first place winner got $100,000, and including the $1,000,000 total guaranteed payout, DraftKings was set to profit over $100,000 for this one tournament. I also joined a $3 tournament against two other users. Considering how many tournaments of different scope and scale are held across a variety of sports, it’s no wonder that these companies are valued so highly. DraftKings has NFL, NBA, NHL, NASCAR, MMA, MLB, soccer, college sports, and even virtual sports (as in video games). I have experience playing season-long fantasy football, but I had no idea what to expect going into DraftKings. What would stop me from drafting the biggest names in football on my team? I quickly found out. DraftKings users must draft 9 players: a quarterback, two running backs, three wide receivers, a tight end, a defense, and a flex (which can be a runningback, wide receiver, or tight end). FanDuel differs here, as there is no flex – instead players choose a kicker. Players are given $50,000 to compose their teams. With established, well-known players setting you back $6,000, $7,000 or even $8,000, there is an extreme opportunity cost of choosing players in this category. Doing so means you have to take complete unknowns at other positions and find the “sleeper” as commercials say. For me, the sleeper was Ladarius Green. The backup tight end for the Chargers had the opportunity to step up with Antonio Gates out, and at only $2,900, he was a key player on my team with 4 receptions for 45 yards, a receiving touchdown and two two-point conversions. On the other hand, at $7,800 Brandon Marshall really underwhelmed and set my team back. A really cool feature about DraftKings is it shows you what percent of leagues your players are in (once the games begin). My top performing player, Todd Gurley costed $5,000 and was drafted in 53.6% of leagues while my second best player, Mike Evans costed $6,400 but was only drafted in 3.9% of leagues. With the Monday Night Game approaching I was out of the money but had my Quarterback Carson Palmer still ready to go. I had no chance of winning in the three person competition, but Carson Palmer projected me into 55,832nd place – earning me $6. My housemate was in a league where roughly 50% of users doubled their money, and he turned his $5 into $10. Two experiments on two different programs, and the two of us walked away as winners.
Currently, I am enrolled in another tournament, and will likely continue to participate in daily fantasy sports “for research.” For a small amount of money, I was more focused on football than I usually am, and had a very slim chance of cashing out big time. The games meant something, and it led to increased excitement. Throughout the week, I was constantly checking my lineup and considering making changes. I had to find the sleeper pick.
While there may be problems with employees or algorithms, calling for the regulation of the industry is a bit extreme. There must be more safeguards implemented by the companies, and the bad publicity regarding this scandal has already led to policy changes and internal reviews. DraftKings has engaged a legal team from Greenberg Traurig to optimize their controls and policies to minimize risk of cheating. As annoying as their commercials are, DraftKings and FanDuel found a legitimately legal way to engage sports fans while profiting majorly. There are talks of mergers involving these companies, and other talks of them going public. Despite a few hiccups, these companies should be given a chance to correct their wrongs before the government gets involved with strict regulations or worse, a complete outlawing of daily fantasy sports.