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DraftKings, FanDuel and the feds: The daily fantasy story so far

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This season, if you're a sports fan or are even sports fan-adjacent, two words have become nearly inescapable: daily fantasy. The suddenly booming industry has steamrolled TV, radio and the internet with ads promising that playing this "game of skill" can turn your intimate knowledge of sports into big bucks. Its annoyingly bombastic ads alone are enough to make anyone skeptical, since even in this fantasy not everyone can wind up an instant million dollar winner. All of the publicity has worked in FanDuel and DraftKings' favor, making daily fantasy games more popular than ever. That is, until a leak that showed the possibility of insider trading sparked a backlash. Now daily fantasy has the full focus of powerful government figures who may decide if the games will continue.

What is it

Fantasy Sports NY

Fantasy sports lets fans compete against each other based on the statistics of individual players, regardless of what team they're assigned to in real life. Participants put together custom squads of players in lineups that typically mimic a real sports team's starting roster, then use whatever stats those players put up in games to score points in their "fantasy" league.

It's become a multi-billion dollar industry that involves nearly every sports league, but things started a few decades ago with groups of sports junkies who tracked stats and transactions in thick binders stuffed full of spreadsheets. Those games were too complicated and time intensive for most, but in the early 00s increased internet access brought with it growing interest in fantasy sports. Websites like ESPN and Yahoo made starting and managing a league as easy as clicking a button, since they could do all the scoring and record keeping for you. Leagues usually run throughout the regular season of the sports, with varying types of matches that let players go head to head or track stats cumulatively over the entire season.

Now you're thinking, but wait, what does that have to do with the big money daily fantasy games I've seen advertised on TV? Those didn't exist until after 2006, when the Unlawful Internet Gambling Enforcement Act (UIGEA) passed, attached to an almost entirely unrelated bill concerning port security. While it prohibited using the internet to transfer funds for gambling, it contained a small loophole that created an entire industry by including language that explicitly excluded fantasy sports.

At the time, it was considered a way to strengthen the 1961 Federal Wire Act, but curiously no one could say for sure how fantasy sports ended up with an exemption. Sports leagues recognized the increased attention fantasy was building and, according to a report by the LA Times, lobbied to make sure the bill ended up the way it is. Even in that article, the writer only considered "weeklong" games that reduced the amount of skill involved -- the explosion of daily games was almost unfathomable.

How it works

DraftKings Inc. And FanDuel Inc. Applications As Ad Spending Increases

"Daily fantasy" splits from casual fantasy sports to create more games, which can be entered by more people and of course, bring in more money. Instead of simply entering a league with the folks at work and waiting all season to see who ends up on top, the games typically last only for a day, or a weekend in the case of the NFL. That means it's always fresh, and if you lose, no problem, you can come right back tomorrow.

On sites like DraftKings and FanDuel, players pay a fee to enter their rosters in a pool along with hundreds or even thousands of others, all vying for a piece of jackpots that can grow to millions of dollars. If you're a sports junkie (or a math nerd) it's ostensibly a way to put your "skills" to the test competing with other players, and it's always open for entries.

In daily fantasy, putting together your roster is usually determined by the "price" of each player, and there's a cap on how many fantasy bucks you can spend. Real life athletes that are virtually guaranteed to have a good performance will eat up a large amount of your budget, requiring anyone playing a fantasy game to fill out their roster with lesser-known names. That's usually where the skill/knowledge comes in, because finding a player that's still cheap but may put up big numbers (because the usual starter is injured, or if it's a particularly good matchup) can provide a huge boost -- as long as everyone else watching ESPN and Twitter for updates doesn't get there first.

A Sports Business Daily article earlier this year cited stats showing the daily fantasy economy largely rests on a combination of "sharks" and "minnows" that reflects what you'd see in a casino gaming setup. No matter who wins each matchups, sports leagues and broadcasters involved enjoy increased attention from fans, and as a result are heavily invested in some of the big daily fantasy names. As a result, ESPN regularly reports on "DFS Best Buys" while Comcast invested $11 million in FanDuel in 2013.

When it comes to the games' legality -- things are complicated. Currently the NCAA and Canada consider daily fantasy gambling, so they're prohibited. DraftKings and FanDuel won't take player's bets in six states, and are currently fighting to keep operating in New York.

The controversy

While daily fantasy has existed since 2007, FanDuel launched in 2009 and DraftKings didn't open its doors until 2012. Over the last couple of years they have increased their visibility with an inescapable slew of ads, fueled by investors and partnerships with media companies like (ESPN owner) Disney. As awareness of the games have increased, so has the question of whether this is (or should be) legal. Fueling the argument that daily fantasy is in fact similar to already banned games, Deadspin notes that DraftKings' own CEO has described the concept as "almost identical to a casino.. specifically Poker."

Its backers argue that the heart of it this is all about skill, and therefore good to go. Recently Nevada decided to shut down daily fantasy operations in its state, and this week New York Attorney General Eric Schneiderman took steps to ban DraftKings and FanDuel. Both have announced plans to fight the ban legally, although as of November 13th, FanDuel stopped taking deposits from players in New York. It's headquartered there, and many of the people protesting Schneiderman's decision (pictured at the top of this article) are actually employees of the company.

In early October the push for further scrutiny on daily fantasy boiled over as an employee of DraftKings scored a $350,000 win on FanDuel. That same week, he also posted insider information on player stats a bit earlier than it should've been available. This brought about the charges of possible "insider trading," as players and outsiders alike wondered how many people inside each company have access to statistics that are normally withheld from the public, like how many people have put a certain player on their roster. A tendency for employees of the two largest companies to play (and win) on their competitor's sites has made people wonder if they have some sort of edge

Even without inside information, researchers estimated that the top 1.3 percent of players are walking away with 77 percent of the profits from games. In September Bloomberg profiled "apex predator" Saahil Sud (aka maxdalury), the #1 ranked player on daily fantasy tracking site RotoGrinders. Sud studied math and economics in college and is now a full-time fantasy player who had already earned $2 million this year, while wagering $140,000 daily.

Since those revelations, both FanDuel and DraftKings have prohibited employees from playing anywhere (they were already banned from playing on their own sites). As an industry, daily fantasy is trying to clean up its reputation and set up self-regulation before the government steps in. The just-formed Fantasy Sports Control Agency is setting up a "strict, transparent and effective system of self-regulation," although it's hard to know when that will take effect, and in what form. Any moves in that direction can't come fast enough, as several states are working on legislation targeting daily fantasy. According to the Wall Street Journal, the FBI is asking questions of key industry players, as the Department of Justice considers if daily fantasy is gambling that falls outside the exception created in 2006.

What it's like to play

I'm an experienced fantasy player, with a Yahoo profile that dates back to 2002 and includes about 99 teams mostly covering football and basketball. While my seven-leagues-at-once days are in the past, according to the ads that kind of experience should put me in line for big money, right? To find out, I took my talents to DraftKings and FanDuel last week, and quickly found out how little skill I've accumulated.

In a rookie FanDuel league, my roster was only good enough for 15th out of 20 entries. On DraftKings, my football team is currently ranked 10,139th out of 16,880 entries -- a mere 7,000 or so spots out of the money. Sure, I'm smart enough to pick Stephen Curry on a hot night (read: any night of the week), but so is everyone else. The difference between back of the pack and finishing in the money is recognizing that 27 year-old rookie Nemanja Bjelica is putting up big numbers, or a matchup opportunity for Utah's Derrick Favors. If you think you can consistently pick out those sixth and seventh man winners better than other megafans, then hey, daily fantasy has a game for you.

Like others who have tried, my experience certainly reaffirms the industry's claim that this game depends on a measure of skill. Putting together a winning roster is far more science than art, and with enough research and time it's possible to improve your results. The only problem? It feels just like poker, where a skilled player can consistently tip the odds in their favor, and for everyone else the old adage applies "If You Can't See the Sucker, You're It." Many of the people who run daily fantasy games and play them at high levels honed their skills during the poker boom, and quickly moved over to this game. With an audience, skillset and payouts that are so similar, it's hard to understand why one is banned online and the other is not -- with the exception of a specifically-worded loophole created before anyone considered this type of game would ever exist.

What it means

So does this spell a quick end for daily fantasy sports? Online poker also enjoyed a quick boom with many of the same hallmarks before being snuffed out by the government. Daily fantasy backers have taken notes from that experience, and are dug in for a fight. With investors that include influential owners of sports teams like Jerry Jones of the Cowboys and Robert Kraft of the Patriots, it has supporters in the right places. At least, it does unless those owners are forced to dump their shares, which could happen if they lose the battle in New York. That's why you can expect them to fight hard to stay legal there, and DraftKings has reportedly secured the services of high-powered attorney David Boies. With all of this data at hand, I'm just hoping the sites stay legal long enough for someone to start a skill based daily game where we bet on who will win the next lawsuit.

Want to know more?

DraftKings and FanDuel will happily explain to you why daily fantasy is legal, if you still have questions. Tracking site RotoGrinders has an interactive timeline that will take you through the growth of the daily fantasy industry, while DailyFantasyNews' recap also hits the high points. Forbes abbreviated history of daily fantasy is a good way to follow the money behind these games. For the other side of the coin, check out these reports from Deadspin, Sports Business Daily and of course, Last Week Tonight with John Oliver.

[Image credit: (protestors, top) Associated Press, (DraftKings Tent), Associated Press, (DraftKings/FanDuel on computer and phone) Bloomberg via Getty Images]

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