If you’ve watched or been to a professional sports game in the past year you’ve no doubt seen advertisements for daily fantasy sports companies like DraftKings and FanDuel.
In just a few years the industry has become the hottest thing in the sports world probably since cable TV.
And with the recent merger of the two companies, it’s pretty clear that they plan on sticking around for a while.
As a whole, the daily fantasy sports industry is pretty new; DraftKings hasn’t even been around five years. But the two companies have raised a combined total of over $1 billion in venture funding. They quickly spent this money making their companies, and by extension the entire daily fantasy sports industry, a household name.
First, what is fantasy sports?
To understand what daily fantasy sports is, it is first necessary to understand plain-old fantasy sports, because that’s been around a lot longer.
A fantasy sport is a game where participants assemble imaginary teams using real players of different professional sports team. So for the NFL you’d draft a team consisting of one quarterback from Philadelphia’s team, a running back from Oakland, a wide receiver from Atlanta’s team, etc.
Everyone else in your league does the same thing, and then your teams compete against each other. So how do you decide who wins? Points are assigned to certain actions — a quarterback throwing a touchdown is 6 points, or a wide receiver would net your team one point per catch he had that game. At the end of all the games you add up all of your players’ points, and whichever team has the highest score, wins.
So what’s the difference?
Traditional fantasy sports typically occur over an entire season — in September you and your friends would draft teams, and you wouldn’t find out who won until the season is over in January. This also means you’re stuck with the same players you draft at the beginning of the season, unless someone in your league wants to trade with you.
But daily fantasy sports, as you can tell by its name, doesn’t last a whole season. It lasts a day: You draft your players in the morning, and by the time the games are over in the afternoon or evening, you know who won.
Another difference is that, while regular fantasy sports typically focused on playing year after year in a league with your best friends, daily fantasy sports is usually played more online with random competitors you’re matched against.
There’s also a money factor — daily fantasy sports leagues on sites like DraftKings can comprise hundreds of thousands of competitors, each paying a few dollars to enter — meaning the winner can end up winning millions of dollars in prizes.
Legislative issues
Traditional fantasy sports is legal. The Internet Gambling Prohibition and Enforcement Act of 2006 specifically contained a carve-out that differentiated fantasy sports from online gambling or sports betting.
The rationale was that daily fantasy sports was always more about playing with your friends, and not about wagering money. And even if you did wager money with your friends, it would take a whole season (six-plus months) to figure out who won or lost. Losing money over six months doesn’t really feel like gambling or sports betting, where you can lose money in a matter of hours or minutes.
Plus, there wasn’t much luck involved, because the results were spread out over a season — while a player may get unlucky and have one bad game, they could bounce back the next week to make up for it.
The law of large numbers says that over time (like a 162-game MLB season) the elements of luck will get averaged out. So fantasy sports was thought of as a game of skill, because it was really about knowing who to draft.
But then daily fantasy sports came along. It only took a few hours for participants to win or lose money, and results were seemingly much more luck-based than traditional fantasy sports.
Suspicious
Because the federal government hasn’t yet ruled on daily fantasy sports, it’s up to the states to decide how they want to regulate it.
And to be honest, states don’t really know how to regulate it. Daily fantasy sports obviously is a lot less like gambling than straight-up betting on sports, which is only legal in Las Vegas. But it’s also a lot more like gambling than traditional fantasy sports, mainly because of the aforementioned luck factor.
So what should states do? For a while, they didn’t do anything. But then in October 2015, things quickly changed. Basically overnight the U.S. Justice Department and FBI opened an investigation into FanDuel and DraftKings to determine whether daily fantasy sports is gambling, which would violate federal law. Both companies quickly lawyered-up, hired lobbyists and prepared for a battle toward legalization — after all, their future depended on it.
Slowly but surely, states across the U.S. fell on two sides — banning it as a form of illegal gambling (like in Nevada and New York) or passing new legislation to explicitly legalize fantasy sports (like Illinois).
But eventually, the tide turned. A few months ago, New York passed a law legalizing daily fantasy sports. And while it’s not yet legal in all 50 states, it does seem that progress is being made.
What’s next?
Of course, the result of a lobbying effort like this is that DraftKings and FanDuel spent hundreds of millions of dollars just to stay alive. And while they are now back on the path to expansion and profitability, somewhere along the way the companies realized it was pointless to continue competing against each other — they were spending hundreds of millions of dollars in TV advertising each year just to outcompete the other, while also paying two separate sets of lawyers and lobbyists to obtain the same thing — legalization.
So they merged. Details are still vague, and there is no new determined company structure (or even company name). But one thing is certain, DraftKings and FanDuel will soon be one company.
What does this mean for the industry? Even though DraftKings and FanDuel are the household names associated with daily fantasy sports, there are still other players, including Yahoo. These smaller providers may find it hard to compete under the shadow of the soon-to-be-formed giant that is DraftKings-FanDuel.
Plus, daily fantasy sports isn’t legal everywhere; there are still about 10 states that ban it, and about five where the legislation isn’t yet clear. So the lobbying work isn’t over yet.