Daily fantasy sports (DFS) contest providers like Boston-based DraftKings and New York City-based FanDuel are in big trouble. Regulators in states like Nevada and New York recently ordered them to cease operations, while other states including Illinois are considering introducing bills to regulate such firms’ activities. At the heart of the issue is whether these contests are a game of chance or skill-based — but the law is unclear on that, said Wharton statistics professor Abraham “Adi” Wyner.
The two companies filed lawsuits against New York Attorney General Eric Schneiderman in Manhattan on Friday morning, asking that a judge block the state from shutting them down. Wyner recently discussed the story on the Knowledge at Wharton radio show, which airs 10 a.m.-12 p.m. Eastern time Monday-Friday on Wharton Business Radio on SiriusXM channel 111.
Trouble began last month after the Federal Bureau of Investigation began an investigation into DFS websites, as reported by The New York Times. A day later, the Nevada Gaming Control Board ordered DFS sites to shut down, saying they need a gambling license to operate in the state. That requirement meant that only casinos in the state, which is home to gambling capital Las Vegas, are allowed to offer daily fantasy sports. Earlier this week, the New York Attorney General also asked the sites to shut down.
“The real issue is what individual states allow” in DFS, said Wyner. “Some states will say if the preponderance of the outcome of the game is skill, then it is a skill-based game. Others are clear: Anything that has any random component at all is not allowed at all.”
“Some states will say if the preponderance of the outcome of the game is skill, then it is a skill-based game. Others are clear: Anything that has any random component at all is not allowed at all.”
Skill or Chance?
Wyner said DFS has all the features of the lottery and some features of skill. However, it is hard to define a game that is preponderantly skilled, he added. He offered the example of the tic-tac-toe game. Somebody who is bad at the game may randomly drop their Xs and Os and win if they are lucky enough to get the initial moves right. However, a skilled player could win two-thirds of the time, he added. Similarly, in poker, an unskilled player might win in one game, but lose in a competition against professional players.
“If the unit of analysis is a tournament, a season [or] a long period of time, the law of large numbers will sink its theoretical teeth into the problem, and skill will dominate over chance,” Wyner said. “But in the short run, any one-game chance will dominate.”
The defining factor with fantasy sports is “how much distance you can drive between the weak and the strong,” even in football or baseball daily over a week, said Wyner. “It looks like gambling [because] the weak players in one day can beat strong ones with reasonable chance.”
Wyner said he can argue both sides of the case convincingly, and prove DFS contests are gambling or games or skill. “That sounds bizarre,” he noted, while also explaining why it is so: “It’s just that the law is not well defined.”
The DFS space has emerged as an attractive investment opportunity. Global investment firm KKR, Comcast/NBC and others have invested in FanDuel, whose valuation exceeds $1 billion, according to a report in Sports Business Daily. In 2014, 1.5 million Americans paid more than $1 billion in tournament entry fees and FanDuel grew 300% in active customers, the report added. DFS providers have protested the moves by authorities in Nevada and New York. “Fantasy sports is fundamentally a test of knowledge,” says a petition that FanDuel is urging its fans to sign and oppose attempts to ban online fantasy sports.