Clarence Fanto | The Bottom Line: Fantasy sports industry is gambling — so let's regulate it
LENOX >> Fantasy sports, an online game of skill and luck, amounts to illegal gambling in New York state, and the two major companies hauling in cash from players who pay an entry fee must cease and desist.
So says New York Attorney General Eric Schneiderman, who ordered DraftKings and FanDuel, multibillion dollar behemoths, to stop taking bets from state residents. So far, they have refused.
It has been hard to find heroes of the week of late, but Schneiderman certainly qualifies, thanks to his tough stand on this burgeoning industry that's backed by investors such as Major League Baseball, the NBA, Google, NBC and Comcast.
The attorney general, citing more than $100 million in TV and online advertising by DraftKings and FanDuel, contends that ads "seriously mislead New York citizens about their prospects of winning" and that the top 1 percent of winning bettors take most of the spoils.
It's worth remembering that fantasy sports — mostly football and baseball — have been around for years. The largest operator is Yahoo, which has millions of players, some of whom pay modest fees of $20 or so for a chance to win $100, over the course of an entire season. Only when high-stakes, highly promoted games entered the scene did the controversy spring up.
'Not in New York'
The impact of Schneiderman's order is stark for DraftKings and FanDuel, since they have more than 1.1 million active daily users combined in New York state, or 13 percent of the overall market, and take in a combined $384 million in annual entry fees plus $35 million in revenue.
Schneiderman's challenge: "It is clear that DraftKings and FanDuel are the leaders of a massive, multibillion-dollar scheme intended to evade the law and fleece sports fans across the country. Today we have sent a clear message: not in New York, and not on my watch."
Despite her impressive track record on behalf of consumers, Massachusetts Attorney General Maura Healey has seemed tentative about putting down markers to regulate the fantasy sports industry.
Nearly a dozen other states are cracking down on these two companies and their smaller rivals, with legislation under consideration or already on the books.
In Nevada, regulators in the nation's gambling heartland ruled that the fantasy industry firms must shut down unless they apply for and secure gaming licenses, just like casinos. Instead, DraftKings and FanDuel chose to leave the state.
But here's Healey, tiptoeing through the controversy: "I think anybody looking at this acknowledges it's a form of gambling. Just because it's gambling doesn't make it illegal. We play the stock market. There are all different ways in which gambling may happen."
Stressing that she won't be swayed by Schneiderman's strong action, Healey conceded that some type of rules are needed in Massachusetts, and she will have specifics by the end of the year.
The point is not to ban Internet wagering on make-believe sports teams, but to regulate and thus legalize it. Whether Wall Street is nothing more than a high-stakes casino is debatable, though successful investing certainly requires a mix of skill and luck. As a result, stock exchanges are subject to regulations, though more are needed.
More luck, less skill
Fantasy sports businesses require players to put together imaginary teams of professional athletes, with scoring based on how well they do in actual games.
Although a federal law passed by Congress in 2006 spares fantasy sports from bans imposed on Internet gambling, the industry was in its infancy then.
Now, as a PBS-New York Times investigation demonstrated, online betting has spread well beyond fantasy football to Nascar, golf, martial arts and more. The element of chance has come to greatly outweigh a bettor's skill.
Schneiderman based his ruling on the New York state law defining gambling as monetary betting that "depends in a material degree upon an element of chance," even if some skill is involved. Gambling also involves betting on an "event" whose outcome is not under the "control or influence" of the player, according to the law.
"We strongly disagree with the reasoning in his opinion and will examine and vigorously pursue all legal options available," DraftKings asserted in its response to Schneiderman's order.
FanDuel contended that "fantasy sports is a game of skill and legal under New York state law. This is a politician telling hundreds of thousands of New Yorkers they are not allowed to play a game they love and share with friends, family, co-workers and players across the country."
The companies urged fans to ignore the New York attorney general's order and keep on betting. This may wind up in court as a test case requiring the state to prove the dominant element of chance, aka. gambling, versus the companies' assertion that skill determines the outcome.
Buttressing Schneiderman's arguments, the PBS-Times investigation found that owners of unregulated online gambling sites have invested in fantasy companies while some DraftKings executives came from those sites or were professional poker players.
Risk of addiction
As with other forms of betting, fantasy players run the risk of addiction and a big bite out of their wallets.
In recent days, Healey showed signs of toughening her approach, citing her goal of "a robust legal and regulatory framework" to protect players and guard against fraud. "We want fair advertising, fair disclosures, and I don't want to see people losing their homes or young people getting addicted," she told reporters in Boston.
Healey did not rule out shutting down the companies if they refuse to play by the rules that the state may impose. The Massachusetts Gaming Commission is looking into the fantasy industry.
But Gov. Charlie Baker told reporters that he played a free DraftKings game on his phone last weekend. "I don't think it's gambling. It's a game of skill," he said, adding: "I'm convinced it's legal in Massachusetts, I don't have a problem with that."
According to industry trade groups, nearly 50 million Americans are playing this year, paying entry fees that vary widely, from just under $100 to more than $1,000.
It's a $4 billion industry with plenty of headroom for further growth. My bet is that the companies, kicking and screaming but with their survival at stake, will agree to regulations that subject the industry to the rule of law and taxation, just like casinos and other forms of gambling.
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