What Exactly Is the Banning of Daily Fantasy Sports Protecting Texans From?

The images of real people winning big money have been a huge part of Daily Fantasy Sports’ allure.
The images of real people winning big money have been a huge part of Daily Fantasy Sports’ allure.

For nearly two decades, the Fantasy Sports Trade Association has been in existence, advocating and charting policies for an industry that continues to explode exponentially in popularity. Twice a year, its several hundred members convene in person to exchange ideas and collectively absorb the state of the fantasy sports union.

January’s semiannual meeting had originally been scheduled to take place in Las Vegas, but when Nevada legislators suddenly opted to make the FSTA’s (and a big chunk of America’s) beloved Daily Fantasy Sports games illegal in their state without a gaming license, the decision was quickly made in protest to move the convention-style gathering to Dallas. “Why bring our convention business to a state that prevents us from doing the precise activity about which we convene?” went the trade group’s sensible line of thinking.

Unfortunately, just one day before the meeting was set to begin in Dallas, the choice of Texas as the event’s venue turned suddenly ironic when Texas Attorney General Ken Paxton issued an opinion similar to Nevada’s that Daily Fantasy Sports games should be considered gambling and, therefore, illegal in his state, as well. That put Texas on a growing list of states, a list that also includes monsters like Illinois and New York, that are telling their residents to find another way besides DFS to enjoy their fantasy sports.

Appropriately, the FSTA’s keynote speaker at that January meeting was Dallas Mavericks owner Mark Cuban, a billionaire who knows from personal experience what it’s like to be under the government’s microscope from his run-ins with the Securities and Exchange Commission. Not surprisingly, the tone of Cuban’s speech was subdued anger over his and other states’ iron hands coming down on a relatively harmless and exceedingly popular pastime, one that has contributed greatly to the explosion in television ratings and further popularity of Cuban’s league, the NBA, and the other major sports leagues in the United States.

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“Seeing politicians just do something for skins on the wall, to try to make a name for themselves, that pisses me off, as much as anything,” Cuban told the audience of about 400 members. “That’s one of the reasons I’m here right now supporting you, because it’s wrong. It’s absolutely wrong.”

To understand where this DFS battlefront is headed, you first have to understand how it began and where DFS fits into the fantasy sports universe. In 2006, the federal government passed a law called the Unlawful Internet Gaming Enforcement Act, which, as one of its secondary corollaries, deemed fantasy sports a game of skill, not a game of chance, and therefore, not subject to federal gaming laws.

That legal opening was the impetus for the creation of New York-based FanDuel in 2009 and Boston-based DraftKings in 2012. Together, these two companies control 95 percent of the DFS market. The key difference between DFS and the yearlong fantasy leagues that your friends and neighbors likely discuss so much is that DFS allows contestants to assemble a lineup of players using a salary-cap system and to win money based on the daily performance of the players they choose. The key is that contestants can play whenever they want, for as long as they want, with no season-long commitment.

Fantasy sports, as a whole, saw more than 56 million Americans participate in 2015, a quantum leap from 32 million just five years earlier, and DFS has been easily the highest-growth subset of fantasy sports. “We literally quadrupled the amount of content that we added to our site in order to support daily fantasy games,” said Paul Bessire, founder of PredictionMachine.com, a resource website for fantasy players. “Previously, we had published high-level, ‘boxscore’ projections for games, but now we allow users to dig into the stats, data and our projections output on every single player in many different ways to help them build the best rosters.”

So how and why did DFS operate freely for roughly half a decade before the state governments decided to bring their draconian hammer down? Certainly, the massive growth of FanDuel and DraftKings in the last couple years, accentuated by nonstop television advertising campaigns, called attention to an industry that had previously flown under states’ radars.

Perhaps the biggest and most unfortunate turning point for the DFS industry, though, occurred back in Week 3 of the 2015 NFL season, when a DraftKings content manager named Ethan Haskell won a $350,000 NFL fantasy contest on FanDuel in the same week that he accidentally posted inside information on player usage rates on the DraftKings website. While legally there was nothing wrong with Haskell’s playing in a contest on a competitor’s site, and while in theory, the usage information he posted had no ties to FanDuel, the optics on Haskell’s victory looked shady, the term “insider information” got thrown around and Haskell was made out to be some sort of DFS version of Gordon Gekko. Instead of Blue Star Airlines and Anacott Steel, Haskell was dealing in Aaron Rodgers and Adrian Peterson.

The spotlight on Haskell’s win led to DraftKings and FanDuel forbidding their employees to play in any DFS contests, regardless of provider, but it was too late. The state of New York had a seemingly salacious current event whose “hot button” notoriety far outweighed its actual harm, and the state launched an investigation into both FanDuel and DraftKings. It determined that DFS was illegal and should be shut down, and that money should be returned to all losing contestants. Currently, the case is on appeal until September, but in the court of public opinion, the damage was done. Illinois followed suit in December, and then in January came Paxton’s opinion on the matter.

“As such, the business practices of a few specific companies actively cross the line between fantasy sports and illegal gambling,” wrote Paxton. “To be clear, your traditional fantasy league, where the participants either do not gamble money or they split the entire pot, is — as a general rule — legal. It’s when third parties get a cut of the pot that they get into dangerous legal ground.”

Seeing the writing on the wall, FanDuel recently promised the state of Texas that it would close down paying contests by early May, and offer only free contests until the state resolves DFS’s legality. DraftKings is not going nearly as quietly. They are suing the state of Texas for the right to continue to conduct paying contests in the state.

All of this leads back to a fundamental question — if a key function of the government is to protect its citizens, what exactly is the banning of Daily Fantasy Sports protecting Texans from?

At its core, the ability to achieve superior results in Daily Fantasy Sports is tied to the same central principles that allow people to make money in the stock market, something Texans do freely and unencumbered every day. Success is not merely based on chance, but a combination of research, skill and, yes, a little luck. “I’ve spent over a decade proving that there are objective ways to gain an edge over the competition in DFS,” said Bessire. “To me, having a degree and background in finance, I view DFS and sports wagering just as I would any financial market.”

Conversely, there are activities deemed perfectly legal by the state government, such as the state-run lotteries and scratch-off tickets, whose payouts are literally based entirely on chance, and at far worse payout odds than in any DFS contests. Apparently, the wall of money the government can build from its cut of the action is tall enough to hide from the hypocrisy of its stance on DFS.

If legislators are looking to the major sports leagues themselves for support and to treat DFS in the same taboo way that they’ve treated regular sports gambling through the years, they are barking up the wrong tree. In the last two years, the NBA has entered a four-year sponsorship deal with and taken a minority stake in FanDuel, while the NHL, MLS and MLB have all invested to varying degrees in DraftKings. Networks like FOX and ESPN have also aggressively partnered with both companies as both investors and advertising partners. Dozens of professional sports teams run FanDuel and DraftKings banner ads in their stadiums during games.

Hell, even American Pharoah crossed the finish line at the Belmont Stakes wearing gear emblazoned in the DraftKings logo!

Just look at television ratings, though, and you can see why professional sports owners are so eager to support DFS, particularly in the NFL, which is far and away the most popular league for DFS players. FOX, CBS, ESPN and NBC all enjoyed ratings for NFL games that were among their best (for CBS and NBC, they were the best) in nearly three decades.

“It would be blind to ignore the impact daily fantasy sports may have had on ratings,” said Sports Business Daily assistant managing editor Austin Karp in an interview with Sports Illustrated. Karp covers television ratings for SBD. “Football is just so well suited for fantasy in general, and the rise of DFS only helped.”

In a down economy, stymieing an industry that drives television ratings and, in turn, stimulates advertising spending is gross fiscal malpractice, yet that’s precisely what Paxton and his peers in other states around the country are doing, all in the name of either grandstanding or exacting their pound of flesh.

In Texas, unfortunately, none of this will get resolved until 2017, at the earliest, the next time the legislature convenes. Many of the states that have enacted a ban will be keeping an eye on the appeal in New York — a hearing is scheduled for September — which is seen as a tone setter on this topic by those close to the DFS industry.

One silver lining in the various DFS shutdowns is that they have accelerated the conversation about sports gambling legalization, as a whole, something the major sports leagues seem to be more open to than ever before.

“If this leads the charge to…define what gambling really is, without nuanced definitions depending on what state you’re in and who’s reading it, then that’s a good thing,” Cuban conceded. “If this leads to gambling being legalized and brought above ground, that’s a good thing.”

Either way, Daily Fantasy Sports players in Texas and around the entire country will be waiting anxiously for the legalization of their beloved pastime, like bar patrons waiting for legalized scotch whiskey before the repeal of Prohibition.

Fantasy players, hardcore and casual, will not be chased off. “They’ve surveyed fantasy-sports players and asked ‘When do you expect to quit?’” Nigel Eccles, FanDuel’s founder and CEO, told Bloomberg News earlier this year.

“And the average response is ‘Never.’”

Listen to Sean Pendergast on SportsRadio 610 from 2 to 6 p.m. weekdays. Also follow him on Twitter at twitter.com/SeanCablinasian or email him at sean.pendergast@cbsradio.com.

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