Last week, New York State attorney general Eric Schneiderman issued cease-and-desist letters to DraftKings and FanDuel, the two largest daily-fantasy-sports (DFS) companies, claiming that the games they offer constitute illegal gambling under New York law. The companies have responded with legal action of their own, putting the decision in the hands of the New York court system.
While this is just the latest in a series of confrontations playing out across the country over the status of daily fantasy sports, it is perhaps the highest-profile one. It also raises important questions about how the law is applied to innovative products and firms, such as DraftKings and FanDuel, as well as who is in the best position to protect consumers.
In fantasy sports, participants choose their own “teams” composed of real-life athletes in a particular sport, then get points for the statistical accomplishments (yardage gained, rebounds, goals scored, stolen bases, etc.) that their players achieve in real-life games. Traditional fantasy sports operate with users competing against a set group of fellow users, drafting teams for a competition that lasts an entire season. But in recent years, online daily fantasy-sports competitions have been launched, with each day or week being a separate contest, generally against dozens or even thousands of anonymous other competitors.
In his letter, Schneiderman declares these latter products to be “games of chance” rather than “games of skill,” and he uses this distinction as the basis for his actions. The same distinction was used by the Nevada Gaming Control Board to file a cease-and-desist order against DFS operators last month. But what exactly is the standard being used, and how does this apply to new, innovative products such as DFS games?
While Congress explicitly removed fantasy sports games from its online-gambling laws, state laws remain much more ambiguous when it comes to what constitutes gambling. Games deemed “of skill” are considered legal, while those “of chance” are considered gambling, which is then either heavily regulated or prohibited, depending on the state.
In Schneiderman’s view, traditional, season-long fantasy sports are games of skill while daily games are ones of chance. Yet every game involves some combination of skill and luck. One recent survey found that success in season-long fantasy sports game is 55 to 65 percent skill, with the remainder being luck.
The problem with using this skill-versus-luck test is that it has never been fully defined. The line between skill and luck is an ambiguous standard that leaves much room for subjective, arbitrary decisions. This has resulted in varying interpretations across states. A handful of states already ban season-long fantasy sports under the skill-versus-luck test, and others have already done the same for daily fantasy games.
Beyond the implications for season-long and DFS games, this logic could be applied to ban a number of commonplace games. For example, statistical analysis has shown that skill does not overtake luck in determining NHL standings until the season is nearly complete. If someone saw fit, he could argue that hockey is game of chance rather than one of skill. Will the Sabres, Rangers, and Islanders be receiving cease-and-desist letters?
When it comes to consumer protection, these latest developments in states like New York and Nevada call into question who is in the best position to protect those who seek to play fantasy sports. Schneiderman’s cease-and-desist letter is based on a rather low opinion of those who play fantasy sports, claiming that DraftKings and FanDuel are merely attempting to “fleece sports fans across the country” by promoting their games as “a path to easy riches.” But if the goal is truly “consumer protection,” is outright prohibition the best route?
As we’ve argued before, if regulators are seriously interested in protecting consumers, the best thing they can do at this point is allow competition to play out. Players who feel that DraftKings and FanDuel no longer provide what they are seeking will likely move to other platforms, and this is an opportunity for entrepreneurs to create products that are more responsive to consumer demands, which might include more equitable prize distributions or more transparent protocols for lineup submissions (to avoid various types of cheating). For the time being, however, it seems players are satisfied with their experiences even in the face of the recent order from the attorney general. FanDuel CEO Nigel Eccles recently stated that the company hasn’t seen an unusual number of withdrawals since the letter was released.
The vast majority of people who go to casinos or play the lottery do not believe it’s a prudent financial investment or a sound retirement plan. They simply enjoy the excitement of the game.
What’s apparent in reading Schneiderman’s letter is that he thinks daily fantasy sports are being marketed as a sort of investment. Yet daily fantasy lineups are not a hedge fund, not a mutual fund, not a bond or security. They are games. DFS is, plain and simple, an entertainment product that people play for fun.
It’s worth noting that the vast majority of people who go to casinos or play the lottery do not do so because they believe it’s a prudent financial investment or a sound retirement plan. They do so because they simply enjoy the excitement of the game. But this consideration is often disregarded when regulators attempt to calculate “consumer welfare” in this context. No one criticizes the money being spent on products such as Netflix ($5.5 billion in 2014) or video games ($24 billion in 2015), which are entertainment products that have zero expected monetary return as a scam. Yet when it comes to the entertainment products offered by DraftKings and FanDuel, the analysis takes on a wholly different form.
But DraftKings and FanDuel, as well their users, are not standing idly by while regulators increase restrictions. In fact, the industry is having what may be considered its “Uber moment.” Indeed, DraftKings seems to have taken a page directly from Uber’s playbook by using its app to ask users to make their voices heard. It seems to be working.
Much of this could be moot before long. Some experts believe that all forms of gambling (games of skill and games of luck) will be legal nationwide in the next four to five years. While Schneiderman’s crusade against DFS could end up alongside New York City’s pinball ban as a temporary blip in the history of gambling, it should still be worrisome to New Yorkers that bureaucrats have decided once again that they know better than their constituents how their money and time ought to be spent.
For now, the outcome rests in the hands of the New York courts. Perhaps it is fitting that the resolution should come from there, a slightly different game that is nonetheless still a blend of both skill and luck.
— Christopher Koopman is a research fellow on the Project for the Study of American Capitalism with the Mercatus Center at George Mason University. Jim Pagels is a research assistant for the Mercatus Center at George Mason University and writes regularly on sports economics and prediction markets.