Fantasy Sports

Yes, Fantasy Sports Companies Are 'Regulated'

Is the problem a lack of transparency, lack of tax revenue, or sore losers?


This could be you! But probably not.
Draft Kings

The New York Times simply cannot wait to point out how "unregulated" the recreational (and for some, extremely lucrative) activities of fantasy sports leagues are. The paper's story this week about what is being called a scandal involving two massively growing online fantasy sports companies prompted the Times to describe fantasy sports as "unregulated" in both the headline and in the lede paragraph. 

They're not alone. A recent Sports Illustrated explainer on the scandal calls the activity "largely unregulated." Deadspin describes an "absence of any sort of official regulatory oversight" on these companies when talking about the scandal. Nearly every story about fantasy sports references a lack of regulation. The reality is a lot more complicated. The federal government may not be treating fantasy sports leagues the same as online gambling, but that doesn't mean these companies can just do whatever they please.

But let's take a step back and explain the scandal, first of all. Fantasy sports leagues, like video games, are an example of a wildly popular activity that is treated like an odd, little, mistifying subculture, even though everybody knows somebody (or is somebody) who participates in it. Participants play pretend owners and build teams from actual playing athletes. The "owners" are competing against each other to build the best team, and the winner is determined based on how these actual athletes perform in real-world games.

Anybody watching sports or television (but especially those watching televised sports) has discovered that fantasy sports have blown up big time. Two major companies, Draft Kings and FanDuel are offering daily fantasy sports competitions and huge prize pools. Draft Kings boasts "More than $1 billion guaranteed in 2015." FanDuel claims they're expecting to pay out $2 billion.

There are generally fees involved in participating in fantasy sports leagues in order to win the big bucks. The winnings have to come from somewhere, right? So fantasy sports has the whiff of gambling to it. Yes, there's skill involved in building teams, but of course, there's no small amount of luck. Julian Edelman could unexpectedly blow out his knee in the middle of a game, and there go millions of fantasy sports players' chances of winning.

Setting the luck aside, what also helps determine success is being able to evaluate huge amounts of information about players and make some rather technical team makeup decisions. That's where the supposed scandal comes in. An employee of DraftKings had access to information about which athletes players within his company were selecting. Though DraftKings says he didn't get the information until it was too late to use it, he subsequently participated in competing FanDuel's leagues and won $350,000.

The behavior has been compared to insider trading. Though the employee obviously had no idea how these athletes would perform on the field, he could have known the choices other players were making (and more importantly, not making) to maximize his odds of winning.

The employee's behavior, though, isn't exactly insider trading, and it's not clear that anything illegal happened. A lot of folks clearly don't like the outcome that an employee of one company is winning the contests offered by another company, and so now the calls for more regulation are coming. The two companies themselves came forward and disclosed what had happened and announced they would stop their employees from participating in other sites' fantasy sports programs while they developed a more formal policy. New York's attorney general has announced a probe into the two companies.

It's ridiculous to say that fantasy sports companies are completely unregulated. What people really mean when they say this is that there are no specific regulations that oversee how fantasy sports leagues operate. There is no such thing as an unregulated business in America unless said business is actually operating in a black market, which is obviously not the case here. The Federal Trade Commission (FTC) can investigate and prosecute fraudulent business practices aside from whether there are any specific federal regulations for fantasy sports leagues. If one of these sites collected players' fees and then never paid out promised winnings (for example), you better believe the FTC would be able to intervene. A representative from the FTC would not speak specifically about the Draft Kings/FanDuel controversy or the possibility of an investigation, but did affirm that, just as with virtually any other business in America, the FTC could get involved in cases of deceptive business practices.

Furthermore, these two companies appear to be in it for the long haul and are not looking to cash in on naïve customers and then disappear. They've got the backing of the major sports leagues. Patrick Redford at Deadspin argues that there's no way to substantiate whether FanDuel and Draft Kings are colluding with each other. But the fact is they have huge incentives to be as transparent as possible about who wins their big pools: If they aren't, participants won't believe that they could actually win, and they'll stop playing and stop giving the two companies money. Even if the employee hadn't had access to inside information, just the fact that a winner was internal to the industry is a public relations problem that could cost FanDuel and Draft Kings players.

This is not to say other fantasy sports companies could not come up with a plan less focused on longevity and more on trying to milk whatever they can from players, then disappearing. To the extent that may happen, it's honestly not clear what additional legislation or regulation may be productive based on these stories other than perhaps more transparency about how the sites work.

There is a bit of not-even-subtext to the criticism of these daily fantasy sports programs that it operates too much like online gambling sites and that it's really, really hard to win. It sounds not unlike what happens with online poker, which, despite often being lumped in with other forms of gambling, isn't just a game of chance. Most of the people who play are going to lose, because they are competing against other players. The top players of fantasy sports are "sharks," just like in poker or pool, or even a number of competitive video games. They spend huge amounts of time and effort winning these games that the average player will not. This, though, is also not an argument for regulation or an indication of a problem. Saying those who put in the most effort to win will reap the rewards is actually an argument against treating fantasy sports like gambling. It also has a paternalistic air of assuming that participants of fantasy sports are incapable of grasping what they're up against.

Nevertheless the scandal has given life to the idea that these sites are "unregulated" and the something-must-be-done argument is out in full force. The outcome may be a bit of a mixed bag. It appears that proponents of regulation are attempting to legitimize fantasy sports businesses, not ban them. On Tuesday, New Jersey Sen. Robert Menendez and Rep. Frank Pallone Jr., both Democrats, sent a letter asking the FTC consider setting up rules for fantasy sports companies:

"We believe that fantasy sports should be legal and subject to appropriate consumer and competitive protections," Menendez and Pallone wrote.  "Consumers also expect companies to hold online contests in a fair, transparent manner."

Pallone is also in favor of legalizing actual sports betting and has introduced federal legislation to allow states to decide whether or not to allow it, noting that billions of dollars change hands illegally each year in sports bets, despite federal law.

And then, of course, legitimizing the activity through the federal government opens up the possibility of new tax revenue. Some who call for the regulation of fantasy sports leagues add the possibility of taxing it in the very next breath.

Media scolds may cluck their tongues at rubes who insist on blowing money on competitions with very poor odds. But there's dollar signs in the eyes of some government officials watching this hobby massively expanding and being embraced by the entire sports industry. Government officials don't need to rely on either luck or skill to cash in.