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2015 Lessons Learned, 2016 Practical Tips

Entertainment and Sports >> Daily Fantasy Sports Poses Challenges for Players and Regulators

April 19, 2016

A new industry burst into the mainstream in 2015. At the beginning of 2015, daily fantasy sports was a nascent business taking advantage of gaps in federal regulation to find deep-pocketed backers among major media companies, professional leagues, and their owners. Flush with new investment, the major competitors in this business, FanDuel and DraftKings, blanketed sports media with advertising and discovered an audience aching for an opportunity to spend money. In one weekend in October of 2015 alone, FanDuel and DraftKings collected more than $45 million in entry fees. Daily fantasy sports had become a multi-billion dollar industry.

By the end of 2015, however, the industry seemingly faced every type of legal challenge imaginable. The State of Nevada ruled that daily fantasy sports was unlicensed and, therefore illegal, gambling. In the months that followed, states including Texas, Illinois, and Hawaii made similar rulings.

The New York Attorney General sought to have both companies cease operations in New York. Just after the New Year, he requested that the companies refund to New York residents all the money they had lost playing daily fantasy in that state and pay a fine of up to $5,000 per person. Massachusetts is limiting deposits to $1,000 per month.

On top of state actions, multiple class action suits have been filed. Moreover, an online payment processor announced that it would no longer provide services to daily fantasy companies.

News stories questioned the security of fantasy sports systems, prompting the Federal Trade Commission to consider getting involved. After news reports alleged that an employee of one site used insider information to gain a competitive advantage playing fantasy games on a competitor site, there were calls for Congressional hearings.

Daily fantasy sports also have lost some of its luster with its media partners. The National Collegiate Athletic Association has banned advertisements from championship game broadcasts and DraftKings has asked its media partners to reduce the number of commercials aired.

Looking Ahead

  • The daily fantasy sports industry maybe facing an early flameout caused by inadequate internal safeguards and an underestimation of state and federal regulators, but the odds certainly are swinging against the industry. For sponsors, marketers and media companies, this legal uncertainty will undoubtedly lead to a reevaluation of the value of partnering with the daily fantasy sports industry.
  • With legal attacks on so many fronts, 2016 will remain a year of continued instability and uncertainty for daily fantasy sports. 2016 has already seen both DraftKings and FanDuel agree to stop doing business with people physically located within New York.
  • Media companies, sponsors, and marketers should be cautious in evaluating how deeply to extend their relationship with daily fantasy games. The last year has brought substantial, rapid change and 2016 promises even more – it may be wise to wait until the dust settles.