[toc]Pointing to the moment things changed for daily fantasy sports can be a matter of debate for observers of the industry.
Some point to the Nevada attorney general’s office and the Nevada Gaming Control Board saying DFS is gambling — the first public officials to do so. Some would say the seminal moment was the cease-and-desist letters from New York Attorney General Eric Schneiderman.
But it’s clear to me things really changed — the innocence and feel-good vibe surrounding the industry — in the first week of October of 2015. That’s when the story many know — the inadvertent leak of lineup information from DraftKings — came to light.
At the time, it was a story that I and Legal Sports Report publisher Chris Grove thought was important to tell. But even then, I’m not sure anyone — us included — had a sense of the chain of events it would set off.
So a year later, what changes has the industry made as a result? And is it better off because of it?
I won’t retell the entire story, because most of the readers of LSR probably already know it. But just in case:
In the last week of September, a DraftKings employee posted data about a DraftKings contest on a DFS content site, RotoGrinders, before it should have been available to anyone, let alone the general public. That same week, the employee — playing in a contest at FanDuel — won $350,000.
It’s clear at this point that the two events were a poorly timed coincidence. (The employee in question was later cleared during a third-party review.) Before the story happened, the industry was already getting a lot of eyeballs peering at it without this story and attracting even more with an ad blitz totaling hundreds of millions of dollars.
Why it was a problem
The mechanics of what happened could lead one’s mind to wander. Why are employees playing in contests at all? What other data do they have access to as part of their jobs, and when do they have it?
And so the story percolated over the next week, on internet message boards, via email and phone. In my mind, the problem had little to do with the specific employee and his playing in contests and winning money — that was all approved and accepted by the powers-that-be at both DraftKings and FanDuel.
It was the system behind it that it was the problem: there was no oversight of the industry at all in contests where billions of dollars would change hands in 2015. You simply had to trust that everything going on behind the scenes was being done above board.
The story breaks
It took the two events of the data leak and the employee score, put side-by-side, to illustrate that no one outside of the companies had that much insight into the integrity of the contests. The story came out, and eventually it was picked up by mainstream media.
Much of the media — without any evidence — linked the two events as related. And while you can certainly blame the media for the portrayal, the industry can also blame itself for being in a position where the chain of events that occurred was even possible:
- Employees already shouldn’t have been playing at competitors’ sites.
- Internal controls on data related to contests obviously was a matter of concern, since data had been released early.
- The possibility of self-regulation had been put off for no apparent reason other than FanDuel and DraftKings were more concerned with scaling, and no one wanted to deal with it.
And so we’re left with a year of aftermath. What happened in the past year?
Industry realizes regulation is necessary
In truth, most of the industry already believed some sort of regulation would happen for DFS someday. However, they thought it would happen on their timeline, not one generated by a story that spun out of their control.
The data leak brought attention, and the attention brought about the idea that the industry needed to be regulated (or that it was illegal in the first place, in the minds of some attorneys general).
The idea of a self-regulatory body had already been floating around, and later in October, the Fantasy Sports Control Agency was announced. That effort was soon abandoned, when it became obvious that governments were going to get involved, and that the FSCA would likely placate no one.
But still, regulation became something that needed to happen — and was going to happen whether the industry liked it or not. It was no longer something that the industry would “get around to eventually.” FanDuel CEO Nigel Eccles said as much in October of last year.
DraftKings and FanDuel, to their credit, ramped up an effective lobbying effort in states around the country, and often succeeded in getting regulations passed that they could live with. In all, eight states passed laws regulating DFS contests, to some degree.
Were it not for the data leak and ensuing media coverage, it’s arguable that nothing would have changed in the past year. Regulation might have remained on the “to-do list” for months or years down the road.
Instead, regulation is being rolled out in a variety of jurisdictions even as we speak, with more to come.
The series of events surrounding the data leak might not have been good for the bottom lines of DraftKings and FanDuel in the short term. But it forced the industry to deal with regulation now — perhaps before something truly nefarious happened.
‘100 percent legal,’ UIGEA reliance and gaining legal clarity
One of the side effects of all the scrutiny of the DFS industry was all the AG opinions regarding DFS’ status vis a vis state gambling law. Most of those opinions were not good for the industry. Schneiderman in NY got involved only after the data leak story made the rounds.
All of it forced the industry to realize and deal with the fact that DFS’ status as a legal “game of skill” in most jurisdictions was not iron-clad. Instead DFS had cropped up and grown in an area of the law that was murky at best.
For much of its history, the industry relied upon the fantasy sports carveout in the Unlawful Internet Gambling Enforcement Act. The UIGEA, however is a narrowly tailored law that kicks the can down to the road to the states when it comes to determining if DFS is a game of skill or gambling.
In truth, the sites and their executives, no matter how ardently they believed their product was not gambling, likely knew a day of reckoning was coming. That was despite the fact that lawyers had been telling them they were good to go on the legal front federally and in 45 states based on current laws.
Before last year, most DFS sites boldly proclaimed they were “100% legal” in 45 states in the US; that language has largely fallen out of favor in the industry. Today, DraftKings and FanDuel serve even fewer states.
It all created the will and the momentum to say DFS is clearly legal in a lot of places where that legality was not so clear. That included a trio of states — Tennessee, Mississippi and New York — with negative AG opinions. And it forced the industry to stop using the UIGEA as a poorly constructed crutch.
DFS started getting its legal clarity this year, even if it was dragged into it kicking and screaming.
Trying to be more transparent
There is a difference in how things happened a year ago, and how things are handled now.
A year ago, when I was working on the data leak story, I gave DraftKings an opportunity to have its voice included. It didn’t take that opportunity. Later, the narrative was no longer under its control.
Fast forward to this year, and a story of possible collusion in a DraftKings Millionaire Maker contest sprung up. DraftKings had always told me it didn’t talk about specific cases. But when the Wall Street Journal came calling about the story, that changed rapidly. DraftKings probably would have told everyone to go pound sand a year ago; now it makes an effort to be transparent.
The bravado that accompanied the two companies’ ascent to billion-dollar-plus valuations is largely gone, replaced with the acceptance that it’s a brand new world for DFS.
In the end, the events of a year ago have to be seen as a positive, even if it was painful at the time. Investors in the two companies, and the sites themselves, probably disagree. But heading down a road toward increased legal clarity and regulation are two giant positives that have resulted.
It’s evident change in the DFS industry wasn’t going to occur unless it got a kick in the pants. And the events of last year jump-started those changes, for better or worse.