Why Are DraftKings And FanDuel Discontinuing College Fantasy Sports Contests?

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DraftKings and FanDuel will no longer offer daily fantasy sports contests on college sports after reaching an agreement with the NCAA, as first reported by ESPN.

The news comes as three states have officially agreed to regulate the DFS industry, including two — Indiana and Massachusetts — that have prescribed a ban on college fantasy contests.

Why is this happening? And why now?

The basics of the agreement

ESPN’s David Purdum broke down the deal here, in which DraftKings and FanDuel agreed to stop college contests at the conclusion of the men’s NCAA basketball tournament.

NCAA President Mark Emmert offered this in a statement to ESPN:

“We appreciate and commend DraftKings and FanDuel’s action to stop offering contests involving college, high school and youth sports. This action culminates months of hard work between all parties to reach a place that is good for amateur sports and most importantly, the young people who participate. We will work diligently with our member schools over the coming year to ensure such amateur sports ‘carve outs’ are included in pending states’ legislation.”

(Of note: DraftKings and FanDuel never offered contests on high school or youth sports.)

FanDuel offered this statement at its media site:

As a part of a new agreement with the NCAA, we have decided to voluntarily and indefinitely suspend college sports contests in all states upon the conclusion of this week’s college basketball games. As a leader in calling for smart, common sense regulations for the fantasy sports industry, FanDuel has had months of productive conversations with the NCAA, their member institutions, and various state legislators to better understand their concerns around fantasy sports contests based on amateur athletics. It is clear that this is an issue that matters to a variety of constituencies and we feel that the best path forward is to suspend offering these contests pending resolution on the issue within state legislatures.

The NCAA’s home state of Indiana and our home state of New York were two of the first states to take up this debate. Indiana has passed and New York is considering fantasy sports laws that protect consumers, protect the right to play fantasy sports, AND contain carve-outs stating fantasy contests involving amateur sports are barred in their states. The Massachusetts Attorney General issued regulations with a similar carve-out. We supported all of these efforts, and going forward we will actively support bills containing the same provisions. We are pleased that we can work together with the NCAA on smart regulations for the fantasy sports industry.

The FSTA issued this statement:

“The FSTA continues to support our members that offer college fantasy sports. NCAA football and basketball have been a part of fantasy sports nearly as long as the hobby has been around.”

The backstory of DraftKings, FanDuel and the NCAA

The NCAA and other interests in college sports have arisen as an opponent to DFS in several ways, dating back to last summer. The commissioners of the major college conferences at the time had written letters to DraftKings and FanDuel calling them to stop offering college contests.

The NCAA also pushed to exclude DFS ads from being aired during the College Football Playoff and the NCAA tournaments.

The NCAA recently attached itself to an “educational” effort — the Student Sports Protection Alliance — to have college fantasy contests banned under regulatory bills at the state level.

Why are DraftKings and FanDuel making a deal with the NCAA?

While DraftKings and FanDuel might have been having discussions with the NCAA behind closed doors, they have shown no signs of bending to their will until now.

Both sites — and a number of smaller operators — have continued to offer college contests despite the NCAA’s protests. There are several possible reasons why the sites are acquiescing now:

A possible PASPA challenge?

One theory of why this deal is coming now? DraftKings and FanDuel are trying to avoid a challenge under the Professional and Amateur Sports Protection Act.

PASPA is the law that bars nearly all states from legalizing sports betting. It allows wagering in Nevada and limited sports betting in Oregon, Montana and Delaware. The law is the central issue in the ongoing New Jersey sports betting case, in which that state is attempting to allow sports wagering.

So how would fantasy sports, PASPA and the NCAA intersect?

States have started passing legislation regarding DFS, which could be seen as an “authorization” of sports betting, which PASPA is designed to stop. There is a question of whether PASPA could be applied to DFS in a court of law, but some legal analysts believe state regulation could be a violation.

So, the theory goes, DraftKings and FanDuel could be trying to keep the NCAA happy so as not to dare them to challenge DFS regulation in court, under PASPA. (Professional sports leagues and the NCAA are the groups that can bring challenges via PASPA, under the law, and all are plaintiffs in the NJ sports betting case.)

The Massachusetts Gaming Commission touched on the subject in its white paper on DFS:

Notably, the interests of the amateur sports organizations and the professional leagues are not always aligned as demonstrated by the NCAA’s request that DFS operators stop offering contests based on their college sports, thus leaving the NCAA as a potential wild card PASPA plaintiff.

Is this a driving motivation for DraftKings and FanDuel? That’s a matter of speculation, at this point. Only one law — Virginia’s — would give the NCAA standing at this point, as it allows college contests.

Changing NCAA from foe into friend at state level?

The NCAA has started inserting itself into the DFS regulatory discussion in a meaningful way in recent months; it was responsible for the college contest ban making it into Indiana law.

As noted above, the NCAA also attached its name to a fledgling educational/lobbying group, the Student Sports Protection Alliance (which goes by the acronym SPAN). It is a one-issue advocacy group, trying only to prevent fantasy contests based on amateur sports events (including high school and college.)

SPAN popped up in the past few weeks after Virginia passed its law with no prohibition on amateur fantasy contests.

Maureen Riehl, the executive director of SPAN, applauded the move in talking with Legal Sports Report on Thursday:

“SPAN members look forward to working with the two companies to make sure the legislation and regulations they are promoting for the DFS industry in the states includes a carve out from DFS wagering for all student sports — college, high school and youth,” Riehl said.

“Obviously along the same lines as this agreement, it will be good to know they would also be willing to support and push for an amendment to the Virginia law they just helped to pass to update that law to include the carve out for student sports, too.”

The NCAA has been a fairly well-behaved and quiet lobbyist on DFS, to this point. Giving up college contests could simply be meant to keep the NCAA’s opposition to DraftKings, FanDuel and the rest of the industry at a minimum.

The move could also serve to turn the NCAA into a proponent of regulation, instead of an opponent, when legislation includes the amateur sports carveout.

Why pick a fight for a small market?

The current market for daily fantasy sports on college contests is fairly small. FanDuel said that college football and basketball accounts for about 3% of its business in the ESPN report. Estimates put the entire college daily fantasy market between 5-10% of DFS revenue. (The entire universe of all DFS revenue in 2015 was about a quarter of a million dollars.)

The college DFS market pales in comparison to revenue generated by the major pro team sports — the NFL, NBA and Major League Baseball.

There would certainly be room for growth of the college fantasy vertical moving forward, if DraftKings and FanDuel were to continue to offer the sports. But in the current environment, the calculus of antagonizing a foe like the NCAA to hold onto a small slice of revenue might not make sense.

At the same time, it’s a further erosion of the market for DraftKings and FanDuel, who have pulled out of New York, Mississippi and Hawaii in recent weeks and months. FanDuel will leave Texas in May.

What will other DFS operators do?

This will be an interesting question moving forward — or at least when the college football season rolls around in the fall.

Generally, smaller DFS operators have been using DraftKings and FanDuel as legal cover in states with negative environments, and as a bellweather. But it remains to be seen if they will fall in line on this subject.

Not all DFS operators currently offer college contests, but for the ones that do, will they be willing to give up college contest revenue, when DraftKings and FanDuel in essence are handing the market over to them? That could be too tempting to pass up.

There’s also the possibility that DFS operators not in the college market start offering contests to capture revenue that DraftKings and FanDuel are eschewing.

However, a new lobbying group — the Small Businesses of Fantasy Sports — is also pushing for a ban on college fantasy contests. That group includes several DFS operators.

So is the NCAA done on this issue?

Based on the comments from the NCAA’s Emmert and SPAN’s Riehl, this does not signal the end of efforts on the college fantasy sports issue.

Today’s agreement may signal a détente between DraftKings, FanDuel and the NCAA. However, getting laws on the books codifying that fantasy sports based on amateur sports are not allowed — not just an agreement with the two biggest operators — appears to be the NCAA’s endgame.