There is a scandal brewing in fantasy land. An employee of DraftKings released inside information and scored a $350,000 win while playing online fantasy football with his employer's main rival, FanDuel. Both websites have achieved notable success in the exploding arena of online fantasy games. They have created a multibillion dollar industry. Professional team sports and individual clubs quickly hitched their wagons to these two shooting stars, and the future looked bright, at least until very recently.
Fantasy sports games have a long history among friends and office mates who created imaginary teams of actual players. Tracking their personal team's performance over a full season was innocent fun which regularly resulted in complete surprises.
The two major fantasy online websites monetized this informal game by creating weekly contests with millions of dollars in prizes for those who picked well. Because employees of DraftKings and FanDuel knew how their participants were selecting, they could use that information to their advantage, in effect, betting against the odds. Some observers see this as the greatest threat to this new "sports" industry.
In fact, the greater threat might lie in the current effort in Congress and by various attorneys general to determine whether the fantasy websites are not games of skill, but rather gambling pure and simple. A 2006 federal law expressly prohibited online poker but allowed fantasy games that were skill-based and not chance-based. It is obvious that both skill and chance are involved in playing the fantasy games.
Courts have addressed the issue of skill versus chance in order to determine whether an activity is prohibited gambling. One question courts have asked is whether a participant could win at the game without any skill. In one-week fantasy games, skill need not control the final result. Chance influences (and likely dominates) the final result. It seems that the fantasy game scheme is a lottery.
Any sports fan will tell you that short-term results in football or baseball are highly variable. A running back or quarterback has a good week or a bad one. In part, of course, a player's prospects for a particular game depend upon the week's opponent, and that assessment requires skill. Nonetheless, the actual performance each week is likely to vary from the projection. A multiplicity of factors comes into play to a degree to make the outcome impossible to foretell for even the most informed observer. If skill predominated, the online fantasy games would produce untold riches for the best students of the professional game. There is no indication that this has happened. The ubiquitous ads for the two websites each week show a different very happy male (and the winners appear to all be male) carrying around a five-foot, blown-up check for six figures.
There is nothing wrong or evil about DraftKings or FanDuel, assuming they are able to eliminate the insider information problem and convince the public that they maintain a level playing field. Gambling and lotteries have been part of the American scene since colonial days. Benjamin Franklin used a lottery to raise money for cannons to defend Philadelphia during the Revolutionary War. Most states now use lotteries to supplement funding for education. Casinos have spread beyond Las Vegas and Atlantic City to 46 states. People like gambling.
NBA Commissioner Adam Silver has estimated that $400 billion is spent on illegal sports betting each year. No one knows the number for sure because bookies are notoriously lax about reporting their earnings to the IRS. None of the profits are taxed. Regulated and taxed online gambling in the European Union amounts to 15 billion a year. What could we accomplish in improving the quality of life of Americans with that extra cash?
The outpouring of interest in the two fantasy sports websites demonstrates in a convincing fashion the unmet market for sports gambling. Few are naïve enough to think they win at these games because they are sports aficionados. They know the role that Lady Luck plays. While participants appreciate the fact that this online activity seems to be legal and above-board, it is not. Congress can fix that quite easily.