DraftKings and FanDuel: The New Face of Legalized Online Sports Betting

Ryan Bhandari |

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In April of 2011, the US Government shut down five gambling websites. They were accused of money laundering: disguising online payments received by gamblers as payments for online jewelry and golf balls. The indictment also alleged that these online gambling websites used “fraudulent methods to avoid restrictions and to receive billions of dollars from United States residents who gambled.”

The Justice Department eventually dropped the charges and reached a settlement with the online poker websites, and now they are up and running again. But online poker and online gambling in the United States is still technically illegal. All of the online gambling websites are headquartered outside of the United States.

Websites that allow members to pool money together in tournament style fantasy sports games, however, are completely legal in the United States. What’s going on? Why are websites like DraftKings and FanDuel legal, while other online gambling websites are not?

What’s your Definition of Gambling?

The answer to this question is the reason why fantasy sports websites that use money are legal. If you look up “gambling” in the dictionary, your definition is playing games of chance for money. In 2006, the federal government passed the Unlawful Internet Gaming Enforcement Act designed specifically to prevent gambling over the Internet. However, the law made sure to carve out a special exemption for fantasy sports games.

Apparently, the federal government ruled that fantasy sports are a game of skill and not luck. Now, this probably sounds like something the winner of your fantasy football boasts about after winning the league (“it’s not about luck, it’s skill”), but this is actually the opinion of the federal government, as well.

I admit that I’m no expert on fantasy sports, but this whole situation seems a bit ridiculous. How can fantasy sports be a skill? How can unforeseen injuries, suspensions, or poor performances be attributed to some sort of skill? Frankly, it seems absurd to me to classify fantasy sports as a game of skill.

A 2006 research paper by M. Christine Holleman from the North Carolina Journal of Law & Technology refutes everything I just said, indicating that while fantasy sports involve both chance and skill, the skill elements are the dominant ones. Holleman goes on to say that the traditional reasons for outlawing gambling also don’t apply for fantasy sports. Fantasy sports don’t cause individuals to lose massive amounts of money and don’t lead to fraud, theft, or violence. Money is also not the primary factor that motivates an individual to play fantasy sports. The average time spent invested does not match the expected payoff. Therefore, she concludes, fantasy sports should not be treated like online gambling.

Grow Baby, Grow!

The government appeared to agree with her assessment. They legalized online fantasy sports gambling (or buy-in fees). And these businesses have been booming ever since. DraftKings was started in 2012. In 2014, they received $304 million in fees from users. Earlier this month, they also announced a three-year advertising deal with ESPN that’s worth $250 million.

FanDuel has also been experiencing tremendous growth. Neither company is publicly traded, so one way to assess growth is the change in the size of their payouts to their participants. In 2010, FanDuel hosted a live fantasy football championship where they paid out a total of $40 thousand to their winning participants. In 2014, they held the same tournament, except this time the payout to the winners was $7 million in total.

Both FanDuel and DraftKings have enjoyed tremendous success over the last few years. As fantasy sports increase in popularity, so do these websites. With the Federal government behind them, their future is certainly bright, and lady luck appears to be on their side.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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