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Will DraftKings, FanDuel lose a piece of the action?

Pras Subramanian
Len Don Diego, marketing manager for content at DraftKings, a daily fantasy sports company, works at his station at the company's offices in Boston.

If you were watching NFL games this weekend, there was something that everyone saw that was hard to miss. Commercials for daily fantasy sports (dubbed “DFS”) websites like DraftKings and FanDuel played regularly, and their ads were plastered everywhere at stadiums.

As opposed to normal fantasy leagues, where players (or ‘managers’ as they are called) draft a team for an entire season, DFS is, just like the name implies, daily. Managers draft players for a single day based on player values using a website imposed salary cap. With DFS, the player values combined with the salary cap creates ‘odds’ in gambling parlance for the probability of a certain outcome; basically the higher the player value, or cost, the more likely the player will have a better game compared to similar players.

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DFS managers that outperform their peers in a small pool (for example 10 teams) or across the entire site win cash prizes. It is the daily grind of these ‘games,’ or bets if you will, that resolve themselves nightly that make DFS games very different that regular, season long fantasy sports.

With rising popularity, exposure and money coming to sites like DraftKings and FanDuel, comes new scrutiny. Rep. Frank Pallone (D-NJ), ranking member the Energy and Commerce Committee, has requested an inquiry into the relationship between gambling and playing DFS. Said Rep. Pallone in a statement on DFS sites: “These sites are enormously popular, arguably central to the fans’ experience, and professional leagues are seeing the enormous profits as a result.  Despite how mainstream these sites have become, though, the legal landscape governing these activities remains murky and should be reviewed.”

Both FanDuel and Draftkings have received hundreds of millions in VC funding, and a congressional inquiry could create some difficulty. “It could be a big deal if it gathered steam but what's interesting about this is the reason the industry exists at all, to the extent it does now, is because of an act of Congress,” Yahoo Finance’s Mike Santoli notes in the attached video. “Congress itself in 2006 passed a law that was meant to outlaw most types of online gambling, but very specifically carved out a safe harbor for fantasy sports.”

While sports leagues lobbied for the fantasy sports safe harbor back in 2006 because fantasy appeared to increase fan engagement, there is a distinction to note here with DFS. “Now back then it wasn't daily fantasy sports, it wasn't this kind of daytrading of athletes which is what you have right now,” Santoli says.

Although it’s never a good thing to have Congress poking around a company’s business, in this instance Santoli believes there isn’t enough there for Congress to regulate DFS as gambling. “These [DFS sites] are online platforms - I'm not saying it's a good thing or a great thing, but it's a thing and it's obviously become very popular and at some point maybe it requires an extra layer of regulation and scrutiny, but right now I don't think you can say it's equivalent to betting on sports games because that's what Congress didn't want,“ he says. “[Congress] doesn’t want the ability for anyone to sort of throw a game or have all those other complications that compromise the legitimacy of a league, and you don't really have that when you're just trading individual player statistics.”