The Business of Fantasy Sports: The Fall of Daily Fantasy Sports

Published: May 13, 2024

Updated: Jun 03, 2024

In the summer of 2014, the fantasy sports industry thrived. We passed 58 million players in North America. The Fantasy Sports Association had merged into the FSTA with a significant balance to add to the cause. The industry goals were aligned.

WHEN INDUSTRIES THRIVE, PEOPLE CHASE THE MONEY

In 2010, Hall of Famer Steve Cohen and the beloved Matt Deutsch delivered an all fantasy sports channel on SiriusXM. It covered traditional fantasy sports and became a very popular channel at SXM. As DFS became more popular, programming focused on DFS. Fantasy Alarm was one of the channel's first shows, featuring Jeff Mans and Ryan Hallam. Steve & Matt understood what to deliver for fantasy sports. This is a REAL watershed moment in fantasy sports.

In January 2014, I agreed to join the Williams brothers at Fantasy Alarm. When I spoke to them about joining, I wanted (1) RotoInfo to be our fantasy news organization and (2) Ray Flowers to be part of the team. Fantasy Alarm already had a smart, high-energy, irreverent broadcaster in Jeff Mans. Ray had an unwavering way of seeing the world that was entertaining and informational. I wanted to add technology to the mix. With all the money from sponsors, we focused on creating an infrastructure that would allow our talent to shine and drive subscriptions. My son Matt was a junior in college and dove in on the technology side. He was a junior at the University of Vermont. In the next seven years, he led technology at Alarm and quietly transformed us into a content AND technology company.

Many other companies entered fantasy sports of various types: content, services, touts, technology, and entertainment companies. Everyone wanted a piece, and everyone took their shot.

There were a few rules. Many new DFS companies made mistakes. They ran out of money to pay prizes until people signed up for the next season. They commingled customer accounts with operational costs, causing them not to have their user's money when they wanted to cash out. They shut down operations in season. It was awful. The FSTA leadership took the blame for much of it in the media. We need to do something.

FSTA PAID CHARTER & ENFORCEMENT

Our first attempt was to force our members to comply with simple rules. Board Members Nigel Eccles (FanDuel) and Brian Schwartz (DraftStreet; seen in this picture) authored a “paid fantasy charter” each FSTA member needed to sign to protect from Government regulation. The Board of Directors ratified it in June of 2014.

At its core, the paid fantasy charter was created to solve the issues above. It required that all companies separate customer funds from operating funds, pay prizes in a timely manner, and comply with federal law, UIGEA, for payments, processing, and CONTEST PLAY.

All the members and board members signed it.

In May of 2015, in the FSTA Board Meeting (minutes here), Jason Robins of DraftKings accurately argued that DFS games such as Golf and NASCAR were games of skill, so they were legal in many states but did not comply with the safe harbor of the federal law referenced in our charter, UIGEA. Passed in 2006, the UIGEA was not written to contemplate DFS. Now, legally, DraftKings appeared literally correct, but its interpretation was not in the spirit of the law or the association’s rules (to prevent potential legal problems by staying in the safe harbor). It goes without saying that you need the rules to be enforced as an association. Well, we didn’t enforce anything.

The FSTA got skewered in the media over this. As a founding board member, SiriusXM Host, and President at Fantasy Alarm, I was killed when the FSTA allowed a board member to break our paid charter. Legal Sports Report led the reporting. It hit hard. In June, we met in person in New York. I felt comfortable that the head of the compliance committee would motion to have Jason Robins removed from the board. We all wanted DraftKings to continue pushing the popularity of DFS with FanDuel. No motion was made. In our next meeting in August, Charlie Wiegert motioned to stand by UIGEA but make the expulsion part of the paid charter “discretionary.” I seconded this. A compromise. It was tabled to the first thing in the September meeting (minutes here). In this meeting, it was tabled again, and a new motion removed the ability of the paid charter to have any power at all.

There were two votes against. Guess who?

FANTASY SPORTS CONTROL AGENCY (FSCA)

Now we had a problem. We had a company NOT in compliance with the spirit and safe harbor of federal law and creating a danger for companies large and small and the FSTA was not taking a stand.

With key players in the fantasy sports industry taking aggressive stances and inundating the market with advertisements everywhere you looked, it was only a matter of time before opportunistic government officials stepped in and up to the mic. In attempt to head off the expected coming avalanche and the prospect of conflicting regulation that varied from sea to shining sea, the FSTA worked on a project with a former Secretary of Labor called the Fantasy Sports Control Agency (FSCA) to attempt to create one effective and national set of rules and regulations, self-enforced to both insure legal compliance and consumer safety. Rob Phythian and Glenn Colton spearheaded it. Specifically, the goal was to create a separate, independent organization with gravitas that could act as the compliance organization for fantasy sports that companies would join and finance. The theory was that it would be better for everyone in the industry to be regulated by those knowledgeable about the industry rather than by a morass of state by state regulations created by those who do not know or understand the industry. One thing was for sure, the FSTA proved that it was not a compliance organization and was unwilling to take a stand on legal matters as complicated as this. The plan was to work with government officials to stave off the political moves that were coming if we didn’t make a move. Here is the Press Release from Oct 27, 2015 of our move.

After committing to fund the groundbreaking organization, FanDuel and DraftKings preferred state-by-state legislation and pulled their funding from the initiative. The rest of the membership could not raise enough money, and the brilliant idea of the FSCA died. You know what happened next - the predictable government onslaught the FSCA was designed to avoid appeared like a wolf at the door (pun intended).

INDUSTRY CONFUSING EVERYONE - ENTER ERIC SCHNEIDERMAN

With the marketing continuing the war between the two powerhouses, FanDuel and DraftKings spent more than all the insurance companies in America combined. Scheduled to spend a rumored $500M on ads in the fourth quarter of 2015. Commercials from DraftKings promising “boatloads of cash” and commercials from FanDuel with testimonials that looked like gambling or lottery ads created confusion. Was DFS gambling?

In October, a DraftKings employee made an honest mistake and released players' usage across all DraftKings contests before the deadline. It is critical information if you have it early. To win large contests, you must have players who are on fewer rosters so that they differentiate you enough to win. Serendipitously, that employee won $350,000 in a contest on FanDuel, their rival’s site. It was thoroughly investigated, and he was cleared. He had not used the information to win. However, this incident, coupled with the boatloads of cash and the boatloads of commercials, caused more confusion. Was DFS gambling?

New York Attorney General Eric Schneiderman took action about a month later. He saw this as an opportunity to raise revenues for the state and make himself the hero. I mean, AG stands for Aspiring Governor.

Here is a quick timeline of some important events in NY in the fall of 2015:

11/10 - New York Attorney General sent cease & desist letters to DraftKings & FanDuel. In the letter, the New York Attorney General states:
- There is NO criminal liability for the players.
- There is a critical distinction between DFS and traditional fantasy sports – He wrote that “traditional fantasy sports have NEVER seriously been questioned”.
- The letter is focused on advertising “deception” - the boatloads of commercials.
11/13 - DraftKings & FanDuel filed requests for Temporary Restraining Orders (TROs) attempting to prevent the NY AG investigation from moving forward
11/17 - Judge denied TROs and called for a hearing
11/17 - The New York Attorney General requested a court-ordered preliminary injunction to stop DraftKings & FanDuel from operating while the court case proceeds. FanDuel voluntarily stops operating in New York.
11/25 – An oral argument with no live evidence or witnesses is held in NY State Supreme Court (which, by an odd naming convention, is a low-level or entry-level Court not to be confused with the august United States Supreme Court).
12/11 – The NY State Supreme Court Judge granted the NY AG’s request for a preliminary injunction to stop DraftKings and FanDuel from taking entries in NY. This decision, made without live evidence, does not determine the outcome of a case.
12/11 – Within hours, the NY Appellate Division (the so-called middle level court that is higher than the Supreme Court in New York) granted a stay of the injunction to keep the status quo until they could review it in the January session.

Major media outlets continued to misreport that players could not play in New York. The New York Attorney General killed the lexicon so badly that people within sports started calling daily fantasy sports the irresponsible name “fantasy sports betting.” It was like the previous 20 years of my life were invalidated.

This was politics and an attempt at getting attention.

THE RIPPLE EFFECT

In January 2016, the FSTA had its winter conference in Dallas. On the opening day of the conference, Texas Attorney General Ken Paxton followed New York by declaring DFS to be gambling. Mark Cuban was the keynote speaker. He explained that fantasy sports was now a target and that this was all POLITICS! (Clip Here)

Losing New York and Texas amounted to over 20% of all fantasy sports players. Many states followed, and DFS lost 40% of its players in 2016. The FSTA relied on membership dues to thrive. Over 100 companies left the FSTA for cost-cutting or going out of business. The two powerhouses paused many of their campaigns and removed the perpetual nature of their affiliate programs. Companies like Fantasy Alarm had grown to rely on those revenues. Companies were forced to pivot or die.

More members left the FSTA because they believed we sided with DFS companies. The non-DFS paid Fantasy Sports Sites formed the Small Business Fantasy Sports Trade Association (SBFSTA). The industry was fragmented again, but now into three factions.

“A house divided amongst itself can never stand” - Lincoln

In 2005, the FSTA made that mistake, and the CBC vs. MLBAM lawsuit caused the Player’s Associations, Leagues, their broadcast partners, and their licensees to leave the FSTA and start a sister organization called the Fantasy Sports Association (FSA). The two organizations shared some members, like NBC Sports/Rotoworld, which I represented then. When the dispute was resolved, both organizations had done well for the industry and merged back together.

ATTACKS CONTINUE ON OTHER REAL ISSUES WITH DFS

DFS had many problems. We had smart people trying to game the systems that caused less than 5% of the players to make most of the prize money. As we moved into the state-by-state codification of fantasy sports, lawmakers tried to address this by creating regulations to control scripting, bum hunting (good players targeted beginners), and multi-entry tournaments.

Scripting or Internet robotics is the process by which computers enter lineups or analyze site data to determine the best lineups. Since computers process much more information quickly, players can set up rules to find the beginner players and/or enter the optimal number of entries into a tournament. The major companies sped this process by creating upload mechanisms. Lawmakers focused on limiting the number of lineups customers could have in a contest.

Multi-entry tournaments make determining the right risk/reward ratio for playing contests harder. However, scripting and importing lineups can make it very difficult for a good player to use a small number of lineups to win.

Bum-hunting is defined as “the act of seeking out bad players to play against in poker.” With bigger tournaments and more average sports fans playing, coupled with so much information available about the players in their profiles, it is easier. In poker, a bum-hunter can only play a finite number of tournaments simultaneously. With scripting and importing lineups, the number of tournaments a player can enter equals the number of total tournaments.

Legislators looked for solutions to these, plus the aforementioned pooling of operations, customer funds, and swift prize fulfillment. The FSTA began to lobby on behalf of the industry led by Peter Schoenke. The FSTA had just lost almost a third of its membership and funneled a decade of profits into lobbying to define the laws for “paid fantasy sports.” The real big lobbying money was coming from FanDuel and DraftKings. The FSTA has no choice but to join their cause or be excluded altogether. More members leave the association because they feel they were not represented.

The moral of this story is that when success and money arrive in an industry, so does politics. Innovation and investment were hurt during the next couple of years, but the good news is that laws were clarified in 27 states, and 19 states had no clarifying laws, so paid fantasy operators were running contests in 46 states. It just would have been so much simpler, more effective and less painful to so many in fantasy sports had the FSCA been allowed to thrive and do its job for the benefit of the Industry and fantasy players alike.

Next week, I will break down the repeal of PASPA and the wild expectations for Sports Betting in the US that immediately followed - more politics.

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