Yahoo Scandal 11/10/2015

Why the DraftKings & FanDuel Scandal is Important
Adam Johnson could potentially be that guy who if he is not having fun, no one can have fun. If you are not one of the hundreds of millions of people who follow any form of sports in this country, Mr. Johnson is seeking to have federal courts certify a class action law suit against daily fantasy sports (DFS) giants DraftKings and FanDuel.
The scandal’s origins date back to Monday when the New York Times
broke a story on a DraftKings employee named Ethan Haskell winning $350,000 on FanDuel. Per a Sports Illustrated report, Mr. Haskell used “inside” drafted player frequency data on the DraftKings “Millionaire Maker” game to gain an advantage on FanDuel.
According to Mr. Johnson, via SI, “DraftKings employees have won ‘at least $6,000,000’ playing FanDuel games over the last few years, a pattern of success that Johnson attributes to crooked business practices.”The SI article then continues by writing the following, regarding Mr. Johnson’s claims:
“Johnson asserts that FanDuel and DraftKings have misled consumers into believing that they have a fair chance to defeat other participants so long as they are ‘smarter than the average fan.’ Rather than being ‘smarter,’ Johnson insists, FanDuel and DraftKings employees win because they have inside information that makes it easier to defeat those without such information. Johnson’s attorneys contend that these allegedly deceptive practices prove that FanDuel and DraftKings have violated multiple areas of law. Johnson’s complaint raises seven counts, including those for unlawful conspiracy, negligence, false advertising, deceptive practices and consumer fraud.”
Game of Skill vs. Game of Chance
DraftKings and FanDuel are in this grey area of the law and reality, which makes assessing this scandal rather difficult. Calling what Mr. Haskell did “insider trading,” as the New York Times did in its story, would not necessarily be the proper description of Mr. Haskell’s actions.
As Daniel Roberts in his Fortune article on the subject explains, “knowing the ownership data is only half the battle—the players you choose still need to excel. In Haskell’s case, he is an avowed “grinder”—that’s industry-speak for the obsessives who do research, make spreadsheets, and win by expertise.” Furthermore, all persons participating in DFS know player ownership percentages when they are selecting their teams.
“Is fantasy [insert sport] gambling?” is another question that has a murky answer. Under federal law, participating in DFS is not gambling because it is a “game of skill” rather than a “game of chance.” Poker, more specifically Texas Hold ‘Em, falls into this netherworld as well, in that some people believe it is a “game of skill” and some advocate the contrary.
I personally can understand and take either position of whether participating in fantasy sports is more ability that luck. Then again, the public’s interpretation on the matter isn’t important. If there is going to be continued controversy, the federal government and easily interpret the law differently and deem DraftKings and FanDuel gambling websites.
What’s at Stake?
Neither DraftKings nor FanDuel have released official financial records to how much revenue the two companies are generating. From the amount of money both companies are spending on advertising and paying out on an annual basis, it is safe to assuming revenues are quite significant.
CNN Money reports that “DraftKings and FanDuel have combined to spend $205.9 million on ads airing nationally across both network and cable from the beginning of the year until Oct. 5” (the date of the NYT article).
The article continues by stating, “While FanDuel ran more ads last year, its rival has had the clear edge in 2015. DraftKings spent $131.4 million on ads for a total of 40,283 national airings. Last year, its ads ran just 8,743 times. Over the same period, FanDuel spent $74.5 million for a total of 21,545 national airings, up from 14,017 in 2014.”
DraftKings struck a deal with Dinsey (DIS) subsidiary ESPN, making it the official daily fantasy company of the sports media giant (if you haven’t been listening to ESPN Radio or watching its televised programming, DraftKings ads are everywhere).
The only data FanDuel reports, via its website, is that the company has over 1 million active users and $2 billion will be paid out to users in 2015, compared to 2014’s total of $560 million in payouts.
If those 1 million active users each pay a $25 fantasy football league entrance fee (there are cheaper leagues as well), that is $25 million for that week alone, all divided and shared between all parties involved. That is $400 million just for 16 weeks of the NFL season.
Final Thoughts
There is clearly money to be made in fantasy sports and both DraftKings and FanDuel have billions of dollars to lose if this scandal is not shut down as soon as possible. Both companies have banned their employees from using the competitions website. But without any form of independent regularity agency, adequately enforcing this will be very difficult.
Despite the legality of this, fantasy sports performed on these websites is unfettered gambling in its purest form. Sports Illustrated reports the following:
“Over the last two days, the attorneys general from two states with particularly robust consumer protection laws—New York and Massachusetts—have signaled a desire to learn more about the impact of “insider trading” on the integrity of DFS games. New York Attorney General Eric Schneiderman has launched a formal inquiry and Massachusetts Attorney General Maura Healy has expressed a desire to meet soon with FanDuel and DraftKings officials. This is not good news for the two DFS giants, especially given the possibility of Congressional hearings and Federal Trade Commission probes on DFS and sports betting.”