Cash flows to fantasy sports sites

Fantasy sports websites that play on a daily basis have dodged strict online gambling restrictions to become an industry valued in the billions of dollars.

Hyper-speed fantasy leagues that allow cash stakes have surged in popularity, thriving within the confines of a law that otherwise restricts online gambling.  

{mosads}While the sports sites have largely avoided scrutiny, the young industry is clearly on guard against regulatory and legislative proposals that could put a crimp in their business.

FanDuel, the largest of the fantasy sports sites, joined the influential Internet Association last week, increasing its lobbying presence in Washington. The company said no specific policy battle spurred the move.

Here are five things to know about the surging fantasy sports industry, from its legal standing to the investors who are jumping onboard.

LEGAL ISSUES 

Users will not find the words “betting” or “gambling” on fantasy sports websites. The companies go to great pains to stress that their business model does not fit the legal definition of online gambling. 

Even though customers put down real money to enter a draft and receive cash payouts if they win, FanDuel points to an exemption in the Unlawful Internet Gambling Enforcement Act, a 2006 law meant to crack down on the payment processors of online sports books.

Participating in fantasy sports is permitted under three conditions: that all prizes be known up front and the pot is not determined by how many people enter; that it is a game of skill based on the performance of individual athletes, and that the outcome is not based on a point spread or a team’s win. But the law was written before the “daily” fantasy model was formed. 

“Indeed, there is no blanket immunity under federal or state law for ‘daily fantasy sports,’” City University of New York Professor Marc Edelman wrote in a forthcoming paper about the issue, adding that the legality depends on a game’s particular rules. While there has never been a prosecution, he noted the industry di not really take off until 2013.

HOW IT WORKS

Daily fantasy sports customers can spend money on almost any sport. Customers enter a draft for a set amount of money anywhere from $1 on up. The winning prize varies from the hundreds to tens of thousands of dollars. 

Like traditional fantasy sports games, a customer drafts a roster of players to compete. While traditional sites carry on throughout the season, the daily fantasy games allow customers to handicap a single day’s games and receive a quick payout. Customers can compete head to head, against multiple people, or through a tournament. 

HIGH-PROFILE INVESTORS 

FanDuel ballooned from $135,360 in revenue in the first quarter of 2011 to nearly $37 million in the final quarter of 2014. It progressed steadily until exploding in the last part of 2014, more than quadrupling its revenue.

The site has separately raised $88 million in venture capital funding from major investors, including the National Basketball Association, NBC Sports and Comcast Venture. 

Professional sports leagues have purchased stakes in the daily fantasy market, including FanDuel and rival DraftKings, with the idea that it is boosting viewership. The backing has also given added legitimacy to the industry. When the NBA announced an exclusive deal with FanDuel last year, the league said fans watch sports on two screens and daily fantasy “is now part of that experience.”

WHERE IT’S ILLEGAL

Major fantasy leagues, like FanDuel and DraftKings, do not allow residents of Arizona, Iowa, Louisiana, Montana and Washington to enter contests or win payouts. All five states have some type of restriction on games of chance.

Edelman, the CUNY professor, has also pointed to Arkansas and Tennessee as states where the legal landscape is dicey.

The Fantasy Sports Trade Association, which includes FanDuel as a member, has lobbied for changes in those state laws. 

FEDERAL LEGISLATION

A few House and Senate lawmakers have introduced legislation that would renew federal restrictions on online gambling — a bill that has support from major political donor Sheldon Adelson. It is unclear how the bill could affect the fantasy industry, but the Fantasy Sports Trade Association spent $40,000 on lobbyists to monitor the legislation and other issues in 2014. A spokeswoman said the group does not have a position on the bill.

Sen. Lindsey Graham (R-S.C.) and Rep. Jason Chaffetz (R-Utah) have introduced legislation to reinstate the original interpretation of the Wire Act, which was used to prosecute early Internet gambling such as online poker. The Justice Department changed its interpretation in 2011 to say the law should not be used to go after online gambling, except traditional sports betting. 

When asked if fantasy sports business models, like FanDuel’s, could be affected by the legislation, a spokesperson for Graham said he had never heard of the site. Other sponsors of the bill did not respond for comment.

Correction on April 21: The Fantasy Sports Trade Association does not have a position on legislation that would renew federal restrictions on Internet gambling. A previous version contained incorrect information.