Fantasy Sports and Fantasy Regulation
The U.S. online fantasy sports industry has grown over the last decade, fueled by the rise of behemoths like DraftKings and FanDuel. Currently, the industry boasts more than 50 million players and roughly $10 billion in annual revenue.
As the market continues to expand and evolve, it has attracted the attention of regulators, which could hamper competition and limit future innovation and growth. Perhaps surprisingly, the call for regulation is increasingly coming from the industry itself, as incumbent firms seek to maximize profits not through competition in the marketplace, but by creating a regulatory framework that protects their market share and deters new entrants.
Brief History of Online Fantasy Sports
Fantasy sports have their roots in the 1960s when Bill Winkenbach and a group of friends created the Greater Oakland Professional Pigskin Prognosticators League, leading to the first fantasy football draft in 1963. Participants selected players from NFL teams based on statistics of their previous performance, and their teams competed based on the game-day performance of their rosters. Fantasy baseball also emerged in the 1960s when sociologist William A. Gamson created the Baseball Seminar, where participants drafted teams that then competed based on various player statistics over the course of the season. This evolved into rotisserie baseball, created in 1979 and named after the Manhattan restaurant Le Rotisserie Francais where Dan Okrent and his friends met to refine the game. These early versions of fantasy sports laid the groundwork for the modern fantasy sports industry.
While popular among committed sports fans, early fantasy sports required compiling detailed statistics and a level of communication among participants that proved to be limiting in the 1960s and 1970s. Fantasy leagues were built by ardent fans meeting for drafts and then compiling and monitoring season-long statistics for the players on their rosters.
As in so many other sectors, personal computing and the rise of the internet in the 1990s revolutionized fantasy sports. The emergence of search engines and websites exponentially increased the amount of information available and drastically lowered the costs of participating in a sports fantasy league. Broader access to information and data also opened the door to other fantasy sports beyond football and baseball. New websites such as Yahoo.com and ESPN.com began catering to fantasy sports players with products that allowed users to create teams, track statistics, and compete with others on a much larger scale. By the year 2000, all major sports had fantasy leagues, and they have since become a popular mainstream pastime that has changed how fans consume sports entertainment.
From Season-Long to Daily Fantasy Sports
The origin of fantasy sports lies in season-long contests, with teams drafted at the beginning of the season and their rankings based on the actual performance of team members throughout the season. Consequently, season-long fantasy sports require a longer-term commitment from those who join a league. This includes time to manage team rosters, trade players, and adjust team line-ups for every game. This time commitment, while considerably lower than the pencil-and-paper management of the earliest eras, still limited the scope of fantasy sports.
However, as the internet evolved, so did fantasy sports. In particular, the integration of fantasy sports platforms and mobile apps created a new market for daily fantasy sports games, which are less labor-intensive and more flexible in terms of prizes and engagement, spurring even higher levels of market growth.
With daily fantasy sports, participants can choose to play in a single day’s game or in all of the games played in the league for the week. These new formats also mean that, rather than a season-long commitment with a delayed reward, participants can enjoy short-term contests with the potential for immediate rewards. Today, daily fantasy sports platforms offer a wide range of contests with varying entry fees and prize pools.
More recently, daily fantasy sports companies have added new contests that provide an even simpler game that appeals to a wider audience. Known as “pick’em” contests, or daily fantasy sports 2.0, these games allow participants to select a series of players from various teams and predict outcomes based on their game-day performance on metrics like points scored, number of rebounds, number of field goals, and the like. These are simple “over/under”-style contests where participants predict whether a player will exceed or miss the metric in question. The more players on a team that are successful, the larger the payout will be.
Relatively newer companies such as PrizePicks and Underdog Fantasy are innovators in these newer-style games, launching them into the fastest-growing segment of the industry. One study of four states where data was available found that in the first half of 2023, PrizePicks was the clear market leader, with a 43.2 percent share, compared to FanDuel’s 13.5 percent market share and DraftKings’ 31.7 percent market share. This is explained in part by innovations made by PrizePicks and in part by industry leaders such as DraftKings and FanDuel transitioning toward online betting rather than fantasy sports.
However, pick’em games are not without controversy. Many have challenged their legality and whether they are actually fantasy sports. In fact, the large incumbent companies such as FanDuel and DraftKings have sought to ban these games from daily fantasy sports, claiming that they fall into the realm of proposition betting and calling for them to be regulated as such. Conveniently, such a ban would keep upstart rivals like PrizePicks and Underdog Fantasy out of the market, securing the market dominance of the industry giants. Cesar Fernandez, FanDuel’s head of state government relations, has claimed that daily fantasy sports companies that offer pick’em style games are “running illegal sportsbooks,” ignoring the fact that they meet the definition of a game of skill.
Skill, Not Chance
While technological innovation has fostered growth in the fantasy sports market, so, too, has the industry’s regulatory framework. Fantasy sports are unique in that they are defined as a game of skill, not a game of chance. This classification separates fantasy sports from online sports betting, which, where legal, operates in a heavily regulated framework as games of chance.
The distinction between game of skill versus game of chance became particularly relevant after the 2006 passage of federal legislation on internet gambling. The “Unlawful Internet Gambling Enforcement Act,” (UIGEA, which was included as Title VIII of the SAFE Port Act) was passed amid concerns of widespread online gambling. Because most online gambling operators were headquartered offshore and were therefore outside of U.S. jurisdiction, the UIGEA targeted banking institutions, prohibiting “gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law.”
The legislation targeted online gambling, and it included a specific carve-out for fantasy sports, which were categorized not as games of chance, but as games of skill. In particular, a fantasy sport is considered a game of skill and not subject to UIGEA if it meets specific criteria, including “All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.” Notably, this applies to all fantasy sports, from the original season-long format to more recent pick’em games.
This federal-level carve-out created an unencumbered path forward for the fantasy sports industry. Coupled with increased computing power and mobile apps, the market grew quickly, subject only to state laws, which vary significantly and have evolved substantially over time. FanDuel emerged in 2009, specifically acknowledging the UIGEA’s role in paving the way, and DraftKings followed in 2012.
The Harms of Market Power in a Regulated Industry
Up until recently, FanDuel and DraftKings dominated the daily fantasy sports market through “marketing, product innovation, and large prize pools.” Their efforts were successful, leading to a collective market share in 2018 of more than 87 percent. The two industry leaders contemplated merging, but abandoned the idea when the Federal Trade Commission voiced opposition on the grounds that the new entity would have 90 percent of the relevant market and “produce concentration levels well beyond what is necessary to establish a presumption of competitive harm.”
Just as important to their rapid growth was their extensive state-level lobbying campaign to open the door for daily fantasy sports across the nation. Both companies spent the 2010s lobbying in various states to expand daily fantasy sports and create new markets for their products. In 2016 alone, 78 lobbyists in 34 states were estimated to have spent $5 million to $10 million to pass state laws to protect or establish markets for daily fantasy sports. In New York, for example, both companies worked to influence Gov. Andrew Cuomo to sign a bill defining fantasy sports as legal games of skill. The bill was struck down in the lower courts but was ultimately upheld by the New York Court of Appeals, clearly establishing daily fantasy sports as legal games of skill. Today, daily fantasy sports in some form are allowed in 45 states.
This degree of market power in a regulated industry can yield harmful effects for consumers. Economists have long known that regulations can be used for private gain. Regulatory capture can be problematic, particularly in heavily regulated industries, leading to higher levels of rent-seeking, higher prices, and decreased innovation, along with associated losses in consumer welfare. As the regulatory and legal landscape of fantasy sports has changed, the dominant firms in daily fantasy sports have changed their tactics, embracing anticompetitive strategies that impede new entrants in the marketplace.
From Market Makers to Market Breakers
The most important change in the policy framework since the passage of the UIGEA was the Supreme Court’s 2017 decision striking down the “Professional and Amateur Sports Protection Act” (PAPSA), which acted as a federal ban prohibiting states from authorizing sports betting. In effect, the Court’s decision opened the door to state-regulated sports betting. Under PAPSA, only a handful of grandfathered states permitted sports betting; now, sports betting is legal in 38 states (at casinos and racetracks), and online sports wagering is available in 27 states.
Both FanDuel and DraftKings took advantage of the new landscape by launching traditional sportsbooks for online wagering. While daily fantasy sports continue to operate in a less well-defined regulatory framework, sports betting remains heavily regulated in states where it is legal.
DraftKings and FanDuel are now far more popular for their sportsbooks and online wagering than their daily fantasy sports. In fact, from July 2022 to June 2023 FanDuel’s sportsbook app was downloaded 8.8 million times, whereas its fantasy app had only 1.2 million downloads. Similarly, the DraftKings sportsbook app had 8.4 million downloads compared to its fantasy app with 2.4 million downloads.
As the dominant firms began transitioning from daily fantasy sports to online sports betting, they also began opposing innovative, new daily fantasy sports products, such as pick’em contests, offering their own parlay bets as an alternative. Although lobbying continued to be integral to their growth, their efforts shifted to limiting access to the market by urging lawmakers to ban popular daily fantasy sports products like the pick’em contests offered by potential rivals.
In Wyoming, for example, the Sports Betting Alliance, a trade association representing DraftKings and FanDuel, explicitly lobbied to ban platforms like PrizePicks for offering illegal sports betting. This led to cease-and-desist letters being sent to these fantasy sports companies, essentially banning their popular games. Similar fights are simmering in a number of states. In New York, for example, although the law authorizing fantasy sports was upheld in court, in January 2024, the legislature approved a measure banning pick’em-style games—a move endorsed by DraftKings and FanDuel. Similar confrontations are playing out in several states, including Massachusetts, Arkansas, Ohio, and Florida.
Banning pick’em games eliminates the most dynamic sector of the daily fantasy sports market and the biggest threat to incumbents like FanDuel and DraftKings. Daily fantasy sports companies would either have to exit or stop offering these popular contests in states where they operate. But pick’em contests meet the qualifications of a game of skill, relying on a player’s statistics rather than the pure probabilities of a game of chance. Pursuing legal and regulatory changes that somehow attempt to parse the various games offered in daily fantasy sports contests would be misguided, as it fails to recognize the fundamental skill-based nature of pick’em games and risks stifling innovation in an emerging industry.
Conclusion
In the past two decades, the daily fantasy sports market has seen significant growth as regulatory barriers on these products eased through legislative and legal changes, opening new markets in new states. Early pioneers aggressively pushed to expand their offerings to larger audiences by adopting new technologies to develop innovative games of skill that withstood regulatory scrutiny. However, as in many regulated industries, as incumbent firms matured, they began endorsing anticompetitive regulatory changes that create barriers to entry for potential competitors.
By advocating for bans on new games, industry giants like DraftKings and FanDuel are seeking to eliminate popular, innovative products that are being offered by newer entrants in the marketplace. If such bans are enacted, the companies that are innovating and driving competition with the newer daily fantasy sports products would only be able to compete in the longer-term product lines that the incumbents already dominate. The only other choice the newer, innovative companies would have would be to transition these new daily fantasy sports products to the online betting market, but that market is heavily regulated and much more difficult to enter.
Policymakers must ensure that the market for daily fantasy sports remains open and competitive. This means allowing companies to offer any games that meet the definition of a game of skill. Rather than taking steps to ban new daily fantasy sports games, which would stall growth and innovation within the industry, it would be more appropriate to examine the anticompetitive practices of incumbent firms.