As the 2015 NFL seasons gets underway this weekend, you’ll undoubtedly notice TV commercials hyping fantasy football sites, FanDuel and DraftKings, which are essentially betting arenas — although they really aren’t in the legal sense.
While sports gambling remains illegal in much of the United States, fantasy-sports gambling is exempt from the Unlawful Internet Gambling Enforcement Act of 2006.
Te booming industry’s exemption or “loophole,” depending on how one characterizes the legality, represents a huge growth area. Both companies have raised a ton of money from venture capitalists. Each has valuations of $1 billion or more.
FanDuel, the more established of the two companies, paid out more than $560 million to more than a million paying players in 2014, the company itself claims. But don’t feel sorry for upstart DraftKings, which recently got the exclusive right to advertise on ESPN, giving DraftKings an edge in attracting new players.
But how can FanDuel and DraftKings get around the sports-betting prohibitions in much of the U.S.?
Mostly because fantasy sports relies on each player’s “skill,” as opposed to straight betting on the outcomes of sporting events or games that hinges on “chance.”
In 2006, the federal government enacted a law called the Unlawful Internet Gambling Enforcement Act that established fantasy sports as a “game of skill” and not a “game of chance.” The law says it’s legal if it:
(I) is not dependent solely on the outcome of any single sporting event or non-participant’s singular individual performance in any single sporting event;
(II) has an outcome that reflects the relative knowledge of the participants, or their skill at physical reaction or physical manipulation (but not chance), and, in the case of a fantasy or simulation sports game, has an outcome that is determined predominantly by accumulated statistical results of sporting events, including any non-participant’s individual performances in such sports events
In fantasy sports betting, users compose their own teams using the performance of actual players. The outcome of the game depends on how each player on a user’s team performs, accumulating points based on real-game performances. The law sees as a game in which actual skills matter to win.
This nitpicking is quite debatable, but for now FanDuel and DraftKings are at the forefront of a very lucrative online business model, although profits are still in the future. Both companies spend a great deal on advertising and neither are profitable yet.
FanDuel reportedly generates nearly twice that of DraftKings. It brought in about $57 million in 2014. FanDuel takes a small percentage of the betters’ entrance fees.