Q&A: What’s Going On With Daily Fantasy Sports?

Bloomberg News

FanDuel Inc. and DraftKings Inc., the two most popular daily fantasy sports sites in the U.S., have come under scrutiny over whether the fast-growing startups do enough to police sensitive internal data and employees who might have access to that data. Here’s a Q&A covering the basics to the nitty-gritty. 

I understand fantasy sports. What’s different about daily fantasy?

In daily fantasy, people draft teams for only that day or week and enter into pools that vary by the number of contestants, the format and the entry fees, which can go from 25 cents to thousands of dollars. Many of these pools include both casual, small-time players and deep-pocketed “sharks” who may submit multiple entries to increase their chances of hitting a big prize. All of those factors determine how much prize money is available in a pool, which can reach into the millions—DraftKings week has one pool with $7 million of total prize money, with $1.2 million going to first place.

Unlike most season-long fantasy leagues, multiple people playing daily fantasy are allowed to own the same athlete. You can draft Green Bay Packers quarterback Aaron Rodgers even if another entrant has done the same. Each athlete is assigned a salary by the daily fantasy site—the best players have the highest salaries—and contestants have to keep their teams under a salary cap. That stops everyone from just drafting the best players at every position. Splurging for Mr. Rodgers means you may have to skimp elsewhere. 

Is this gambling, or even legal?

That’s still a debated issue, depending on where you are and who you ask. As of now, daily fantasy games are legal in 45 states; they are outlawed in Arizona, Iowa, Louisiana, Montana and Washington. In 2006, Congress passed the Unlawful Internet Gambling Enforcement Act, which said these types of fantasy-sports games must reflect skill in order to be legal. So it boils down to whether these games reflect luck or skill. Proponents say the latter; critics say it’s luck—much like the debate over Internet gambling.

What’s this new controversy about?

There was already concern that daily fantasy sites aren’t regulated enough. That concern amped up after a DraftKings employee, Ethan Haskell, admitted on an online message board that he had prematurely published internal data about contestants’ lineups—data that usually isn’t published until all teams and players are locked in. The same week, he won $350,000 playing in a contest on FanDuel, a rival site.

Both companies said the data didn’t help Mr. Haskell win. He hasn’t commented since his message-board post, in which he said only he had access to the data and that publishing it early was a mistake.

Still, the incident raised questions about whether daily fantasy games are fair: What kinds of internal data do employees have access to, and when do they have access? Are employees allowed to compete on their own sites? Are they allowed to play on competitor sites? Can employees with internal data use that information to their advantage?

Among the biggest concerns is that, unlike typical players, employees might know potentially valuable information, such as what percentage of entries in a pool own a particular player. (More on that below.)

Before the controversy erupted, employees were banned from playing contests for money on their own sites. This week, FanDuel and DraftKings banned employees from doing so on competitor sites as well. Even so, there are questions about the companies’ oversight of their employees.

 

Why does contestant-lineup data matter so much?

Knowing player-ownership data could provide a significant advantage in the big, lucrative contests known as guaranteed prize pools. It’s desirable to have valuable players who aren’t popularly owned. (In the other common type of contest, called 50-50—the top half of the entries win, typically double the entry fee—selecting commonly owned players is less of a strategy.)

If you draft Seattle Seahawks running back Marshawn Lynch, and so did a large chunk of everyone else in the pool, you’re not gaining much ground even if Mr. Lynch performs well. Everyone who owns him reaps the same points. But if you draft a player who performs well, and no one else has him, those points are yours alone. Those are two extreme examples. The data would help point out cases when players aren’t owned as much as they should be relative to their salary. It’s not just about finding the best players, but finding the best values.

This is similar to the game-theory logic that suggested it didn’t make sense to pick the Kentucky Wildcats to win the 2015 NCAA men’s basketball tournament in an office pool. A person had a better chance of winning a large pool by running with a less-picked team that still had enough talent to win the title. 

Did the DraftKings employee use internal data to win?

DraftKings said no, because the employee had the data at a time when it was too late, theoretically, to change his lineup and act on the information. FanDuel said the same.

Ownership data doesn’t guarantee success. After all, you still need to pick players that perform well that in that contest. When you fill out an NCAA tournament bracket, you can probably guess that few people will choose a No. 16 seeded team to win it all. That doesn’t mean picking the lowest-seeded team is a good strategy.

Despite the ban on employees playing daily fantasy contests for money, questions remain about how this potentially valuable information will be kept secure. That’s been a chief rub of critics, who say the fast-growing, billion-dollar industry lacks proper governmental oversight.

Do I have any chance at winning?

Absolutely, but it’s tougher—especially if you are a small-time player.

According to a McKinsey study of the first half of this year’s Major League Baseball season, 91% of the profits in daily fantasy contests were won by just 1.3% of the contestants. This 1.3% comprised the largest bettors, who accounted for 40% of the entry fees. On the other hand, 80% of the contestants were smaller users who on average lost $25 on entry fees of $49. In this study, the sharks swallowed the minnows.

Though it was just a study of one sport, it suggests a potential concern for casual players: that they don’t stand a chance against deeper-pocketed players. A regular criticism leveled against the daily fantasy industry is that there aren’t enough ways for the small-time players to avoid the high rollers. Think of it like someone who plays a $5 Saturday night poker game with friends sitting in on a high-stakes game against pros. It’s difficult to win with a small stack. One solution would be contests for newcomers only.

What’s going to happen next?

After this recent uproar, the industry is on the receiving end of more scrutiny. Attorneys general offices in New York and Massachusetts asked FanDuel and DraftKings to hand over data and information about their internal policies. The companies are scrambling to stay ahead of the fallout by appointing former U.S. attorneys to conduct internal reviews and law firms to supply continuing guidance on best practices.

MORE ON DAILY FANTASY SPORTS

Viewpoint: I Won Millions in Daily Fantasy—and Even I Want Changes 

FanDuel, DraftKings Ban Employees From Playing Daily Fantasy Contests for Money

Critics Raise Heat on Sports-Fantasy Sites DraftKings and FanDuel