Here’s why the daily fantasy sports ‘scandal’ matters

October 7, 2015, 6:12 PM UTC
DraftKings Inc. And FanDuel Inc. Applications As Ad Spending Increases
The DraftKings Inc. app and FanDuel Inc. website are arranged for a photograph in Washington, D.C., U.S., on Monday, Oct. 5, 2015. Fantasy sports companies DraftKings Inc. and FanDuel Inc. raised a total of $575 million in July from investors including KKR & Co., 21st Century Fox Inc. and Major League Baseball to attract players to games that pay out millions of dollars in cash prizes in daily contests. Photographer: Andrew Harrer/Bloomberg via Getty Images
Photograph by Andrew Harrer — Bloomberg via Getty Images

This has been a tough week for daily fantasy sports sites DraftKings and FanDuel.

On Monday night, The New York Times reported that a DraftKings employee used his own company’s data to win $350,000 on FanDuel. The Times likened the practice to insider trading; DraftKings and FanDuel issued a joint response. The ensuing outrage already has altered advertising deals, user rules and prompted a regulatory investigation.

But it may soon get worse for DraftKings and FanDuel, which have raised more than $725 million in combined venture capital funding. Not because users will conclude the sites are corrupt, or because regulators will decide that they offer illegal “games of chance.”

No, this particular event involving one DraftKings employee could well blow over, but the scandal has bigger implications for a different reason. It exposes the dirty little secret of real-money daily fantasy sports: Most users are destined to lose over and over again.

To be clear, I’m not saying the games aren’t on the level. In fact, quite the opposite. They are designed to be won by those skilled enough to win them.

When DraftKings and FanDuel’s executives make the case (as they do constantly) that they deserve their “games of skill” designation, they claim certain users manage to win a statistically significant portion of their entries (a better winning percentage, for example, than top poker players). That suggests that success in fantasy sports is more about understanding math than understanding sports. And it’s now even further buttressed by the fact that someone leveraged user data from one site to win money on the other — because it’s the numbers, not the athletes, that reign supreme.

All of this might be great for living on the legal side of skill vs. chance, but not great for marketing to new users. Imagine if the typical ESPN viewer turned on their TV and saw an ad that led: “Did you ace calculus in high school? Then you could do really well on DraftKings!” The very argument these sites use to defend their legality hurts their ability to appeal to new users.

It’s not that DraftKings or FanDuel are lying to users or to regulators about how their businesses work. Rather, they highlight different aspects to each constituency, in order to curry favor.

But if users feel they were wronged and regulators respond, then that artificial wall may come crashing down.

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