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Are daily fantasy sports contests gambling or games of skill?

 DraftKings promotion tent

Workers set up a DraftKings promotions tent in the parking lot of Gillette Stadium in Foxborough, Mass., before an NFL football game between the New England Patriots and New York Jets.

(Charles Krupa / Associated Press)

If Californians — indeed, all Americans — had a thoughtful, consistent approach to gaming, daily fantasy sports sites such as FanDuel and DraftKings would be treated as gambling and their sponsors regulated and taxed. They’d be subjected to government oversight, background checks of employees, audits of their books and certification that their games aren’t rigged — just like most other forms of U.S. gambling.

Instead, fantasy sports games have become ensnared in the web of inconsistent laws and confusing regulations governing gaming. At issue is whether daily fantasy play really qualifies as gambling, and if so whether it should be outlawed or merely regulated.

The biggest stakes for the mushrooming fantasy sports industry may be in California, which could hold the largest population of fantasy sports players in the nation. And at the moment, the legality of their daily games is very much up in the air.

That’s likely to raise the hackles not only of the companies and their customers, but their well-heeled backers, which include the major pro sports leagues, team owners and leading media companies. Comcast and Time Warner are investors in FanDuel, Fox in DraftKings.

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Walt Disney Co., owner of ESPN, backed out of an investment in DraftKings this summer over concerns about conflicts of interest, but the fantasy firm remains a key ESPN advertiser. In fact, some 59% of the media advertising revenue growth in the last quarter ($134 million) came from the fantasy sites, according to analyst Todd Juenger of Sanford C. Bernstein and Co., who called that trend “unsustainable.”

“Very powerful political players have entered the arena,” observed gambling law expert I. Nelson Rose in a recent analysis. The industry may be just beginning to flex its muscle, hiring lobbyists in Washington and Sacramento in preparation for what could be bruising battles over its future. The fight resembles that over online poker, whose supporters similarly portray it as largely a game of skill, but whose detractors cite its potential for victimizing underage and irresponsible players.

California Atty. Gen. Kamala D. Harris has launched an active investigation of the legality of daily fantasy sports, according to legislative sources. (Harris’ office refuses to comment.) Harris is under pressure to follow the lead of New York Atty. Gen. Eric Schneiderman, who on Nov. 10 ordered leading firms DraftKings and FanDuel to shut down their activities within the state. Nevada gaming authorities last month also ordered the firms to cease operations in the state until they obtain gambling licenses.

“These games should be shut down in California,” Assemblyman Marc Levine (D-San Rafael) told Harris in a Nov. 2 letter, “until California law is made clear and consumers are protected.” Assemblyman Adam Gray (D-Merced), chairman of the governmental organization committee, has scheduled a hearing for Dec. 16 to begin work on legislation that could bring oversight to daily fantasy games. “This is a very new thing, it’s growing rapidly and it’s in a gray area,” Gray told me. He doesn’t sound inclined to outlaw daily fantasy games outright, but he says, “It’s when these activities go unregulated that the problems happen.”

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The first step is to classify them. Daily fantasy players assemble lineups from active pro sports athletes “priced” at different levels; like a real team, players have a budget to work with. They then pay an entry fee ranging from a few cents to thousands of dollars to enter contests in which their success is based on the performance of their lineup choices in real games.

DraftKings and FanDuel deny that their games are “contests of chance,” typically the key element in definitions of gambling. In meetings with Gray, industry representatives have asserted that “we’re skill-based entertainment, as opposed to chance-based gambling,” says Jeremy Kudon, a New York-based lobbyist for DraftKings, FanDuel and the Fantasy Sports Trade Assn. That would make daily fantasy games no more illegal than a chess tournament with an entry fee and a cash prize or, for that matter, playing the stock market for fun.

More to the point, as DraftKings asserts in a legal filing opposing Schneiderman’s order, the daily games “involve the exact same skills … as traditional fantasy sports played over a season,” which are commonly regarded as social interactions, not proxies for casinos.

Some experts disagree. “It’s gambling,” declares Timothy Fong, co-director of the gambling studies program at UCLA. “You’re putting something of value at risk on something with an uncertain outcome in the hope of earning a reward.” He argues that daily games incorporate more chance than season-long fantasy leagues, in which random developments cancel each other out over time. He also calls foul on the depiction of daily fantasy games as entertainment: “If I go to the movies, I’m not expecting to get my money back or leave with more than I started with.”

Then there’s Amaya, a Montreal-based online gaming company that owns StarsDraft, a small fantasy site, as well as PokerStars, which is hoping to enter the online poker market in California through an alliance with the Morongo Band of Mission Indians. Amaya last month irritated its larger rivals by flatly declaring daily fantasy sports to be “gaming activities” and calling for stringent state regulations. The company cited a scandal in which a DraftKings employee with access to internal company statistics emerged as a consistently heavy winner on FanDuel. (Company rules forbid him to play in his own company’s games, but not on others’.)

The revelations seemed to underscore that while especially skillful and knowledgeable players could win big in daily fantasy sports, the vast majority of participants looked more like sheep groomed for shearing. Poker strategist Ed Miller and Daniel Singer of McKinsey & Co. calculated this summer for Sports Business Journal that, through the first half of the 2015 Major League Baseball season, 91% of all winnings were collected by just 1.3% of all players. DraftKings attorney David Boies asserted in a conference call Friday that that’s actually a sign that these are games of skill — if they were games of chance, the law of averages would allow the proles to do a lot better. The companies paint themselves essentially as technology firms that happen to be selling a form of entertainment: DraftKings, in its legal response to Schneiderman, identified itself as a company built by entrepreneurs from the fields of “computer science, engineering, and analytics.”

The fantasy sports industry seems resigned to some level of regulation, including rules mandating the segregation of customer accounts, protection of customer financial data and barriers against underage players. The promoters will resist tougher rules like those governing casinos in Nevada and New Jersey, such as background checks for owners and key employees. But their biggest challenge may be persuading lawmakers that they’re almost entirely based on skill.

“The assertion that this is a game of skill and anyone can win is clearly not true,” Levine says.

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Michael Hiltzik’s column appears every Sunday. His new book is “Big Science: Ernest Lawrence and the Invention That Launched the Military-Industrial Complex.” Read his blog every day at latimes.com/business/hiltzik, reach him at mhiltzik@latimes.com, check out facebook.com/hiltzik and follow @hiltzikm on Twitter.


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