In this Wednesday, Sept. 9, 2015, photo, Len Don Diego, marketing manager for content at DraftKings, a daily fantasy sports company, works at his station at the company's offices in Boston. The daily fantasy sports industry is eyeing a breakout season as NFL games begin. And its two dominant companies, DraftKings and FanDuel, are touting lucrative opening week prizes to try to draw more customers as more competitors pop up. (AP Photo/)
Photo: Stephan Savoia
Photo: Stephan Savoia

Fantasy sports games make a play for legitimacy

RICHMOND, Va. -- Fantasy sports, the lucrative online industry that blends virtual worlds with professional sports, was looking for an easy target and found one in Virginia.

Conditions were favorable: Virginia has no casinos or entrenched gaming interests to throw up a roadblock, and it had well-connected lobbyists available for hire and a business-friendly governor, Terry McAuliffe (D).

And two weeks ago, the industry succeeded in persuading lawmakers to make Virginia the first state to regulate fantasy sports, lending legitimacy to a business that has occupied a gray area of Internet trade even as it has exploded in popularity.

Virginia is the beachhead in a national fight by the industry for friendly state regulations to establish daily fantasy sports as part of American culture and commerce.

Top operators DraftKings and FanDuel are racing from statehouse to statehouse to craft favorable laws before attorneys general shut down their business as illegal gambling, as has happened in seven states.

In the space of a year, the campaign has ballooned from a couple of lobbyists in two states to more than 75 lobbyists in 35 states, according to the lawyer spearheading the effort. The companies, ordinarily business competitors, have joined forces for the lobbying effort.

"DraftKings and FanDuel don't get a lot of bites at this apple," said Chris Grove, a partner at the gaming consulting firm Narus Advisors. "They have a window to make this happen, to allow them to survive."

Policymakers, many of whom have little personal experience with daily fantasy sports, are faced with regulating a young industry that is signing deals with some of sports' and media's most powerful players, including the National Basketball Association, Major League Baseball, the National Hockey League, Fox Sports, Comcast, Google Capital and NBC Sports. High-profile investors include Mark Cuban, the billionaire owner of the Dallas Mavericks.

And business is booming: About 4 million players helped the industry reach nearly $300 million in revenue last year, according to industry research firm Eilers & Krejcik Gaming.

The industry's central challenge is convincing lawmakers that daily fantasy sports are games of skill, not luck, and therefore should be exempt from state gambling laws.

Often dubbed "the new national pastime" by boosters, daily fantasy sports are a revved-up version of the season-long fantasy games popular in workplace leagues. Players draft groups of professional athletes into their fantasy teams, which are then scored on how well the individual players perform in the day's real-life games. Among the sports included on the sites are college and professional football, soccer, baseball, basketball, golf, hockey, auto racing and rugby.

Unlike traditional games that stretch over a season, the fast-paced nature of the daily leagues and the opportunity for quick payoffs have driven their rapid rise in popularity.

But anti-gambling activists worry about the games' potential to be addictive and the ease of access that makes betting as simple as a few clicks on a computer. And consumer advocates are concerned by recent cases in which some operators of daily fantasy sports abruptly shut down while owing players money.

The concerns extend to other abuses, including an insider-trading scandal.

Complicating matters is the thorny question of whether state-by-state regulations are practical in Internet commerce. Daily fantasy operators large and small use software to identify players' locations and prevent them from participating if they are in states where playing is illegal, but experts say there are ways around the technology.

The industry has plenty of incentive to keep people betting.

The average player of daily fantasy sports spent $257 last year, compared with $162 for traditional fantasy matchups, according to data from the Fantasy Sports Trade Association. More than 56 million bettors played fantasy sports games last year, the group said.

The business model depends on building a wide pool of regular players. In their biggest games, FanDuel and DraftKings guarantee large prizes that they must pay out, even if there are too few bettors paying to support the prizes.

David J. Miller, executive director of George Mason's Center for Innovation and Entrepreneurship, said the industry is just beginning to tap into its potential reach.

"It's massive," Miller said.

"It's cricket in India," he said, referring to the game that is a national obsession in the South Asian country.

When DraftKings and FanDuel came calling in Richmond, they proposed a two-page bill that Del. David B. Albo, R-Fairfax, called a "fluff sandwich" with a line in the middle declaring that fantasy sports games are "not illegal gambling."

Albo said he met about eight times with the industry's lead Virginia lobbyist and attorneys from the companies to rewrite the legislation. He added language requiring operators to disclose principal stockholders and whether they have been convicted of felonies or "crimes of moral turpitude." The rewritten legislation also gave the state the authority to revoke companies' permits to operate and required them to have enough cash on hand to cover prize money without relying on entry fees.

In Virginia's conservative political culture, which has long resisted efforts to legalize gambling, lawmakers have little experience regulating such activity. Albo and other drafters of legislation looked at statutes governing charitable bingo and betting on horse racing "and borrowed stuff that seemed to fit this."

Still, industry observers say the result was a weak bill tailored for the market leaders.

The law, which takes effect in July, applies to any fantasy contest that charges an entry fee, meaning not just daily fantasy sports, but also season-long contests and potentially all kinds of games involving hundreds of operators.

The $50,000 company registration fee shuts out many small operators and seemingly flies in the face of a central theme of the McAuliffe administration: innovation and entrepreneurship.

"It's not the messaging I hear about trying to support start-ups," said Miller, the George Mason expert who started a now-defunct fantasy site about a decade ago.

The Virginia Department of Agriculture and Consumer Services - not the state attorney general or another law enforcement agency -- will oversee the registration process. The department already monitors charitable games and horse racing in the state.

Daniel Wallach, a Fort Lauderdale-based gaming and sports legal expert with Becker & Poliakoff, said the Virginia law does not require many concessions from the companies and does little to protect consumers.

"It does not in any way alter the way in which these companies do business," he said. "I think these states can do better. And I think the industry can do better. I'm afraid this is a missed opportunity."

The bill easily passed both chambers. A few hours after McAuliffe signed it into law, Jeremy Kudon, a New York City-based lobbyist who is managing the national legislative strategy, tweeted: "#DFS [hearts] VA #FSFA"

He expects at least six states to follow suit this year.

"Passing a bill is really, really, really hard," he said. "It's sort of like getting into the hall of fame. There's not a lot of first-ballot hall-of-famers."

Although Virginia's bill sailed through the General Assembly, legislation stalled in Georgia. The attorney general there issued a letter making his the seventh state to call the games illegal gambling. The others are New York, Illinois, Texas, Hawaii, Mississippi and Vermont. In Nevada, the sites are permitted to operate but must apply for gaming licenses.

"We felt like common sense prevailed in Georgia this year," said Virginia Galloway, southern regional director for the Faith and Freedom Coalition, a nonprofit group representing tea party and evangelical voters.

She was particularly concerned about a recent deal between the adult film giant Vivid Entertainment, which operates fee-based pornography websites, and the daily fantasy sports site Draft Day.

In Massachusetts, home of the Boston-based DraftKings, the attorney general is pushing for regulation that experts call the gold standard for the industry. Players would have to be at least 21 years old, not 18 as currently required by the sites; and companies would be barred from advertising on college campuses, could not extend credit to players and would have to cap players' monthly deposits at $1,000.

At the other end of the spectrum, legislation pending in New Jersey would not categorize the games as gambling or even address the question of whether the games involve chance or skill, said state Sen. Jim Whelan, a Democrat whose district includes Atlantic City, home to many casinos. But the proposed 9.25 percent tax on the companies' revenue would match the rate paid by casinos.

"We're all plowing new fields with this," he said.