[author] [author_image timthumb=’on’]http://www.conjsports.com/wp-content/uploads/2017/09/Craig-Giangiulo-Headshot.jpg[/author_image] [author_info]
conjsports.com contributor
@XtraKrizbee[/author_info] [/author]
As one-day fantasy (ODF) has evolved into a bona fide industry, Draftkings and Fanduel have experienced issues that have nothing to do with the classification of ODF as gambling. These issues revolve primarily around allegations of unethical business practices. The most recent major story about Draftkings and Fanduel is that of their attempted merger, which was blocked by the Federal Trade Commission (FTC) based on antitrust law before the companies even had to chance to formally integrate.
On paper, it is not hard to see why the FTC took action so quickly. Anti-trust regulations (in this case section 7 of the Clayton antitrust act of 1914) stipulate that no merger should be allowed if “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” The industry already lacked parity, as it is dominated by just two companies.
“Draftkings and Fanduel combined handle about 95% of [daily fantasy] users already,” said Marc Edelman, an associate professor of law at Baruch College in New York and a regular contributor of articles about sports and the law to forbes.com. “So, knowing about antitrust laws in this country, it was hard to even imagine that that [merger] would have been allowed. The merger getting blocked was not surprising to me.”
Edelman believes that the merger being blocked will ultimately promote competition and benefit potential startups in the one-day-fantasy industry.
“They [Draftkings and Fanduel] would have had the rights to the NFL, NBA and MLB as soon as they merged,” said Edelman. “At that point, it’s likely that no new ODF companies would be able to get contracts with any of those leagues.”
What is particularly interesting about one day fantasy is how quickly Draftkings and Fanduel went from being startups themselves to potentially monopolizing an industry that didn’t even exist 10 years ago.
“If you look at Draftkings and Fanduel valuations from a couple years ago compared to now, its clear that one day fantasy has been exploding,” said Edelman. “It’s just been the two companies, but there’s room for competition and even them competing with just each other helps keep them at least semi-honest. One giant, unified ODF site would probably be way less incentivized to provide the customer with a good experience.”
Based on the numbers, it seems surprising that Draftkings and Fanduel thought the merger would be allowed. Fanduel CEO Nigel Eccles said after the FTC’s decision that Fanduel still believed the merger “would have increased investment and product development, benefiting consumers and the broader industry.” The benefits to the companies themselves are obvious: more lobbying power (that would have been used to try and legalize one day fantasy in more states) shared regulatory expenses and no longer advertising against one another would save them a lot of money.
“They [Draftkings and Fanduel] have been involved in a lot of legal battles together since one-day took off, and when you sue both of them like New York did in 2016, you get twice as much money spent on legal fees versus if it was one company,” said Edelman. “You also get twice as much from a settlement if there is one– like what happened in New York. Draftkings and Fanduel each had to pay their own $6 million settlement to the state.”
The amount of legal trouble Draftkings and Fanduel seem to get in regularly could also explain why neither company has so far contested the FTC ruling that prohibited the merger.
“They would have to prove to a court that the merger wouldn’t affect competition. I don’t think that’s possible,” said Edelman.
One prominent example of the legal trouble that has befallen Draftkings and Fanduel is the 2016 false advertising lawsuit mentioned by Edelman. New York Attorney General Eric Schneiderman reached a $12 million settlement ($6 million from each company) with Draftkings and Fanduel after a year-long investigation by his office found that “both companies had consistently misled consumers in advertisements.”
The AG’s office found that commercials greatly exaggerated the consumers chances of winning money on Fanduel and that the ads had used “full time” players as examples of what a typical Draftkings/Fanduel winner would look like. The winners featured in the commercials were made to look like “average joes” when in reality they were full-time, one-day-fantasy players who used advanced methods like “automated computer ‘scripts’ and sophisticated statistical and game theory strategies.”
None of these strategies were mentioned in the commercials.
“It’s like the income inequality issue in America in that a very small amount of players take home a very disproportionate amount of the pot [total amount won by all players],” Edelman said. “The people that did win and were featured in the commercials were very often stat-heads who studied and analyzed with a level of commitment that most people don’t have time for.”
Both companies also withheld the statistical information that the majority of Draftkings and Fanduel players lose money. It is well known in gambling that “the house always wins” and the average player will lose money. The problem with the commercials was that they did not describe it that way. The message of the commercials was that anyone can win.
But, according to Edelman, “having someone that spent eight hours a day studying fantasy football tell the average American that ‘I won so you can too’ is misleading.”.
The ads also promised to match a new player’s initial deposit, but according to Attorney General Schneiderman’s office “provided a much less generous rebate on entry fees.” The investigation also found that the companies were dishonest about the danger that one-day fantasy could potentially pose to people with gambling or addiction issues and did too little to protect people with gambling problems while marketing the product as “harmless fun.”
People should be allowed to bet their money on fantasy sports if they want to, but the companies that provide the service have to be honest about the return rate and accountable for what they promise in their advertisements.
Inquiries sent to Draftkings, Fanduel, and Boies, Schiller & Flexner (Draftkings’ legal counsel) about a brief interview were not returned. A similar unreturned inquiry was sent to Attnory General Schneiderman’s office.