Column: Daily fantasy holds breath awaiting New York ruling

AP News
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Posted: Dec 07, 2015 6:28 PM

Sometime soon, perhaps in the next few days, a judge in New York is expected to issue an opinion that may go a long way in determining the future of the daily fantasy industry.

Justice Manuel Mendez could hand a lump of coal to FanDuel and DraftKings if he orders the two sites to stop operating in New York because they violate state gambling laws.

Or he could provide a gift that keeps on giving, a blessing that the nascent industry can take from state to state as proof of its legitimacy.

Either way, daily fantasy has an issue.

An industry that sprang out of nowhere might find itself back there nearly as quick if Mendez rules FanDuel and DraftKings are nothing but gambling sites trying to hide behind an exemption in a 2006 federal anti-gambling law. The ruling likely would serve as a precedent for even more states — eight currently use the same language about gambling as New York — to ban the online play as gambling.

But if he rules in favor of the companies they have a different problem. They must convince millions of potential customers they really do have a legitimate chance of winning their contests.

At issue is whether skill trumps chance in daily fantasy. Mendez won't have the final ruling — his will be appealed either way — but the sites could be banned from doing business in New York in the meantime.

That would be the worst case scenario for the companies, which insist they are not gambling sites. Since most states haven't specifically addressed the issue, whatever happens in New York could serve as at template for other states.

FanDuel and DraftKings also would face pressure to disassociate themselves from the professional leagues they have gotten quite cozy with. That includes baseball, which would have to reconcile any legal ruling with Commissioner Rob Manfred's statement last month that he does not consider daily fantasy play to be gambling.

New York Attorney General Eric Schneiderman certainly does, and he doesn't stop there. In moving to stop daily fantasy sites from operating in New York, he called DraftKings and FanDuel "leaders of a massive, multibillion-dollar scheme to evade the law and fleece sports fans across the country."

Hard to imagine that just a few months ago, the sites were spending millions of dollars on ubiquitous TV ads promising to make players millionaires. Now they're investing the money they've gotten from investment funds and pro leagues into lawyers in a fight for their very survival.

But what if the sites are successful in pressing their argument that skill, not chance, determines who wins the contests that weekly offer up to $1 million for winners? How do they keep drawing in customers, when that argument flies in the face of commercials that show average Joes winning shiploads of money?

"It's a double-edged sword," said Marc Edelman, a law professor at Baruch College's Zicklin School of Business who consults on sports-related legal issues. "From a legal perspective they need to show these are truly skill games and not chance. From a marketing perspective, though, some of these contests want to give the perception that any entrant has a realistic chance of winning."

That's not true in the daily fantasy world, of course, something thousands of would-be millionaires have found out. The average fan is up against sophisticated players who use computer algorithms and flood contests with multiple entries to increase their chances of winning.

One big player is so good he won not one, but two, million dollar prizes this year, a statistically improbable outcome in contests where he was facing tens of thousands of other players.

DraftKings and FanDuel flood the sports market with their ads for a reason. There's so much churn in daily fantasy — a high percentage of players leave after going through their first bankroll — that they must continually sign up new customers to pay for the big winners.

Right now, the two companies desperately crave a win in New York. Their long-term survival depends on states either leaving them alone or regulating them so lightly they can go on doing business as usual.

But if potential new customers believe the odds are stacked against them, one day there may not be enough rubes left to make it worthwhile.

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Tim Dahlberg is a national sports columnist for The Associated Press. Write to him at tdahlberg@ap.org or http://twitter.com/timdahlberg