Business

Evan Horowitz

Time may be running out for DraftKings, FanDuel

DraftKings promotional tent in Gillette Stadium parking lot

AP

Workers set up a DraftKings promotion tent in the parking lot of Gillette Stadium in October.

In New York, fantasy sports betting is now considered a form of illegal gambling. Cross the border into Massachusetts, however, and you’re still free to risk your money on a fantasy team.

In a statement this week, Massachusetts Attorney General Maura Healey chalked it up to legal differences. But in fact the two states have very similar standards for what counts as gambling, and it basically boils down to this: You can risk money on games of skill, not games of chance.

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So the fate of fantasy sports may hinge on how much skill it takes to win.

How does fantasy betting actually work?

Let’s say you want to join one of these fantasy football leagues. You start by visiting its online site, getting an account, and adding some money to the weekly pot, sometimes as little as a few dollars.

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At that point, you’re given a budget and the opportunity to pick players for your personal team. On the most popular fantasy site, DraftKings, you get a fictional budget of $50,000 to choose nine team members — eight individuals, and one team’s defense/special teams. Selecting a superstar like Tom Brady will cost you a big chunk of your budget, whereas a promising outsider will cost far less.

When your lineup is set, you wait for the weekend and watch to see how your players perform. Their triumphs bring you points, but their blunders take them away. Again using DraftKings as an example, a punt returned for a touchdown is awarded six points, and a lost fumble loses one point. At the end of the week, if your lineup racks up more points than the other fantasy teams in your pool, you get a share of the winnings — which can be hundreds of thousands or even millions of dollars.

Over the last few years, there’s been an explosion in fantasy betting — and in advertising. Today, it’s a multibillion-dollar industry, with some 50 million participants.

Why is fantasy betting legal?

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There’s no blanket prohibition against gambling. Sometimes it’s OK to make bets, other times it’s not.

Take the Massachusetts lottery, for instance. That’s a form of gambling, but it’s sanctioned by state law. Same goes for casino gambling. For a long time, casinos were illegal in Massachusetts. Then in 2011, a new law was passed, initiating a process (still ongoing) to authorized up to three casinos and a slots parlor.

The real question for fantasy sports, then, isn’t whether it’s innately legal or illegal. It’s about how Massachusetts, and other states, choose to treat it.

How do states decide whether betting is legal or illegal?

Precise rules vary among states, but often it’s about the relation between luck and skill. Games of luck are generally prohibited. Games of luck generally need explicit government approval. Games of skill are given more latitude.

A handful of states have already said that fantasy sports games meet the definition of gambling, which means they can’t go forward without some express approval from the state. New York and Nevada are the latest to do so.

To beat back these and other legal challenges from states, then, purveyors of fantasy sports may have to show that their games depend on real skill.

Do fantasy sports games require skill?

New York says no. In his letter to FanDuel and DraftKings, the state’s attorney general emphasized that their games are basically a “contest of chance.”

Massachusetts has yet to officially weigh in, but an analysis from the Public Health Advocacy Institute at Northeastern’s School of Law reached the same conclusion, namely that fantasy betting is essentially a lottery based on chance, and therefore illegal in Massachusetts.

At the same time, the Public Health Advocacy Institute also noted that 90 percent of the winnings in fantasy betting go to roughly one percent of the players. And that itself is a reason to think there’s some real skill involved.

The very fact that winnings are concentrated, in other words, suggests that some people are especially good at fantasy sports, not just lucky.

Granted, what makes them good may have little to do with football — it’s more about algorithms, game theory, and statistics — but it’s a skill nonetheless.

Does the federal government have a say?

The federal government has its own gambling statutes. And one reason high-profile sites like FanDuel and DraftKings have operated so brazenly, advertising their games on TV and taking bets in the open, is because they felt their activities were protected by a carve-out in federal law that officially sanctions fantasy sports betting, provided people bet on the performance of individual players rather than the outcome of games.

But states are free to setup additional regulations on what kinds of gambling takes place inside their own borders. And that’s what various states seem to be doing.

What’s the future of fantasy sports betting?

A month ago, the future looked bright. Investors were pumping in money, professional sports leagues were embracing partnerships, and users were signing up in droves.

Swiftly, though, a cloud of legal uncertainty descended, and then darkened.

New York’s decision to ban the practice may count as the first lightning-strike, depriving the big fantasy sports operations of what was their biggest state market.

Still, it is possible the storm will pass, and a new calm arrives in the form of what you might call the Massachusetts approach, where leaders look to regulate, rather than ban, the practice.

What seems especially unlikely, though, is any return to the heady days of last summer, when fantasy sports betting was largely free of regulation, even as it flaunted its wares on TV.

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the US. He can be reached at evan.horowitz@globe.com. Follow him on Twitter @GlobeHorowitz
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