DraftKings, Airbnb exploit loopholes to cash in

DraftKings and rivals like FanDuel operate under a loophole in a 2006 federal law.Erik Jacobs/The New York Times

These are boom times for Internet companies running businesses that arguably, ostensibly, kinda-sorta pass muster with the law. For a website that still has to reassure people that it’s “100 percent legal,” Boston-based DraftKings found big-name investors and marketing partners pretty quickly.

Sure, Massachusetts Attorney General Maura Healey and her New York counterpart, Eric Schneiderman, are poking around the daily fantasy sports industry. And on Wednesday, The Wall Street Journal reported that agents from the FBI's Boston office had been contacting DraftKings customers to ask about their experiences. But in essence, investors are short-selling current regulatory structures — that is, betting that when government runs up against the nimbleness and ingenuity of new startups, it's government that will back off.

Launched in 2012, the Boston-based fantasy sports site has millions of registered users, an estimated value over $1 billion, and major ad deals with Fox Sports and, until recently, ESPN. Among its funders are Major League Baseball, the National Hockey League, Madison Square Garden, and the Kraft Group. DraftKings offers big cash prizes, which can reach seven figures, to users who do the best job of picking which real-life pro athletes will perform best over a short period.

Never mind that online sports betting is largely banned in the United States. DraftKings and rivals like FanDuel operate under a loophole in a 2006 federal law that was designed to preserve season-long fantasy baseball and football leagues — and was enacted before the speeded-up model of so-called daily fantasy sports ever existed. Still, consumer skepticism is only natural. Hence the "Why It Is Legal" page on the DraftKings website, which seeks to convince incredulous sports fans that the company isn't some dodgy offshore Internet gambling outlet.

In an expanding economy of barely legal businesses, DraftKings isn't the only company staying just on the right side of poorly crafted laws. By describing themselves as mere communications platforms for people who want to rent out their spare bedrooms or the passenger seats in their cars, companies like Airbnb and Uber have sidestepped onerous municipal rules that govern short-term lodging and taxicab services.

The flood of private investment into such firms suggests that murky legal status has become no big deal.

Entrepreneurs, by temperament, aren't easily dissuaded. "The idea of pushing the envelope and getting close to the edge is not new," says Sydney Finkelstein, a professor at the Tuck School of Business at Dartmouth College. He cites fracking and complex financial products as just two of the businesses that emerged with little or no government oversight. "Regulators have always been playing catch-up," he adds.

He also notes that "the digitalization of the world" multiplies the potential number of insurgent business models.

Had DraftKings built a bricks-and-mortar gambling hall in downtown Boston, a number of government agencies would have stepped in long before it drew its millionth customer. Thanks to the Internet, entrepreneurs' head start over regulators is widening, and a massive fan base may protect daily fantasy sports from any serious legal reversal. "It would cause such a public outcry," DraftKings CEO Jason Robins told The Washington Post last winter, "I just don't see how it would happen."

The battles over Uber and Airbnb have created hard feelings among local regulators, who bristle at newfangled companies that work around the rules instead of seeking permission through the usual political process. Yet the more glacial the pace of that process — and the more influence that competition-averse cab companies or hotels or casinos exercise over it — the more irrelevant it becomes.

Conversely, the sooner regulators explicitly bless today's barely legal companies, the sooner government can enlist their help in fulfilling legitimate public goals: consumer protection, the health and safety of tourists, the prevention and treatment of compulsive gambling, the collection of revenues for broader social needs.

Nothing, it turns out, exposes cracks in the law like a startup built to exploit them. To believers in prudent regulation — a time-honored stance in Massachusetts — the intense pressure coming from well-financed private enterprises is something out of a libertarian dystopia. Sometimes, though, the democratic process benefits from a kick start. The rise of DraftKings could be an occasion to reassess which online gambling laws work and which do not.

The growing respectability of the barely legal economy holds a lesson for government at all levels: If you don't update your laws for changing times, somebody else will.