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It’s legal to bet on daily-fantasy-sports leagues because of a law passed in 2006 that some consider to be a loophole in the current system.
Called the “Unlawful Internet Gambling Enforcement Act,” it basically classifies daily-fantasy-sports leagues as a “game of skill,” and not a “game of chance” – hence allowing users to bet money on their teams made up of real-life players, and their actual game performances.
Now, data from this McKinsey article seems to bolster the argument that it’s all about skill.
“Daily Fantasy Sports (DFS) affords a huge advantage to skilled players. In the first half of the 2015 Major League Baseball (MLB) season, 91 percent of DFS players profits were won by just 1.3 percent of players,” the report said.
As seen in the chart below, the top 11 players (“Sharks”) made a profit of $135,000 each on an average entry fee of $2 million. The rest of the top 1.3% winners made a profit of $2,400 each on $9,100 entry fees, which translates to an impressive 27% return rate.
The report cites this as a potential threat to investors. “Investors are overlooking a fundamental operating challenge: the risk that the skill element of daily fantasy is so high that DFS pros will wipe out recreational players in short order.”
Daily-fantasy-sports leagues have been drawing huge attention from investors lately. FanDuel and DraftKings, two of the largest DFS sites, are valued at roughly $1.3 billion and $1.2 billion, respectively.
But there are growing concerns over the lack of oversight and stronger regulation in this space. Just recently, a DraftKings employee accidentally released information about that week’s betting trends early, before the start of games that weekend. That same person won $350,000 playing at rival site FanDuel that week. Overall, DraftKings employees have made $6 million betting on FanDuel, according to a report by ESPN.
It’s unclear how the recent controversy will impact the game’s classification as a game of skill. Regardless, in a recent interview with Fortune, FanDuel CEO Nigel Eccles reiterated the notion of DFS leagues being a game of skill, stressing they’re different from other traditional gambling activities, like horse racing:
…[betting on horse racing] wouldn’t be skill-predominant. If you were really good, you still are going to lose like half the time. Chance is still more important than skill. And a lot of states have specific laws that horse-racing is gambling.
We’re very similar to, say, a golf tournament or a spelling bee or a road race. There’s an entry fee and if you win it, there’s a prize. It’s not gambling because it’s the skill of an athlete that determines the winner. We can show with FanDuel that the high-skill players will win predominantly. Second, our games are considered contests between players, rather than betting against the house.