August 3, 2015 / 11:02 AM / 2 years ago

RPT - INSIGHT-Daily fantasy sports land in gambling industry crosshairs

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By Liana B. Baker

NEW YORK, Aug 3 (Reuters) - Mike Petta played Internet poker until 2011, when most U.S. poker websites were shut down. Last year, the 31-year-old father of two quit his job as an accountant to play fantasy sports full time, spending thousands of dollars a night entering fantasy sports contests. Now, the gambling industry wants him back.

Playing from home in Livonia, Michigan, Petta is one of millions of Americans who draft virtual sports teams online and enter real-money competitions that last only a few hours. Investors have followed suit, making daily fantasy sports a multi-billion-dollar business.

The two fantasy sports startups which lead the industry, FanDuel and DraftKings, have both raised hundreds of millions of dollars in funding in the past few weeks, scoring valuations of about $1 billion each.

That's sparked some frustration at major gaming companies such as MGM Resorts International and Boyd Gaming Corp , as well as sports book companies such as William Hill Plc, which have told Reuters they want to see daily fantasy sports regulated like gambling.

"I make my living in the gambling industry, so I'm hardly opposed to gambling," said Joe Asher, CEO of William Hill US. "I think daily fantasy sports betting should be legal, just like I think traditional sports betting should be legal. But let's not pretend one is OK and the other is not. Drawing some artificial line between the two makes no sense as a matter of law or policy."

Daily fantasy sports companies now operate in at least 45 U.S. states, though some are mulling reviews on whether the activity should be treated as gambling rather than games of skill. Nevada's Gaming Control Board, the regulatory body that oversees gambling in the state, has started to analyze the legality of daily fantasy sports.

Companies that offer traditional sports betting, legal to some degree in only four states, are heavily regulated by gaming boards, need to follow anti-money laundering guidelines, follow strict rules on protecting player funds and pay special gaming taxes.

Proponents of the daily fantasy sports industry say that the Federal Unlawful Internet Gambling Enforcement Act of 2006, a law meant to crack down on online poker, included a carve-out that exempted fantasy sports.

DraftKings' website says it is "100 percent legal." FanDuel's website says it takes "the legal status of the games it offers very seriously and does its utmost to ensure compliance with existing state and federal laws."

Lobbyists for the industry claim that anyone who has participated in FanDuel or DraftKings games would agree that, unlike gambling, a fantasy player has a major effect on the outcome through their knowledge and effort.

"They're not like games of chance, where no matter how skillful the player is, winning or losing almost always comes down to luck - whether it's the spin of a wheel, the roll of the dice, or the turn of the cards," said Jeremy Kudon, a partner at the law firm Orrick and lobbyist for the Fantasy Sports Trade Association.

Coveted Demographic

Modern fantasy sports started in 1980 when a few avid baseball fans starting drafting teams at a New York City restaurant called La Rotisserie Francaise. Since then, they have mushroomed online with participants typically creating teams that span an entire season, in major sports including baseball, basketball and hockey.

Daily fantasy sports, where players draft teams in games played in just one evening, developed in the past few years. This has allowed fans to bet with a frequency that some critics argue is akin to sports betting or gambling.

"When you start offering daily fantasy contests, then you start to blur the line between skill and chance," said AG Burnett, chairman of the Nevada Gaming Control Board, who is leading a review of daily fantasy sports. "When chance begins to govern the outcome more than skill, you have a form of gaming, and that's when the need for regulation kicks in."

FanDuel and DraftKings said in a joint statement for this story that they "are speaking with gaming industry representatives to educate them on the fantasy sports industry as our products are fundamentally separate from, and not competitive with casinos and gaming businesses."

Petta, who bets between $20,000 and $40,000 each night in 500 games he enters, sees it as a skill-based job. He does his research in the morning, poring over player stats and planning his nightly lineup. He then takes a break to look after his children, 1 and 3, and finalizes his virtual team before the games start in the evening.

"I know there is a lot of debate, with some people considering it gambling. But I can tell you there is a skill set, there is a strategy where you can get an edge or an angle and make this profitable," Petta said.

Petta is an outlier in terms of the time and money he spends - and earns, in the six figures. Most participants bet less than $100 per week on fantasy sports, and about 70 percent of them fail to win money regularly, according to a survey by research firm Eilers Research LLC published last month.

Yet Petta belongs to a demographic that the gambling industry, weary of retirees playing penny slots, is hungry for. A staggering 98 percent of daily fantasy sports players are male, according to Eilers. More than 90 percent of them are white. Fifty-one percent are between the ages of 25 and 35, and 59 percent have an average household income of $75,000 or greater.

Lobbying

Regulating fantasy sports like gambling could help casino companies enter the market, and it could also give them an edge since they have experience dealing with gambling licenses and regulation.

Daily fantasy sports companies are now looking to protect their home turf. Kudon, the industry lobbyist, said he has met with lawmakers in a dozen states over the past six months, and helped pass a bill in Kansas in May that confirmed that fantasy sports are legal in that state. But there is a risk that some states will eventually decide to treat them as traditional sports betting, shrinking what has been a growing market.

So far, there has not been much lobbying from the gambling industry to restrict daily fantasy sports, mainly because the main trade group, the American Gaming Association, has formed a task force to study the issue but has yet to decide what its stance on it will be. Nevertheless, this has not stopped some gaming companies from speaking out, with some calling daily fantasy sports unlawful.

"It is not in the interests of consumers that established gaming companies, which are fully licensed and regulated, are the only market participants that cannot engage in the business," said MGM International's general counsel John McManus. "MGM Resorts International would like to see daily fantasy sports made legal and properly regulated, similar to our position on all forms of gambling."

Nevada's Burnett said he did not believe the Federal Unlawful Internet Gambling Enforcement Act legalizes daily fantasy sports, but did not ban them either, and that their legality was up to individual states.

"I don't have an opinion yet (on the legality)... The issue is not whether skill is present. It is whether the skill of the players determines the outcome of the game they are playing," Burnett said.

The controversy has succeeded in making some investors reluctant to back fantasy sports companies. ESPN, a unit of Walt Disney Co's was close to investing in DraftKings earlier this year but then passed. DraftKings CEO has said that the "adult product" did not fit with parent company's brand, but DraftKings did reach an agreement to advertise on ESPN's properties.

Amaya Joins in

High-profile investors have poured money into both industry leaders. In DraftKings' $300 million investment round announced July 26, the funding was led by Fox Sports and also included Major League Baseball, the National Hockey League, the Madison Square Garden Company, the Raine Group and Wellington Management. FanDuel's $275 million funding round, announced July 14, was led by private equity firm KKR & Co LP and included Google Capital and the venture arms of Time Warner Inc and Comcast Corp.

"Once the sports leagues and media companies became involved, it sent a signal to both entrepreneurs and investors alike that this industry was only going to continue to grow," said Stephen Murphy, CEO of Boom Shakalaka, a new fantasy sports company founded out of Stanford's Graduate School of Business.

Some of the traditional players are now getting in on the action. Amaya Inc, which acquired online poker company PokerStars last year, has said it plans to come out with a daily fantasy sports product this year.

Even if some casinos keep out of daily fantasy sports, Petta claims they are not competing for his attention against FanDuel and DraftKings. "It does not change how often I go to the casino, I enjoy gambling every so often. My wife and I go on a Friday night when we have a babysitter," Petta said.

Reporting by Liana B. Baker in New York; Editing by Greg Roumeliotis and John Pickering

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