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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 MGM.N and Boyd Gaming Corp
BYD.N , as well as sports book companies such as William Hill
Plc WMH.L , 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 DIS.N 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 KKR.N and
included Google (NASDAQ:GOOGL) Capital and the venture arms of Time Warner Inc (NYSE:TWX)
TWX.N and Comcast Corp CMCSA.O .
"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 AYA.TO , 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.