Fraud, consumer protection, oversight: Those are words associated these past few weeks with the industry of daily fantasy sports. That’s where companies like DraftKings in Boston help people make up rosters of pro sports players, and compete for cash against other fantasy sports players.
But there are two words that are more important to the industry. They’re at the heart of the legal test that will determine how the industry is regulated going forward: skill and chance. That's something that golfers and pinball players know a little bit about.
A Million-Dollar Swing
At Turner Hill Country Club in Ipswich last summer, golfer Jimmy Duncan stepped up to the tee. For winning the charity golf-a-thon that day, he got to play one more hole. If he hit a hole-in-one, 165 yards away, he’d walk away with a $1 million prize. Duncan took a practice swing, and then squared up for his fateful shot.
He missed it, most people do obviously, but if he’d won, he would have been $1 million richer — in Massachusetts. But that same feat in another state could put him and the leaders of the charity behind bars for gambling.
"That question is going to vary based upon the jurisdiction in which you’re in," says Marc Edelman, a lawyer at the Zicklin School of Business in New York City.
He says some states see a hole-in-one contest the way Massachusetts does. "Because you are an actual participant, it would be treated as a game of skill."
But other states say a hole-in-one has less to do with the golfer and more to do with a lucky bounce or a fortuitous gust of wind.
"Also, because the chance of hitting a hole-in-one on any single hole is such a remote item in itself, that could lead some to say even the most skilled player can’t do it with regularity, it would be the random event where it would take place," Edelman says.
That could be seen almost as random as picking the right number in roulette. In other words, a game of chance. So it’s not a coincidence that if you look at the handful of states in which the Boston-based company DraftKings does not operate, it happens to be those very same states that see a hole-in-one competition as a game of chance. Although, company CEO Jason Robins says he considers the fantasy sports contests on his site a far cry from being akin to gambling.
"We’re not the house. We’re just facilitating games between other people," Robins says. "So there’s not a need for us to design a product where there’s a significant element of chance. We can make it so that, much like a chess competition, if you’re a better chess player, you’re going to win most of the time."
Chess is often given as an example of a game of skill. It all comes down to player decisions. There’s no roll of the dice, no random drawing of cards. Although, there’s still an element of a randomness, since chess players draw to see who makes the first move.
Daily fantasy sports companies like to cite a recent study from the consulting firm McKinsey that suggests there is skill involved in winning their contests. It found that 91 percent of net winnings in daily fantasy baseball contests earlier this year were won by just 1.3 percent of the players.
The Storied History Of Pinball
Even so, there’s a continuum between skill and chance, and some experts say the daily fantasy sports industry could learn something from the pinball industry.
In the 1930s and '40s, to many people, pinball machines were seen as dangerous as slot machines. From New York to San Francisco, cities banned pinball machines, saying they were stealing the milk money of America’s youth and turning them into addicts. It didn’t help that many of the manufacturers were based in Chicago, a la Al Capone.
Back then, the pinball machines that New York City Mayor Fiorello La Guardia smashed with sledgehammers were more like those slot machines he tossed into Long Island Sound. With pinball, you just pulled the knob and let the ball go. It was mostly chance. But pinball made a comeback into the American consciousness by adding flippers.
Putting those buttons on each side to control flippers slid the game away from chance, and more toward skill. In the '60s and '70s, enthusiasts dragged pinball machines into courtrooms and city council chambers to demonstrate the skill involved in racking up high scores. And by doing so, they got anti-pinball laws off the books.
The daily fantasy sports industry is facing a similar test today. Florida sports attorney Daniel Wallach says at least 20 states allow online contests for prizes if they’re predominantly skill-based — in other words: less than half based on chance.
"So in those states like Massachusetts, which follow the predominant purpose test, daily fantasy sports is almost inarguably purely legal and would not be subject to any challenges. But in the rest of the country we have a fair amount of murkiness and unsettled law," Wallach says.
Wallach says some states consider contests gambling if there’s even a small bit of chance. Others say if it looks like gambling, it is gambling. It’s why Edelman says DraftKings could learn something from the table kings, and introduce more pinball flippers into online fantasy sports contests.
"The more players a contestant has to select, the greater the element of skill would be," Edelman says. "Furthermore, the ability to change players, interact, negotiate, make trades, all would play into the elements that would be deemed to be skill."
Edelman says the more that daily fantasy sports companies like DraftKings can show that their winners have won on skill, the less chance there is that prosecutors and judges and juries will tilt contest servers into Boston Harbor.