Fantasy Sports Scrutinized Even As Advertising Continues at a Brisk Pace

Nevada Says Companies Must Stop Play, Seek Licenses

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Fantasy sports companies like Fan Duel are coming under scrutiny.
Fantasy sports companies like Fan Duel are coming under scrutiny. Credit: FanDuel

Fantasy sports companies are coming under scrutiny, even as they continue to pump millions of dollars into advertising.

FanDuel ranks 2nd on iSpot.tv's Spend Rank, which estimates TV spend over the past 30 days, with 13,992 national airings. DraftKings ranks 7th with 11,584 national airings. According to iSpot.tv estimates, DraftKings and FanDuel together funneled $107 million into the networks' coffers in the month of September alone. Nearly half ($50.3 million) of that outlay was spent on national NFL broadcasts on CBS, Fox, NBC, ESPN and NFL Network.

Daily fantasy sports pools, including those offered by FanDuel Inc. and DraftKings Inc., are gambling and need to be licensed if they want to do business in Nevada, the state's Gaming Control Board said Thursday.

Until the companies are licensed, they can't legally accept payments from Nevada customers, according to A.G. Burnett, chairman of the control board, which regulates betting in the state with the largest casino industry.

The industry is under scrutiny by legislators, regulators and law enforcement and has been outlawed by five states. With Thursday's announcement, Nevada is the first to stake out a middle ground between a free-for-all and a total ban. Still, its decision opens daily fantasy sports companies to liability and enforcement action if they defy the demand. It means additional costs for them if they pursue licensing.

The U.S. Justice Department and FBI are also probing whether daily fantasy sports businesses violate federal law, the Wall Street Journal reported Thursday, citing people familiar with the matter. On Tuesday, two legislators from New Jersey, where traditional casino gambling has been in decline for years, have called for new regulations.

"Maybe we need to start treating online fantasy sports gaming like traditional sports betting, which has safeguards in place to protect the player," U.S. Senator Robert Menendez, a Democrat, said at a press conference outside of MetLife Stadium.

Nevada's board has been looking at the legality of pay-to- play fantasy sports for several months, according to a statement, and is ordering them to cease and desist in the state. The state's licensed casinos have expressed frustration at the unregulated growth of daily fantasy sports, in particular the industry's claims that it's not gambling.

"The casino gaming industry has repeatedly called for greater legal clarity on daily fantasy sports," the American Gaming Association, a trade group for casinos, said in a statement. "We appreciate that the Nevada Gaming Control Board has provided that clarity as well as a roadmap for DFS companies and casinos to provide popular fantasy sports within Nevada borders."

The daily fantasy sports companies can apply for a license or "just go dark in Nevada," Mr. Burnett said in a telephone interview. The licensing process requires that an application be filed and background investigations conducted, a process that could take six months, he said.

DraftKings and FanDuel said they would temporarily stop offering their services in the state.

"We strongly disagree with this decision and will work diligently to ensure Nevadans have the right to participate in what we strongly believe is legal entertainment that millions of Americans enjoy," DraftKings said in an e-mailed statement.

FanDuel said it was "examining all options and will exhaust all efforts" to resume operations there.

Fantasy sports have exploded in popularity in recent years, in large part due to the promotion of DraftKings and FanDuel, which have raised hundreds of millions of dollars from investors such as KKR & Co., Time Warner Inc. and Major League Baseball.

The sites charge anywhere from 25 cents to $1,000 to customers who pick teams of players. Customers can win millions of dollars based on the performance of their picks.

Last week, a scandal roiled the industry when DraftKings acknowledged that an employee who had access to confidential customer information won $350,000 on FanDuel, raising concerns about possible cheating in the industry.

The Unlawful Internet Gambling Enforcement Act of 2006 explicitly says that fantasy sports games don't count as betting so long as they have a few key attributes, such as set prize pools, skill-based contests, and not relying on the outcome of any single sports events. FanDuel and DraftKings interpret this as an exemption from gambling laws and designed their games to adhere to this definition of fantasy sports.

--Bloomberg News with additional reporting by Ad Age

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