The fantasy sports industry has seen exponential growth in the number of participants, revenue and value in just the past couple of years. FanDuel and DraftKings are the top fantasy contest providers, but these behemoths are only two of 125 contest operators of both season-long and daily fantasy sports contests. With a Congressional hearing set for May 11, and legislation pending in over 30 states, regulation of the fantasy sports industry poses special challenges to small- and medium-sized contest operators who do not have the profit margins of FanDuel and DraftKings. In addition to paying state registration or licensing fees that could be as high as $50,000, smaller fantasy sports operators must increase spending on technology to ensure compliance with newly-enacted laws.
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Whether or not lawmakers consider fantasy sports to be gambling will determine how products are designed in the future. Fantasy sports contest operators assert that gambling differs from fantasy sports for several reasons, but most importantly because fantasy sports leagues are a game of skill that requires knowledge and strategy to win. In contrast, gambling and traditional sports betting allows people to win by chance rather than skill. Plus, it allows for betting on a single game with only one outcome.
Stacie Stern, General Manager of Head2Head Sports, says that the structure of fantasy sports contests and the algorithms behind it requires participants to build teams using no less than three players from any one professional team. Further, winning is based upon the outcome of multiple sporting events instead of one game. Even though the fantasy sports industry takes the position that fantasy sports is not gambling, each state could classify fantasy sports differently. This will create systemic design challenges.
Which changes to implement also pose a challenge. State laws will vary, creating a patchwork of diverse rules to comply with. Initially, the most difficult problems to solve include how to determine the location and age of each participant. The location of a participant will determine whether or not he or she can lawfully participate in a contest and it will determine what rules, including age requirements, will apply to each participant. This is a daunting task.
Jon Revie, Director of Technology for Head2Head Sports, says that the new regulations introduce “speed bumps” that require geofencing technology to define geographical boundaries. These geographical boundaries indicate which state a participant is in. The contest operator can then provide state-specific information, options and restrictions to participants.
Further complicating matters, some state laws require that participants be 21 years old or older. Some of these regulations are vague. Contest operators are unsure of how to implement features that may determine the age of participants. Even if the laws were clear, developers are challenged to create ways to verify the age of participants with accuracy.
As a result of these regulations alone, contest providers must customize the whole process of participating in fantasy sports. That is a big investment to ensure compliance and maintain cohesiveness – not just in online contests, but also in all of an operator’s mobile apps.
Another challenge is modifying websites and mobile apps in time to comply with laws when they become effective. In some states there may be only 90 days between the date of enactment to the date the law goes into effect. Contest operators must comply with each state’s requirements by the effective date. However, once enacted, some laws may be repealed or revised in the coming months so that developers must again modify online contests to comply. The tasks of tracking, re-writing code and updating fantasy sports products so they comply with different regulations in different states effective on different dates are a major undertaking no matter how simplified or efficient this process is.
One bit of good news is that fantasy sports operators are trying to attract the best developers to keep up with the ongoing changes in the industry. As the legal landscape evolves and as technology increasingly expands in capability, the way the contests are designed and the products offered will change. Statistics are already an imperative part of fantasy sports. And for high stakes-contests, participants want the most granular data available. As a result, new data types and data sets, including biometric data collected from athletes, will become a hot commodity. Innovative developers will be needed to evolve the products as fantasy sports continue to grow.
The bottom line is that regulatory challenges in the fantasy sports industry have many ramifications, including increasing innovation and the cost of implementing technology to create compliant products. Changes in state laws will drive innovation but it remains to be seen whether the majority of fantasy sports operators will be able to cover the costs of compliance. In order to survive, smaller fantasy sports operators are modifying their contests and hope that they are not pushed out of the market by state-created duopolies that favor the larger fantasy sports operators who can pay high license fees and taxes as well as fund the technological requirements to create compliant contests.
Kristy comes from a corporate background having been a member of in-house legal teams in a variety of industries including tech, big data, financial services, and pharmaceuticals. Her experience in the intellectual property, transactional, regulatory and other corporate practice areas gives her a unique perspective and ability to identify legal issues and real-world solutions that satisfy the business and legal teams. Kristy focuses her efforts on sports tech law issues that arise where sports, tech, business and the law intersect, consulting for all sports industry players who utilize tech. Kristy received her LL.M. in Sports Law and Business from Sandra Day O’Connor College of Law and her J.D. from Arizona Summit Law School. Kristy, based in Phoenix, enjoys all sports (but is partial to basketball and football), is an avid hiker, and loves jumping out of airplanes and other adventures.