COVER STORY

BY JACK I. TADMAN AND NIC SULSKY

Daily Fantasy Sports Contests: Opportunities in the Canadian Market Fantasy sports contests have become a mainstream social activity and an integral part of North American sports culture. It is estimated that, in 2015, there were 56.8 million players who spent nearly $26.5 billion dollars (USD) on entry fees and materials related to fantasy sports.1

Two major developments in the as a member of the media and his (UIGEA). The passing of UIGEA (brief) history of fantasy sports have relationships with sports journalists, not only led to prominent online been instrumental in shaping the fantasy sports contests received, for betting and gaming operators exiting current fantasy sports landscape. The the first time, mainstream media the United States, but also exempted first development was the formation exposure and the popularity of fantasy sports contests from the of Rotisserie League in 1980 fantasy sports contests increased definition of “bet or wager,” provided by magazine writer Daniel Okrent. significantly. that fantasy sports contest operators Rotisserie League Baseball was The second major development complied with certain rules.2 not the first fantasy sports contest, was the passing of the Unlawful This apparent clarification by but because of Okrent’s position Internet Gambling Enforcement Act United States lawmakers of the legal

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status of fantasy sports contests appears to be currently profitable. this means that none of the offences has led to a proliferation of fantasy For example, in the fourth quarter relating to an unlawful “game” apply sports contest offerings, including of 2014, DraftKings and FanDuel to a game of skill alone. the fantasy sports contest offering generated just over $81 million “Bet,” is defined in the Code to known as a dollars of cumulative revenue, yet mean “a bet that is placed on any (DFS) contest. Instead of a fantasy their collective marketing spend was contingency or event that is to sports contest lasting the length of well over $100 million dollars. take place in or out of Canada, and the sports season, which was how DraftKings and FanDuel, which without restricting the generality of fantasy sports contests had typically operate using a business-to- the foregoing, includes a bet that is been run, DFS contests generally last consumer (B2C) model, generate placed on any contingency relating to for one day. approximately 96+% of the revenues a horse-race, fight, match or sporting DFS contests started to become in the DFS space. The remaining 4% event that is to take place in or out of popular in late 2008 when Fanball. is generated by other DFS operators, Canada.” com launched the game “Snapdraft.” meaning that gaming companies, As of the date of this article, DFS began gaining momentum including provincial lottery DraftKings and FanDuel offer in 2012 and experienced a major corporations, have had almost no DFS contests to players located in increase in participants in September impact in terms of generating revenue Canada. DFS operators claim that 2014 (coinciding with the beginning from DFS.5 Perhaps the reluctance of DFS contests are games of skill. As of the 2014 NFL season). North American gaming operators games of skill, DFS contests would In addition to a major increase in to enter the North American DFS not be subject to the gaming and the number of participants playing market is related to the lack of a clear betting provisions of the Code, and DFS contests, average spending by legal precedent stating that DFS is would not have to be conducted and participants in DFS contests has legal. managed by the provincial lottery increased from an average of $5 per It is difficult for a new operator corporations. person in 2012 to $257 per person in to enter the DFS space because of There has not been a definitive 2015.3 the importance of having liquidity pronouncement from a Canadian DFS contest operators have and large prize pools to generate court regarding the legality of fantasy experienced a major increase with interest from existing and potential sports. Accordingly, whether DFS respect to investments. DraftKings customers. A major obstacle facing contests are considered bets, games and FanDuel, the two largest DFS North American gaming operators of chance, games of mixed chance contest operators, raised a combined is that no DFS platforms or models and skill, or games of skill, is not $111 million dollars in the third currently exist that would allow settled law. Daily Fantasy Sports Contests: quarter of 2014. FanDuel raised operators to protect their databases, If a B2B DFS operator were another $275 million dollars in the provide a base liquidity for operators interested in marketing its product third quarter of 2015 and DraftKings to hit the ground running, and cater to existing Canadian gaming and announced a $250 million dollar to operators’ ability to integrate their betting operators, the provincial raise with Disney that converted own brand power and loyalty into the lottery corporations would be the into a marketing arrangement. operator’s DFS offering. Therefore, obvious customers. If DFS contests DraftKings has raised an additional in our view, an opportunity exists for were considered gaming or betting, $300 million dollars of funding in a company to monetize a business-to- the B2B DFS operator would have the third quarter of 2015.4 business (B2B) model that caters to to structure the DFS contest so that As venture capital investments North American gaming operators. it complies with the conduct and have increased, so has the amount In Canada, provincial lottery manage obligations under the Code. of money DraftKings and FanDuel corporations are the entities Essentially, the B2B DFS operator have spent on marketing, estimated responsible for conducting and would supply the B2B solution to the to be in the hundreds of millions of managing all “gaming” and “betting” provincial lottery corporation and dollars. in Canada. the provincial lottery corporation Despite the billion dollar “Game,” is defined in the Canadian would have to be the guiding mind valuations of DraftKings and Criminal Code6 (the Code) to mean of the player-facing DFS operation. FanDuel, and hundreds of millions “a game of chance or a game of mixed If DFS contests are considered of dollars of investments, neither chance and skill.” By implication, a game of skill and therefore not

FALL 2015 | 7 COVER STORY

gaming or betting, a B2B operator would be free to enter are considered games of skill will colour the types of into an agreement with a provincial lottery corporation agreements in which provincial lottery corporations are and would not be subject to any requirements under the able to enter. The provincial lottery corporation would be Code or private entities. best served by a B2B solution that would allow provincial The DFS industry is in its relative infancy; of the 56.8 lottery corporations to protect their databases, provide million fantasy sports contest participants in North a base liquidity to hit the ground running, and cater to America,7 only 5% play DFS. However, in the fourth provincial lottery corporations’ ability to integrate their quarter of 2014, specifically around the time of the own brand power and loyalty. CGL beginning of the NFL season, there was a large increase in the number of players playing DFS contests. The DFS industry will continue to grow, and will get a Jack Tadman is a lawyer in Toronto. His practice is focused on gaming legal boost from the 2015 NFL season. However, at the time of and regulatory matters. writing this article, there is still no B2B service provider working with North American gaming operators. Nic Sulsky is a sports media & technology expert and currently the Vice From a Canadian perspective, whether DFS contests President, Fantasy Sports for Sportech Inc.

1. Fantasy Sports Trade Association: Industry Demographics, retrieved August 5, 2015 from http://www.fsta. 5. Amaya Gaming has announced plans to enter the DFS space in the fall of 2015 in time for the NFL season. org/?page=demographics. 6. R.S.C., 1985 c. C-46. 2. 31 U.S.C. §§ 5361-5367. 7. According to the Fantasy Sports Trade Association http://www.fsta.org/?page=demographics 3. Fantasy Sports Trade Association: Industry Demographics, retrieved August 5, 2015 from http://www.fsta. org/?page=demographics. 4. DraftKings Secures $300MM In Funding From All-Star Lineup, retrieved August 5, 2015 from http://www. prnewswire.com/news-releases/draftkings-secures-300mm-in-funding-from-all-star-lineup-300118906.html.

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