How Daily Fantasy Is Changing the Game

Thursday October 8th, 2015

Editor’s note: FanDuel is a sponsor of The MMQB. This piece was pursued and executed independent of that business relationship. Sports Illustrated, the parent of The MMQB, has a partnership with DailyMVP, another daily fantasy sports provider.

BOSTON — Saahil Sud, perhaps better known by the screen name “maxdalury,” welcomes me into his apartment with a soft hello and a handshake. It’s not until much later that he  reveals that the 24th floor penthouse, with a breathtaking view of Downtown Boston, was previously rented by Rajon Rondo of the Celtics. I follow him to his computer lab with a couch, some choice Yankees and Rangers memorabilia from the ’90s, three computer screens and two flat-screen TVs.

This two-bedroom condo is where Sud, 26, made north of $1 million during Week 3 of the NFL season playing daily fantasy football.

Analytics go a long way for the Amherst College grad, who expects to gross more than $5 million this year as the top-ranked Daily Fantasy Sports (DFS) player in the world (according to RotoGrinders.com). But intuition is the icing on the cake. In Week 3, Sud, who enters hundreds of lineups every week, chose Packers receiver Randall Cobb in all of his lineups—a rare move for a DFS pro, and one that carries a big risk considering the unpredictability of a single-game performance by a single player. Sud reaped the rewards after Cobb grabbed seven catches for 91 yards and three touchdowns on Monday Night Football.

Sud calculates the decision to feature Cobb was worth seven figures. “I usually go with analytics, but I also take more risks than others,” Sud says. “I know that this was the right decision to maximize my profit, as long as I am comfortable with the risk.”

Meanwhile, Cobb, who received a long-term contract befitting a star receiver this past offseason (with most of it loaded into bonuses), likely got in the neighborhood of $100,000 (base salary plus game-day roster bonuses), before taxes, in his weekly paycheck. Told of Sud’s windfall after a Packers practice this week, the fifth-year wideout was incredulous.

What? Hey, man, I’ve got to start collecting my money from these guys,” he joked. “If I’m on your team and I’m making you money, I need a paycheck for that. Help me out, man!”

Everybody, it seems, wants a cut of the millions of dollars changing hands in this budding, newly visible and, up until now, barely regulated world of daily fantasy sports. Yet DFS finds itself at a crossroads. As ads from the industry’s top two competitors, FanDuel and DraftKings, have inundated the airwaves during the first month of the NFL season, challenges to DFS’s legality (most states do not consider DFS gambling) from lawmakers threaten to slow the massive, seemingly endless cash flow. Some would-be players have shied away, intimidated by the statistical skills and large capital of pros like Sud. And a new threat, one originating within the walls of the two competing companies, has shaken confidence in the fairness of the games themselves.

FanDuel and DraftKings are now each valued in the neighborhood of a billion dollars, and are backed by the NBA, MLB, major broadcasters and some NFL owners, among others. Half the teams in the NFL also have advertising deals with DFS sites. Recent developments raise the question: Has DFS grown too fast for its own good, or just fast enough to survive?

* * *

About 200 yards from Sud’s apartment is the red brick office building that houses the DraftKings offices. It’s visible from Sud’s living room.

He swears it’s a coincidence; and jokes that the DraftKings bosses think he’s plugged into their office wifi.

But to see why the industry finds itself embroiled in controversy, DraftKings need look no further than its own office. Eyebrows were initially raised during Week 3, when DraftKings content manager Ethan Haskell inadvertently posted data on ownership trends for the site’s Millionaire Maker contest before all games had begun (and therefore, all lineups for all games had been locked). Ownership data is hugely valuable in DFS; from a strategy standpoint, it’s important to field a unique lineup—the fewer competitors that own a player, the more value a big performance will carry.

Haskell apologized for the mix-up and reiterated that, while he had access to the data, as a company employee he was prohibited from entering the contest.

However, Haskell was not prohibited from entering a similar contest at rival FanDuel, where he played DFS contests regularly, and where, because of similar pricing algorithms, ownership rates are often similar. Haskell has insisted that he did not use the DraftKings data to make his FanDuel entry, and the company says he didn’t have access to the data until 40 minutes after his FanDuel lineup was locked. But the optics were undeniably bad when The New York Times reported that Haskell placed second out of 22,989 entries in the FanDuel contest, taking home a prize of $350,000 on his $25 entry.

Major League Baseball, which has a stake in DraftKings, echoed the thoughts of many DFS participants: They did not think DFS site employees, some of whom presumably have access to valuable inside information, were permitted to play DFS at any site. According to ESPN, FanDuel said 0.3% of their prize money had gone to DraftKings employees—estimated to be around $6 million.

A top official at an online sports book, when briefed on the structure of FanDuel's anti-fraud unit: “Let’s just say we have a significantly larger unit in place.”

The incident raised questions about the industry’s ability to regulate itself and prompted the sites to release a joint statement Monday promising a commitment to the “integrity of the games we offer.” Both companies immediately banned employees from playing DFS at any site, and have since said that prohibition will be permanent. Both companies also initiated third-party audits of their procedures.

New York State Attorney General Eric Schneiderman announced that his office planned an inquiry into both DraftKings and FanDuel. Massachusetts Attorney General Maura Healey plans on pressing both companies for additional consumer protections. California state assemblyman Adam Gray called for an informational hearing on the industry. ESPN went so far as to—at least temporarily—pull DraftKings-sponsored elements from its programming (the network continues to run traditional DFS advertisement).

Yet, DraftKings CEO Jason Robins, in an interview with The Boston Globe, bristled at the suggestion of government regulation, calling DraftKings a “very ethical company.” FanDuel declined comment on the issue of regulation.

Two days before news of the scandal broke, I visited the Manhattan office of FanDuel, where more than 40 staffers plugged away at computers. FanDuel has other offices in the U.S. and in the U.K. as well, with more than 400 employees.

Co-founder and VP Tom Griffiths said their fraud prevention team consists of six employees. The group is run by a former law enforcement officer and staffed with lawyers and ex-DFS players who investigate possible discrepancies.

That unit will surely have to grow. The MMQB reached out to several top online sports books, most of whom declined to disclose details about their security or anti-fraud teams, and how they might contrast to those in DFS. One top official at a well-known sports book said there really isn't any confidential information in the sports-betting community that would give industry employees an advantage. Another, when briefed on the structure of FanDuel's anti-fraud unit, said, “Our security team’s purpose doesn’t exactly compare to daily fantasy sites, but let’s just say we have a significantly larger unit in place to ensure online gaming is both fair and safe for all participants.”

* * *

FanDuel co-founders Nigel Eccles and Tom Griffiths.
Michael J. LeBrecht II for Sports Illustrated

New employees at FanDuel—and there are plenty these days—are greeted with green and silver balloons affixed to their swivel chairs that read: First-round draft pick.

That unassuming office at Union Square is where those suddenly ubiquitous daily fantasy ads that have been crop-dusted across your Sundays—the ones with the lightly-bearded, jockish-looking pitchman shouting million-dollar payouts into your subconscious—were hatched. A who’s who of major corporations, including Comcast, Turner, Time Warner and Google, invested some $363 million so that FanDuel could become the No. 1 advertiser in the country this fall.

The strategy, which has brought a host of positive and negative consequences for both FanDuel and DraftKings, is rooted in the old StubHub game plan. The online ticket-buying industry sprouted around the turn of the century (and the once-shady often illegal practice of “ticket scalping” became the above-board “secondary ticket market”). The sites we now know as the biggest names in that industry spent well beyond their means to advertise all over the map in order to dominate the market.

“You have to capture the mindshare first,” says Griffiths.

Born in Liverpool and schooled in Edinburgh, the 33-year-old knew next to nothing about American football when he and five friends huddled in 2009 to decide what to do with their middling news prediction site, Hubdub.

Says Griffiths: “There was a moment when we realized, ‘Holy s---, I don’t think our current product is going to work.’ ”

• GENERATION DFS: A visit to a small New England college campus offers a snapshot of the novice daily fantasy football player, and illustrates the reasons administrators and parents are concerned about students playing DFS

They rented a house in Austin to attend South by Southwest, the film, media and music festival that attracts entrepreneurs every March, and they gathered one day in the backyard and brainstormed for specific avenues to focus their online contests. They wrote their ideas on post-it notes, stuck them to the wall of a tool shed, and debated the possibilities.

The Unlawful Internet Gambling Enforcement Act of 2006 was a death knell to the world of online poker but provided for the continuation of traditional fantasy sports. There hadn’t been any evolution in fantasy sports since the games went online, and the founders resolved to change that by tapping into the attention-deficit generation with weekly and daily fantasy sports.

Fast-forward six years and FanDuel payouts are the largest they’ve ever been. The industry at large is estimated to generate $2.6 billion in entry fees this year, according to Eilers Research.

People are annoyed with the ads, and Griffiths gets that: “People are complaining about how often they are on. So we’re looking at refreshing the creative and changing it up so people aren’t bombarded with them.”

The marketing push came with one more unintended, and unwanted, consequence.

“Now [the NFL has] invested in fantasy sports,” Congressman Pallone says. “They’ve carved out a niche so they can make money and prohibited everybody else from doing it.”

DFS consists of two major kinds of contests (and there’s probably a promo code just for you!). In a football head-to-head game, for instance, players can draft a team from a pool of about 500 NFL players with an allotted portion of cash. A user is given a salary cap and each NFL player is afforded a salary determined by the site. Your lineup then goes up against another user, typically chosen at random, with the entry fee ranging anywhere between 25 cents and $1,000 depending on how much you chose to wager. A tournament follows the same rules, but the pool of users is much larger, and more than one person wins. In some tourneys, the top half of players who enter get something, if not all their money back. FanDuel says seven out of 10 new users eventually win.

This much was explained to viewers in a series of commercials that accompanied NFL games during the first week of the season. One of those mini-infomercials caught the eye of a congressman from New Jersey, democrat Frank Pallone of the state’s sixth district. Fantasy sports had once existed in the good graces of the law as a provision in the UIGEA of 2006, a tack-on to a counter-terrorism bill backed by an NFL-appointed lobbyist and passed in the final hours of a congressional session.

But now Griffiths and his ilk are flashing too much money for Pallone and a handful of legislators across the country who liken daily fantasy to sports betting and want both practices regulated and taxed.

“The tipping point was a few weeks ago when they started spending millions of dollars on advertising,” Pallone told me in a phone conversation during his Amtrak trip between New Jersey and Washington. “I watched one infomercial on Monday night that basically explained to you how to play. The teams are supposedly so concerned about sports betting they don’t want it legalized, but they’re [running] infomercials for fantasy?”

In 2011, Pallone successfully campaigned for a referendum allowing sports betting in New Jersey on the promise tax revenues could revitalize places like Atlantic City. State leaders argued they were not in violation of the federal Professional and Amateur Sports Protection Act of 1992, which limited sports betting to Nevada, Oregon, Delaware and Montana. The NCAA and the four major professional leagues sued to prevent the implementation of the state law, and the U.S. Third Circuit Court of Appeals in Philadelphia affirmed the federal ban in 2013 and again last August, striking down New Jersey’s vote.

FanDuel has advertising agreements with 16 NFL teams, and while teams are not permitted to invest in DFS companies, individual owners are. (Jerry Jones and Robert Kraft have stakes in DraftKings.) It’s with good reason. In surveys of users, FanDuel found that DFS participation resulted in 40% more consumption of NFL games, on average. Users went from consuming 17 hours of football and football-related media per week to 24, on average.

“Now they’ve invested in fantasy sports,” Pallone says. “So they’ve carved out a niche so they can make money and prohibited everybody else from doing it.”

Roger Goodell answered a question about the legality of DFS during a press conference on Wednesday.

“States are the ones that make the determinations about whether something is legal or not legal. We feel that a cautious approach is the right way, but we’re protecting our game. Daily fantasy—it’s hard to see the influence that it could have on the outcome of a game because individual players are picking different players from different teams, mashing them up, you might call it, and it’s not based on the outcome of a game, which is what our biggest concern is with sports betting. So our position continues to be that way, but we recognize some states consider it legal, some don’t, and we’ll follow that law and make sure we do.”

Pallone last month called for a congressional review of fantasy sports in relation to gambling, the natural end game being a justice department inquiry into the legality of DFS. At issue is the UIGEA provision that gaming online must require more skill than chance. In many states, that requirement is more stringent. In Arkansas and Tennessee for instance, two of the 45 states where FanDuel and DraftKings currently operate, any element of chance whatsoever is illegal. Legal experts agree an argument could be made that betting on football players who compete at the whim of weather patterns and injury constitutes a considerable degree of chance.

FanDuel, with its abundant coffers, recently commissioned M.I.T. for a yet-to-be-released study that, according to Griffiths, will demonstrate the substantial amount of skill involved in fantasy games.

“With horse racing, you’re picking from a field of eight,” he says. “With us you’re picking nine players from a field of 500. We had the university calculate the number of possibilities; there’s over a trillion. We see the top users repeatedly win, not because they play so many games, but because they have a higher point distribution. Choice equals skill.”

* * *

The leaderboard at the 2014 FanDuel World Fantasy Football Championships last December.
Ronda Churchill for Sports Illustrated

Marc Edelman began studying fantasy gaming shortly before he was assigned the country’s first law course on the topic, at Barry University Law School, in central Florida, in 2011. He translated his course notes into an article for Forbes, and now teaches the same course at Baruch College in Manhattan.

A fantasy player in the traditional sense, Edelman became fascinated with the sprawling path of the industry. American laws in their complexities and hierarchies and imprecision don’t have a clear answer for DFS, which is one of the reasons power hitters like ESPN, a major provider of traditional fantasy games, have yet to go all-in on the industry.

“Current federal and state law is ambiguous about the legality,” Edelman says. “Certain formats are likely legal in certain states, and certain are illegal everywhere, and certain are legal almost everywhere.”

The ambiguity has allowed FanDuel and DraftKings to flourish with near impunity, much like StubHub once did. Now, if ESPN were to jump in, Griffiths says, it couldn’t make a dent: “I think if they could’ve done that two years ago they could’ve beaten us, but the stage and scale we’re at now, six years old, paying out $2 billion… whoever joins [the industry], we’re not too worried.”

The uncertainty that keeps ESPN out also encourages startups to follow in the major players’ footsteps. Last month two Columbia students made news for dropping out of school and collecting $2.2 million in investments for their own DFS venture, Draftpot. There isn’t a clear blueprint for startups like Draftpot, because there aren’t even agreed-upon standards among the top two rivals. DraftKings, for instance, seemingly flouts a UIGEA provision that fantasy games must involve multiple contests, i.e. a week’s slate of NFL games. They offer NASCAR and PGA fantasy matchups. (“Golf and NASCAR are legally aggressive,” Griffiths says. “We don’t need to take that risk.) And before this week’s scandal, despite heavy scrutiny from the Massachusetts attorney general, Robins recently participated in a panel discussion on whether or not fantasy sports is gambling at a gaming conference in, of all places, Las Vegas, leaving some in the industry to wonder if the one of the biggest names in DFS is putting the cart before the horse.

“Words like ‘tournament,’ ‘jackpot,’ ‘head-to-head,’ it all feels very much like poker,” says Fong, a leading expert in gambling addiction. “It can potentially be very addictive.”

A legal challenge is coming, and Edelman believes the industry will then face a crossroads that has a precedent.

UIGEA sent online poker into the closet and off of your television screen in the years following its passage. Less than a decade earlier, the online ticket-buying startups faced a similar threat but flourished. The big difference? Poker had few institutional allies. StubHub, like FanDuel and DraftKings, partnered with a bevy of influence-wielding sports leagues and teams.

“On one hand, you take online poker. When they began advertising congress cracked down on them.” Edelman says. “On the other hand, one could look at the model of a company such as StubHub, which was once perceived as being illegal ticket sales, but in time was able to build partnerships with the sports league and build legislative change that saved the industry.”

* * *

Lost in this discussion of advertising budgets, legalities and league partnerships is the human toll of DFS. For every Saahil Sud, there are untold hundreds of who sign up and lose, with the potential to lose big.

Six years ago, Arnie Wexler was running a treatment center for gambling addicts in West Palm Beach when the first case of an impending pandemic hit his doorstep. Ralph (not his real name) didn’t believe he was an addict; he called himself a poker pro and boasted of playing real poker on television, but his wife threatened to leave him if he didn’t stop gambling online.

“We had an explosion,” Wexler says. “All these young kids were saying, ‘I don’t need to go to college. I am going to become a poker professional and make a lot of money.’ A lot of those kids today are in recovery programs.”

Neither Wexler nor Dr. Timothy Fong, a leading expert on gambling addiction, have seen the first wave of DFS addiction cases yet, but it they expect to.

“It usually takes about two years after the boom to start seeing people who have lost their jobs or their families as a result of addiction,” says Fong, Associate Clinical Professor of Psychiatry and Biobehavioral Sciences at UCLA and co-director of the school’s Gambling Studies Program.

Fong says the language and graphics used to promote DFS is strikingly similar to that of poker during its heyday.

“Words like ‘tournament,’ ‘jackpot,’ ‘head-to-head,’ it all feels very much like poker,” he says, “Similarly, you can keep hunting for games and pour endless hours of strategy into the games. Anecdotally, we know the same people who were playing poker are now playing fantasy. It can potentially be very addictive.”

The new obstacle, Fong says, is the restoration of consumer confidence after the insider info scandal. Naturally, it’s difficult to attract new users if games aren’t perceived to be on the level. But online poker faced similar skepticism at the onset, when confidence in internet financial transactions was lower than it is today and many users wondered if the poker rooms were full of bots instead of people.

“People didn’t trust it at first,” Fong says, “but then they started winning games and winning jackpots and the sites marketed that and built confidence. The payouts were there.”

Wexler, who founded a national gambling addiction hotline (1-888-LASTBET) after quitting gambling 47 years ago, successfully pushed in 1996 for New Jersey’s legislature to require all casino ads to carry the warning, “if you have a gambling problem, call this number.” DraftKings and FanDuel do not carry such warnings on their sites (naturally, because it would be an admission that this is, indeed, a form of gambling), and permission to sign up requires only an unverified birth date and a credit card. The ease of online gaming is what concerns Wexler, and what led to online poker addicts constituting a third of all calls to his hotline several years ago.

“You want to go to a racetrack or a casino, you have travel, put gas in your car,” he says. “Now you have Internet gambling and this is an impulse disorder. You got gamblers that wake up in the middle of the night and they can go sit at their computer in their birthday suit and lose everything.”

Wexler says he’s phoned Congressman Pallone’s office three times in the last week and sent a letter offering his help in having fantasy games defined as gambling and regulated. (He hasn’t received a reply.) Of course, their interests don’t quite align. Wexler wants the games regulated for public health reasons; Pallone will happily tell you his biggest concern is the potential financial benefit to the state of New Jersey.

“They have extended fantasy beyond the law,” Pallone told me on the phone. “Nobody was making money on it when it was a bunch of guys sitting around a living room drafting players.”

* * *

Saahil Sud, aka “maxdalury.”
Robert Klemko/The MMQB

Back in Boston, the losers and the addicts concern Sud to the extent that their losses don’t poison the well. That’s because he started out as one of the losers.

Four years ago he tried out daily fantasy on a whim. He entered a $100 head-to-head college football fantasy game and drafted Michigan phenom Denard Robinson, the LSU defense and several other stars. His opponent picked no-names and a few Texas A&M role players, and promptly trounced Sud. Fresh out of Amherst with a degree in math and economics, Sud realized simply being a dedicated fan wasn’t good enough to get rich; this was a math problem more than anything. Anticipating he might one day value his privacy, he picked a screen name that was only tangentially related to himself.

Max Dalury—the real Max Dalury—also lives in Boston and does not earn millions playing DFS. He was a squash player at Tufts whom the 5-foot-9 Sud had battled numerous times previously in high school in Brampton, New Jersey. (“I don’t even know why I chose his name. I don’t know what I would do if I saw him on the street. I’d be like, ‘Sorry man!’ ”) Nowadays the real Dalury’s online footprint is shadowed by maxdalury chatter among the DFS blogosphere.

Sitting on his couch in the lab, I asked Sud why he chose to do an interview with me, forfeiting whatever shred of anonymity he held onto after numerous blog posts and stories revealed his true identity in recent months.

“I wanted to clear up some misconceptions,” he says.

He refers to a Bloomberg article from Sept. 10 quoting Sud sparingly and carrying the headline, You Aren't Good Enough to Win Money Playing Daily Fantasy Football: Is that a problem for DraftKings and FanDuel?

The article highlighted the many ways pros like Sud use complex analytics programs and programming scripts to optimize lineups and enter hundreds of games per day. According to data collected by Rotogrinders for Bloomberg, “the top 100 ranked players enter 330 winning lineups per day, and the top 10 players combine to win an average of 873 times daily. The remaining field of approximately 20,000 players tracked by Rotogrinders wins just 13 times per day, on average.”

“One could look at the model of StubHub,” Edelman says, “which was once perceived as being illegal ticket sales, but in time was able to build partnerships with the sports league and build legislative change that saved the industry.”

FanDuel and DraftKings walk a tightrope in this regard. Both have introduced games that are off limits for veteran players, allowing first-timers to compete with one another, and both sites have capped entries from the same user to large tournaments, but both sites also capitulated to pros who run scripts that allow them to adjust multiple lineups rapidly in response to, say, a change in weather patterns. Sud takes issue with the popular notion that sharks don’t know when to hold back. He says he stays away from $1 games, which are usually populated by woefully inadequate novices and can be very profitable for pros, and he doesn’t initiate head-to-head games (occasionally players invite him to a game for the novelty of it, something like wanting to sit at a poker table with Phil Ivey). He believes the biggest challenge facing daily fantasy would be a perception that minnows can’t win.

“One of their biggest issues is if you put in $10 and you lose right away, you don’t want to come play again,” Sud says. “On DraftKings people can block me in head-to-head games. It makes sense from the company’s perspective. I want to make as much money as I can within the bounds of the ecosystem. I think there’s some type of line there where I know it’s not good for the long-term future if I cross it.”

One of the pitfalls of online poker was the unchecked opportunity for sharks to feed on novices. Wexler’s first online poker addict, Ralph, described coordinating with two or three friends to join the same online rooms and coordinate their bets over cell phones, leaving the fish at a distinct disadvantage. In DFS, it’s not that simple. Griffiths is confident that any two accounts running similar algorithms or fielding similar lineups can be detected.

“We have complete control over who sees what contest, and I think we’ll have more controls,” Griffiths says. “We limit those guys who play and win a lot because we care about the health of the ecosystem.”

But very few people possess the skills, talent or dedication to win like maxdalury. He doesn’t own a car, spends eight hours a day programming during the offseason, watches sports religiously on two different TVs in-season, and splurges only on vacations with his friends or girlfriend (Las Vegas, Colombia, Belize and Jamaica so far in 2015).

Sud shows me the output of the program he’s built to beat the game. By pulling in data from box scores, weather sites, analytics sites like Pro Football Focus and using his own intuition, he says he’s risking about $140,000 a day and profiting 8%, with outliers like Week 3 in which he clears six figures. He estimates that he loses money on 30% of days.

• THE RISE OF PRO FOOTBALL FOCUS: An Englishman who never played the game abandoned a profitable business to run an NFL advanced stats website. Now, PFF is helping to transform the league.

His mom doesn’t understand DFS. His dad does. Both would rather he get rich doing something else, but this isn’t a point of contention as long as he’s winning. Wearing a cornflower-blue dress shirt with a rumpled collar and some ratty old tennis shoes, he doesn’t seem much different from the kid who blew $100 on Denard Robinson and the LSU defense four years ago. His bank account, however, indicates otherwise.

“People say guys like me bastardized fantasy,” Sud says, “I’m sure that people have said the same thing about the stock market when algorithmic trading came out. They’re cheating. I can understand where they are coming from, but any time there is money to be made, people are going to find the fastest and smartest ways to do it, whatever way that is."

The same can be said for two companies that emerged seemingly from nowhere in the past few years to exploit an untapped market. For better or worse, the involvement of the most powerful entities in sports—the leagues and the broadcasters—has provided FanDuel and DraftKings with the means to get where they are today. But this is now uncharted territory in a fast-moving industry with billions of dollars at stake. And no one knows where it’s headed.


Kalyn Kahler and Emily Kaplan contributed reporting to this story.

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