Economics of the North American Fantasy Sports Industry Presentation to the IASE 2008 Kevin G. Quinn St. Norbert College Department of Economics.

Economics of the North American Fantasy Sports

Industry

Presentation to the IASE 2008Kevin G. Quinn

St. Norbert CollegeDepartment of Economics

North American Fantasy Sports Industry

Purpose of paper: to introduce industry as a topic worthy of attention by academic sports

economists.

• Presence of topic in academic economics literature is nearly non-existent.

• Industry data are as yet scarce and not always reliable.

Outline

• Size and Scope of Industry• Economic History of Industry• Industrial Organization of Fantasy

Leagues• Complementarities and Externalities• Intellectual Property Rights Issues• Gambling and Moral Hazards• Fantasy Sports in the Classroom

What are Fantasy Sports?

• Simulation of the experiences and choices made by real team owners and managers.

• Included sports: auto racing, baseball, basketball, boxing, bowling, cricket, cycling, darts, fishing, football, hockey, golf, horse racing, skiing, soccer, sumo wrestling, tennis, and wrestling. NFL and MLB most common in U.S.

• Primary tasks: LR: Build a player roster; SR: Decide which will be “active” in each contest.

North American Fantasy Sports Industry; Demand Side, 2007

• Estimated 6.5%-7.5% of North American population (15-20 million) played.

• Average player spent approximately $500 annually on fantasy sports.

• As many as 50 million North Americans may have played at least once.

Demand Side, 2007 (con’t)

• 93% male overall; 12% of NFL fantasy players female.

• Median player: 36 years old; married with children; $76K household income.

• Estimated Total Expenditure: $1.5 billion

Supply Side

• Entities:• Real Leagues • Online Media• Print Media• Broadcast Media

• Industry revenues ~$150-200 million; grew ~7%-10% annually 2003-2006.

Industry Associations

• Fantasy Sports Trade Association• established 1998• over 140 organizational members, including some

major media corporations

• Fantasy Sports Writers Association• established 2004• 232 individual members, including representation

from major media corporations

Background – Statistics in North American Sports

• Core input to fantasy sports: statistics.

• Baseball: statistics tradition from cricket; Wisden Almanack.

• 1850s: Henry Chadwick refines box scores in baseball.

• 1870s: Print media publishes sports annuals.

• 1910s: Statistical services to MLB and print media.

Background: Simulation Games

• 1941: All-Star Baseball• Roulette-like game with paper disks.• Only hitting statistics considered.

• 1961: Strat-O-Matic• Multiple dice used.• Simulated hitting, pitching, fielding, base-running.

• 1980s: Computer video games• Graphical representations.• includes physical interaction of participants.

• Key point: Player performances are based on past statistics.

Background - Fantasy Sports

• Baseball: 1960 Gamson, Harvard, then Michigan; “National Baseball Seminar;” BA, RBI, W, ERA.

• “Rotisserie”: 1980 Okrent; New York • Football: 1962 Winkenbach; Oakland

• Key point: Player performances based on ongoing season statistics.

Industrial Organization of Fantasy Leagues

• Philosophy and Competitive Balance• Rawlsian (1971) ex ante fairness of outcomes.• League choices between returns to owner effort

and skill versus chance – analyze via public choice theory?

• Structure Formats• Tournament • League

Fantasy Play as Constrained Optimization

• Objective: Maximize points per scoring system by choosing limited number of players (roster spending caps).

• Long-Run: Roster Assembly

• Short-Run: Active vs. Inactive Roster

Long Run: Roster Assembly

• Keeper vs. Non-Keeper Leagues• Fixed roster size; min and max slots by position.• Methods: Drafts and auction.• Pre-season:

• Drafts: Automatic, non-cap, salary-cap; random and serpentine

• Auction: Usually English with salary cap.

• During-Season:• Trades• Free Agent Pickups; waivers.

Short-Run: Contest-by-Contest, Active vs. Inactive

• Subset of roster chosen as “active,” only active player stats count toward scoring.

• Playing position min and max requirements for active portion of roster.

• Stochastic production functions based on league scoring rules, real player match-ups, injury situations, playing styles, etc.

Complementarities and Externalities – Real Sports Leagues

• Fantasy players ~4 to 5 times more likely to attend real league contests.

• 95% of fantasy players watch television coverage of real contests; watch ~ 2 to 3 hours more television coverage than non-players.

• Consumers watch 55% more television sports coverage after they become players than before.

Complementarities and Externalities – Media

• 1980s, USA Today – circulation; reduced league management costs.

• Online providers: viewership; reduce league management costs.

• Yahoo, CBSsportsline and ESPN together saw traffic double from July to 15 million unique visitors per day in August 2007 – NFL effect.

• Of estimated $727 million spent for sports website advertising in 2007, approximately $150 million went to fantasy sites.

Stats as League Intellectual Property vs. Historical Facts under U.S. Law

• International News Service v. Associated Press, 248 U.S. 215 (1918).

• Copyright Act of 1976 – Broadcasts protected, but not game data.

• The National Basketball Association v. Motorola, Inc, 05 F.3d 841 (2nd Cir. 1997) – Near-real-time during-game data not protected.

• C.B.C. Distribution and Marketing Inc. v. Major League Baseball Advanced Media, 06-3357 and 06-3358, U.S. Court of Appeals for the Eighth Circuit AND Gionfriddo v. Major League.Baseball, 94 Cal. App. 4th 400, 411 (2001) – 1st Amendment pre-empts player right to publicity.

Fantasy Sports as Gambling under U.S. Law

• Legal Criteria: Prizes, Chance, “Consideration.”

• Tournament Format: Concerns if entry fee?

• League Format: Exempted under Unlawful Internet Gambling Enforcement Act of 2006 and by Humphrey v. Viacom, Inc., Case No. 06-2768 (DMC) (D.N.J., June 20, 2007).

Moral Hazard Issues

• Individual Fantasy League Administration• Commissioner Principal-Agent problems• Collusion• Adjudication services

• Real Players in Real Leagues?• Employee-Employer Principal Agent Problem

• $7.4 billion of productivity losses in 2007 NFL Season? $1.6 in 2008 NCAA tourney?

• Methodological problems – productivity losses associated with employer provision of toilet facilities?

Fantasy Sports as Classroom Simulations

• NFL Football: Econfantasy.com and CBSsportsline.com.

• Final paper: business plan, calculation of player MRPs (Scully method), league competitive balance

• Can be a lot of work, but students highly interested – sometimes too interested.

Summary

• This paper is an attempt to position North American fantasy sports industry as worthy of attention by academic sports economists.

• There are a variety of interesting issues associated with fantasy sports:• public choice, industrial organization, neoclassical

theory of the firm, complementaries, externalities, intellectual property rights, and moral hazards

• Fantasy sports can be used as an effective simulation tool in undergraduate economics of sports courses.