A Question That Needs Answering

Prediction markets are the #1 topic in the industry, but even if Kalshi comes out on top in its court cases (the current billion-dollar question), there are a lot of what-ifs to consider.

Author’s note: Yes, I know a huge story broke yesterday that is right in my wheelhouse (sports betting AND poker scandals), and I have already written a column with a lot of thoughts about it. But I’m going to hold off on hitting publish for a bit so I can really get my thoughts straight, because I feel the story is far more important than the who, what, where, and when details we have now. So with that in mind, here’s today’s feature column.

One of the questions Straight to the Point has been raising about prediction markets is the overall opportunity. There is undoubtedly a bull case, but far too many people are jumping aboard the hype train without making sure the tracks to the destination are in working order.

Yes, money is pouring in, and it seems everyone is getting involved, from Twitch and Paradigm to the NHL to the gaming operators that have been downplaying the threat (at least publicly), noting that there isn’t much to worry about when the two products (prediction markets and traditional sportsbooks) are offered side-by-side.

However, as I noted when the DraftKings-Railbird deal was officially announced: “Until DraftKings, FanDuel, or some other significant licensed online betting company wades into sports contracts, I’ll continue to view these announcements as contingency plans; a spigot that can be turned at a moment’s notice.”

So, while some (digital-only and digital-focused) companies are preparing their contingency plans, they’re by no means shifting to prediction markets as their next core product, as it’s currently viewed as a best-option placeholder for sports betting:

Jay Snowden, PENN Entertainment CEO: “It does exist, as you guys know, and has for a long time over in Europe. I think it is definitely more of a niche market for a variety of reasons… I think it’s largely incremental, especially if it’s something that’s being offered in states where online sports betting is not currently legal.”

Peter Jackson, Flutter CEO: “The Betfair Exchange has, for many years, given us very good insights in terms of how this stuff can play out. I think it tells us that you’ve got to be quite thoughtful about how exciting the exchange product can be when you have a fully-fledged sports betting product available to you… And I think that for existing states where sports betting is allowed, I’m not that confident that this will have a significant impact.”

Jason Robins, DraftKings CEO: “I think the TAM opportunity is likely to be very significant in states that do not have legal online sports betting. And I think it is likely to be fairly small in states that do have online sports betting.”

These comments look pretty accurate, as there is no noticeable impact on sports betting growth trends in legal markets following the launch of sports betting and later parlays at Kalshi.

Where Is the Growth?

“We’re also seeing little evidence of erosion of US sportsbook activity in recent numbers despite Kalshi’s growth since the start of the football season,” Dustin Gouker wrote in his The Closing Line newsletter, adding that, “Parlays have been a pretty de minimis product so far. Over three weeks, parlays have generated $25 million in volume. Retail activity in that volume is likely just a fraction of that.”

And as Gouker noted on X, Kalshi’s trading volume over the last three 7-day cycles isn’t exactly screaming exponential growth:

• Oct. 15-21: $920 million

• Oct. 8-14: $916 million

• Oct. 1-7: $976 million

“Kalshi is offering sports betting in all 50 states — including a bunch that have never had legal sports betting — and it saw less volume in the middle of the football season weekend over weekend,” Gouker told STTP. “And that’s despite launching in 140 countries. That really shouldn’t even be possible at the stage Kalshi is in.”

Thus far, it looks like Kalshi is the proverbial “doofer,” as in, Kalshi will do for now.

As the team at Jefferies recently noted, Kalshi’s growth is coming from states that lack legal sports betting options, with traffic growing in restricted states like California and Florida (with its monopoly structure) and declining in regulated, open markets like Illinois and New York.

On the flip side, Kalshi’s numbers have been trending up, the company is brand new in the space, and the NBA season just started (which should create a significant bump), but considering its nascency and the recent launch of parlays, it's surprising there isn’t more growth.

Well, surprising to some.

Citizens’ Chris Lynch summarized it perfectly on X, way back in May, “Don’t worry, there aren’t billions of dollars of profits from a 2.5% margin product.” And as I said in response, people are way overshooting this opportunity, at least at present.

The point Lynch (and myself) are making is that, just like in the online-land-based cannibalization debate there are two parts to the opportunity question.

As Wynn CEO Craig Billings said, “As an operator, the TAM doesn’t pay my bills, my share of it does.”

For prediction markets, those two questions are:

1. What is the opportunity for the prediction market industry? [TAM]

2. What is the opportunity for individual prediction markets? [Profit]

And all of the questions I’m about to ask need to be viewed through both lenses.

It Might Be Time to Consider the ‘What-Ifs’

There’s a lot of emphasis on product, and can Kalshi et al. close the gap, but something I’ve brought up before, and something Jason Robins has recently been voicing, is what happens when there is competition, and what happens when your beloved product that beats sportsbooks on pricing needs to turn a profit?