Glorified Casinos
Are prediction markets gambling? At the heart of this debate is what percentage of customers are winning and losing, but there is another consideration.
The Bulletin Board
THE LEDE: What everyone gets wrong about peer-to-peer gambling.
NEWS: Colorado passes bill limiting deposits, push notifications, and ads.
AROUND the WATERCOOLER: Winners, losers, and the CLARITY Act.
STRAY THOUGHTS: It’s hard not to be cynical.
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The Lede: Are Prediction Markets Glorified Casinos?
A strange debate has been taking place on X.
It started a couple of weeks ago when bettor and responsible gambling advocate Isaac Rose-Berman published a Substack post that led to an online spat with Domer, a former pro poker player and now one of the biggest bettors on prediction markets — you may recall he was featured in the 60 Minutes segment on the topic.
Here’s the Substack post if you missed it:
I won’t go too deep into the back-and-forth between Domer and Rose-Berman (if you want to try to untangle 20 different threads you can start here), rather, I want to focus on a couple of long-held beliefs in the gambling universe, as Domer’s arguments are a repackaging of the “poker is not gambling” debate from the 2000s, when pros would tell you how important they are to the ecosystem because they start games and are aspirational figures.
While it’s not necessarily wrong (and is illustrated well by another professional bettor, Rufus Peabody, in the tweet below), there are aspects of this debate that Domer and many other professional gamblers willfully ignore or don’t understand:
And this is where it bumps headfirst into the Wall Street Journal article I previously posted about, that kicked off a social media debate about what industry has more net-negative users, and as an aside, why Kalshi is comparing itself to other forms of gambling (although, if you scroll down to the Around the Watercooler section, there is growing evidence that prediction markets have the same winner-loser distribution as other forms of gambling).
“A Wall Street Journal article became, as Chrissie Hynde would say, the talk of the town, on Monday — you can read the article here (paywall). I’ll be discussing this at length in an upcoming newsletter, but the gist of the debate can be summed up in a single tweet:
“What followed was a Spider-Man gif battle about what’s worse for you
drugs, cigarettes, or alcoholsports betting or sports betting at prediction markets.”
Yes, peer-to-peer games of skill are a zero-sum game that can be beaten, where a small percentage of users will profit in the long run.
But ask anyone who has been around these games for a while and they’ll let you in on a deep, dark secret: yes, a non-trivial number of players will win, but, most of the money is going to the very top:
Now, the percentage of people who will profit depends on the skill gap, and how fast a person loses shouldn’t be understated. That’s why popular poker games are calibrated to have just enough luck to make sure the bad players win a decent amount of the time, but lose over time and inject fresh money into the ecosystem — this is one of the reasons 5-Card Stud died off and why poker rooms take jackpot drops as it redistributes money based on luck, not skill.
This is different than Peabody’s ‘calibration,’ because a peer-to-peer facilitator’s (a poker room, DFS site, or prediction market) goal isn’t to find a way to slowly bleed customers, its goal is to keep players depositing; those are two different things.
These scenarios where most people are close to break even and a small percentage of users are big winners or big losers isn’t sustainable.
It’s perfect if you are in a closed system where no new money is deposited or withdrawn, as money exits in two ways: fees taken by the operator and withdrawals by winning players.
Unfortunately, in the real world you don’t get a slow bleeding of your customers, you get a shrinking ecosystem where a very small percentage of your customers are feeding on your other customers.
A customer that is break-even, and nothing more than a holding station for the site or the winning users isn’t changing the dynamic between the winners and the losers. Once all the losers are chewed up and spit out, they become the prey, at which point the facilitator has to consider raising the fees or cutting the rebates.
That isn’t a problem when the industry is in a period of rapid growth (prediction markets are in their Poker Boom phase), but when that growth slows, and losing customers grow frustrated and move on to the next thing, it becomes a very serious problem, very fast.
As Jason Robins said during DraftKings’ Q1 earnings call:
“When you have a peer-to-peer setup, you’re going to have people on one side that are experts, and you’ve got to make sure you protect the ecosystem as best as you can, within the rules and regulations.
“Doing things to make sure that you’re building a healthy ecosystem was critical to us building out a sustainable daily fantasy sports product. Right now, I don’t see that necessarily happening with some of our predictions competitors.”
STTP Thoughts: In a zero-sum game where the facilitator takes money from the ecosystem, you need a constant influx of money to maintain a sustainable ecosystem; customers who are happy to lose and keep depositing. Finding that balance is challenging, but not impossible.
Bonus Thought: I would also point out, as I have in the past, that the typical bettor has no interest in finding edges to bring them closer to break-even:
“Sure, there is a price-sensitive cohort pining for a product like prediction markets, but for the most part, people like to gamble, not treat betting on sports like they’re comparing health insurance plans or retirement funds. The price-sensitive crowd is not a cohort you can build a successful betting company on.”
“Here’s the difference between the price-sensitive bettor and the other 95% of the betting population perfectly summarized by poker pro Joe Ingram in a tweet from a year ago that recently came across my timeline:
Or as Alun Bowden put it on LinkedIn:
“Why does the gambling industry waste so much time and energy fighting the inevitable truth that the large majority of people have to lose?
“… This is a zero sum game. Someone HAS to lose. And for anyone, be it business or individual, to make any meaningful money then a LOT of people have to lose.
”This is just how it works. Gambling relies on lots and lots and lots of losers to function. This is what it is. This is how it works… And don’t be confused, most players know this too. I saw some dreadful post where someone said casino players are idiots because they are just hoping to get lucky. YES OF COURSE THEY ARE. THIS IS LITERALLY WHY THEY DO IT.
”Honestly, the reductive first-order thinking of people who go “but we should all be able to win” is one of my real pet peeves.
”Gambling only exists because of happy losers. Stop pretending it can ever be anything else. It cannot.”
So yes, prediction markets are not a roulette wheel, but at its core, the activity is still gambling. Further, as peer-to-peer operators, they need a constant supply of participants who are happy (or at least willing) to lose. The only real question is whether the industry admits it or keeps pretending otherwise.
And just because this is a great tweet, and I titled this section, ‘are prediction markets glorified casinos?’
Whether you’re looking for market research, legislative arguments that land, increased brand awareness, or responsible gaming strategies, Straight to the Point can help with honest, balanced, no-nonsense analysis of the situation.
Reach out for more information: Straight to the Point Consulting.
News: Colorado Latest State to Pass Gambling Reform Bill
Add Colorado to the ever-growing list of states experiencing buyer’s remorse over their sports betting laws after the Senate concurred with a minor House amendment — the legislation still needs the signature of Gov. Jared Polis to become law.
The Colorado legislature passed a watered-down, but still sweeping gambling reform bill, SB 26-131, that:
Limits customers to six deposits in 24 hours
Prohibits push notifications
Prohibits credit card deposits
Prohibits broadcasting an advertisement or promotion for a sports betting operation from 8 a.m. to 10 p.m. or during a live broadcast of an athletic competition, and ads targeting anyone under 21.
Removed from the bill during the process were a prohibition on prop bets and from limiting bettors based on performance.
Brianne Doura-Schawohl from the Campaign for Fairer Gambling, called the bill precedent-setting: “It is heartening to see the Colorado legislature prioritize the well being of its constituents with these revolutionary consumer protections. We strongly urge Gov. Jared Polis to sign this bill, which will establish Colorado as a national leader in sports betting protections.”
Kentucky passed a gaming reform bill in April that:
Raises the minimum for sports betting from 18 to 21.
Prohibits certain bets (unders) on in-state collegiate athletes.
Regulates DFS and fixed-odds horse racing.
Around the Watercooler
Social media conversations, rumors, and gossip.
Three tweets to highlight today.
First, a little he said, she said, which as Sportico’s Eben Novy-Williams noted, were posted four hours apart:
And as expected, the rumor mill and special interests are cranked up to 1,000 as the CLARITY Act (a crypto regulation bill) gets ready for markup.
Stray Thoughts
The online gambling industry has always pulled me in two different directions. Still, it’s hard to not be a cynic in this climate, as there isn’t much positive energy emanating from it. Without getting into specifics, far too many people I know in the industry trying to do things “the right way” keep getting railroaded.
Basically, the seven years of great plenty post-PASPA look to be over. The question is: Is the online part of the gambling industry returning to normal, or should it prepare for seven years of severe famine?