Will DraftKings prediction market launch trigger major arms race?

At a time when prediction market activity has reached a fever pitch, DraftKings launched its highly anticipated offering on Friday joining a crowded field with its main rivals.

The company announced Friday morning that it is rolling out DraftKings Predictions, a new standalone mobile app and web product regulated by the US Commodity Futures Trading Commission.

DraftKings Predictions plans to connect to multiple exchanges, beginning with CME Group at launch, the company wrote in a press release. The first incarnation of the platform will feature a wide assortment of event contracts with financial derivatives on sports contracts, global benchmarks and economic indicators.  

DraftKings enters the prediction market space several weeks after the company reached a multi-year branding agreement with ESPN. It followed a similar agreement earlier this year with NBCUniversal.

“DraftKings Predictions is a significant milestone and reflects our ongoing commitment to delivering products that tap into the passion of our customers,” said Corey Gottlieb, chief product officer of DraftKings. “We will create an unparalleled customer experience, leveraging key strategic relationships like ESPN and NBCUniversal to provide an authentic, real-time product that moves at the speed of sports.”

Availability in nation’s most-populous state

At launch, DraftKings will offer event contracts across 38 states providing the company with a fresh product it believes will expand its total addressable market. As it relates to sports, DraftKings will make sports event contracts available to customers in a number of large markets, including California, Texas and Florida. The three states, in aggregate, represent more than a quarter of the nation’s population.

The launch of sports event contracts in states with a heavy tribal presence may rankle tribal gaming leaders, especially in jurisdictions where the commercial operators are not presently offering sports betting. Earlier this month, Fanatics announced that it would offer sports event contacts in Florida as part of a wider launch of a new platform, Fanatics Markets. The Seminole Tribe of Florida has a monopoly on legal sports betting in the jurisdiction through its exclusive gaming compact with the state.

It is also expected that the rise of prediction markets will trigger a contentious battle between commercial and tribal operators in California. In 2022, voters in California overwhelmingly defeated a referendum backed by DraftKings and FanDuel that would have legalised sports betting.

Since then, the two sports betting giants have met with a series of California tribes in an effort to ameliorate the relationship.

Raising the temperature

It appeared that any deep-seated resentment between the parties thawed over the first half of this year. DraftKings CEO Jason Robins and FanDuel President Christian Genetski sang the praise of their counterparts during April’s Indian Gaming Tradeshow and Convention. In a panel moderated by conference chair Victor Rocha, Robins told the audience, “There is no chance that there could possibly be online sports betting in California without tribes feeling like their sovereignty is being respected.”

However, the launch of prediction markets by the two companies could reignite tensions, spiking the temperature to a level unseen during the PASPA era.

At last week’s National Conference of Legislators from Gaming States winter meeting in Puerto Rico, prediction markets represented the hottest topic of the conference. On the final day of the four-day event, an Arizona official announced that the state’s gaming regulator had issued a notice stating its intention to pull Underdog’s DFS licence. The decision centered on Underdog’s prediction market platform in more than 20 states through a partnership with Crypto.com.

In response, Rocha took to social media, questioning those whom he felt expressed “faux outrage” at Arizona for its handling of the Underdog case.

“Why is (the) chattering class surprised? Were they not paying attention? Every legal, political and media tool will be used to go after prediction markets and the companies that ratline to the platform,” he wrote.

Financial implications

With DraftKings’ launch on Friday, the operator joins FanDuel and Fanatics among the ranks of leading sportsbooks that now offer event contracts on sports. Two Nevada casino giants, MGM Resorts and Caesars Entertainment, have announced that they are foregoing prediction markets for now due to licensing concerns in the states. Beyond the aforementioned trio, Kalshi, Crypto.com, Robinhood, PrizePicks and Underdog also offer event contracts on their prediction market platforms.

Before the sportsbook operators made the leap into prediction markets, iGB discussed the new asset class with Citizens JMP Securities analyst Jordan Bender in October. The interview focused on if the two sportsbook powers — DraftKings and FanDuel — could maintain a comparable stranglehold on the prediction market space. Amid the crowded field, Bender stated that product and technological innovations will likely be the “key ingredients” in the battle to win customers.

Since then, Citizens has conducted extensive research on how prediction markets will transform price discovery and risk management in capital markets. In a research note released on 14 December, Citizens wrote that prediction markets are in the early innings of exponential scaling as the asset class transitions from “speculation to a more mature component of capital markets, with institutions likely coming next”.

At present, risks exist with federal vs. state jurisdictional tension, especially around sports-linked markets, the note added. Nevertheless, Citizens believes that clear historical precedents already exist in other markets such as equities, options and crypto, suggesting that the “friction will ease as governance and institutional participation mature”.

Stock moves

Separately, boutique gaming firm Eilers & Krejcik estimated that prediction markets could hit a trillion dollars in annual trading volume by the end of this decade.

In addressing the asset class during DraftKings’ third-quarter earnings call, Robins said the company “expects to succeed” in the prediction market space for the same reasons that it has been successful competing in the sports betting industry. Robins added that the company planned to launch DraftKings Predictions in a way that is “respectful” to other stakeholders. Without mentioning any jurisdiction in particular, it is clear that Robins was making reference to state regulators in his comments.

DraftKings traded at $34.38 in early-morning trading, up fractionally on the session. The company is down approximately 7.5% year-to-date.

Matt Rybaltowski

Matt is primarily responsible for long-form feature coverage on complex sports betting scandals. He also provides coverage on finance, M&A and other technological developments.