Deputy Editor
DraftKings has positioned itself to enter the prediction market space after purchasing Railbird Exchange, a federally licensed exchange designated by the Commodity Futures Trading Commission (CFTC).
DraftKings will launch a new app, DraftKings Predictions, “in the coming months,” according to a press release.
The move follows months of speculation about DraftKings’ plans in the prediction space. Exchanges like Kalshi have begun offering sports contract trading, and the interest has been heavy enough to skyrocket volume and company valuations.
However, regulators in several states have issued warnings to companies that hold sports betting licenses. They’ve essentially told operators that offering prediction markets would put their sports and/or casino licenses at risk.
DraftKings, FanDuel, and other operators looking to straddle both sides of the fence will have to tread carefully. To avoid the ire of their sports betting regulators, they’ll need to keep the two products separate and distinct. Among other things, that means no sports events on the predictions side.
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Move Comes After DraftKings CEO Downplayed Prediction Markets
DraftKings, and specifically CEO Jason Robins, had downplayed prediction markets in the months leading up to the acquisition, so the purchase represents a notable shift in the company’s tenor and strategy.
Robins characterized the company as “excited.” The press release noted that “the acquisition supports DraftKings’ broader strategy to enter prediction markets, expanding its addressable opportunity through regulated event contracts.”
That makes it sound like this was a long-awaited move. However, prior comments from Robins were non-committal on the company’s stance toward the emerging products.
Even as top competitor FanDuel partnered with the CFTC-regulated Chicago Mercantile Exchange for a forthcoming predictions product, DraftKings stood on the sidelines. Robins publicly downplayed prediction markets as a viable competitor to traditional sportsbooks.
At the Global Gaming Expo in October, Robins said he didn’t see a scenario where customers chose prediction markets over traditional sportsbooks. He noted the vast gap in product quality and user experience between the two.
Kalshi is trying to close that gap by offering parlays. However, sportsbooks have years’ worth of head starts on the prediction operators in areas like product and customer acquisition.
Promotions are also a big differentiator. Since the prediction markets are ostensibly exchanges wherein users trade against each other (in reality, the market makers are often sophisticated institutions), users aren’t going to get piles of promotional offers like free bets and risk-free parlays to incentivize them to gamble.
All the same, Robins didn’t deny that prediction markets offered a unique opportunity. They have the greatest viability, he said, in states that don’t currently offer legal sports betting.
Why Won’t DraftKings Offer Sports Prediction Markets?
That’s where DraftKings and FanDuel find themselves in a bit of a thorny situation. The best way to monetize prediction markets is via sports contracts. Kalshi’s trading volume, which has comprised roughly 90% sports since the start of football season, makes that clear.
However, DraftKings can’t simply start offering sports contracts in non-regulated states. Ohio, Arizona, Michigan, and Nevada have issued warnings that sportsbooks who start operating prediction markets could lose their licenses.
The possible solution? Offer prediction markets only in non-regulated states, and stay away from sports for the time being.
That appears to be the current plan for DraftKings, based on the wording of its presser. It noted a plan to offer contracts “across finance, culture, and entertainment,” and notably omitted sports from the list.
A DraftKings source told Yahoo the company’s prediction offering will “focus on states without legal sports betting.”
Still, the DraftKings press release notably left the door cracked for an eventual sports prediction market offering. It said the offering “may expand into additional categories over time.”
In that sense, DraftKings may be in wait-and-see mode regarding ongoing lawsuits between states regulators and prediction operators.
The company will also likely see how the state regulators respond to an initial non-sports offering. If DraftKings Predictions goes live with offerings about Taylor Swift’s outfit at the Super Bowl, will cease-and-desist letters will flood into the mailbox?
As long as the legal landscape for prediction markets remains unsettled, DraftKings is keeping its options open through the Railbird acquisition.
Image credit: WPT/Flickr (license)
