Podcast Alert: What to do about prediction markets

Transcript

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Charles Rolston: [00:00:00] Welcome to the Navigating Sports Business Podcast. I’m Charles Rolston, VP of Consulting at Navigate, joined by Navigate’s president, Jeff Nelson, to discuss prediction markets and sports properties, what matters, what’s changing, and what to look out for. And as always as we do these podcasts, we’re drilling down into a specific area of the story rather than try to tell the whole history of prediction markets. 

We’re focusing on how teams and properties should be approaching partnerships and really planning for the future in this chaotic environment. Now, Jeff, before we get into it, you informed me that before this recording you were going to do a little market research on how easy it was to use one of these platforms. So why don’t you tell us, what was your prediction? 

Jeff Nelson: I first went into Robinhood because I already have a Robinhood account. I thought that would be the easiest way to, to test out what it’s like to [00:01:00] make a prediction market trade. And it rejected me. I don’t know why. It wouldn’t let me do it. 

So then I downloaded Kalshi and I went to make a trade on Arsenal winning this weekend, beating Leeds mostly because I’m a diehard Tottenham fan and so I like to really needle our Arsenal supporters, of which I am greatly outnumbered here at Navigate by betting on their team ’cause they think it’s a jinx. 

But it was interesting especially because if you are used to sports betting, you’re staring at the numbers and then trying to think about what that would mean in terms of more normal American odds, and should I even be doing this or should I just go to a DraftKings or a FanDuel and place a bet there? But it’s pretty easy, like almost all sports betting, at [00:02:00] least once you’re allowed to do it, pretty easy. 

Charles Rolston: Jeff, you are notorious for not making any firm predictions on your own team’s outcomes, but that doesn’t stop you from making predictions on your rivals, and oof, it’s gonna be a tough weekend for the Gunners. 

I could definitely see that. So let’s get into this because we talk to sports business leaders at teams on a daily basis, and this topic is coming up more than most when it comes to sponsorship environment. So how should properties really think about prediction markets as partnership opportunities? 

Jeff Nelson: Yeah, I think it’s a pretty significant opportunity, and it reminds me a little bit of either in the financial services category, the tech category, where as those spaces evolve, obviously, and sometimes come together in fintech teams have to figure out, “Okay, do I need to carve up the category [00:03:00] further? 

Does my existing partner have a right to this? If they do, how do I approach it and still make sure I monetize it? If they don’t, do I just go take it to market? And how much risk is there in a new category? And is there more or less risk with different partner options?” So these are all the questions I think that we’re hearing and contemplating. 

I don’t know, anything you think I missed? You’re talking to these teams just like I am. Anything else you think they’re asking? 

Charles Rolston: I think what this takes me back to is Crypto Mania a few years ago, where everybody had an established financial services partner across many different subcategories in the financial services category. And crypto kinda came out of nowhere, and no one really contemplated this within their contracts when they were signed five, 10 years ago. 

It was such a new technology, and really took the world by storm post-COVID. And so there [00:04:00] were teams that said, “Hey, our financial services partner is one of our longest tenured partners, highest paying people that we wanna keep really happy. We’re just gonna take a wait and see approach to see how other teams and leagues do it.” And there were others that said, “We’re gonna take the bull by the horns and while this money is hot and they’re willing to splash, 2X, 3X what a normal partner would in, in this particular category we’re gonna take the money while it’s there.” 

And that led to a lot of PR disasters. The most public one probably being the Miami Heat’s s- stadium naming rights with FTX, and obviously when they went through regulatory pressures and bankruptcy and all the legal proceedings, that, that led to some chaos, certainly internally, but definitely externally facing to the fans across the country. 

So that’s what I’m thinking about a little bit here. Personally, I don’t think that prediction markets are necessarily just going to go away because of some type of, mass run on liquidation or something like that. But I do think that there is, there has [00:05:00] to be some type of regulatory control here that limits what they’ve been able to do while this gray area has existed. 

Jeff Nelson: Yeah. This all comes down, like so many things, to risk aversion, because if you talk to people in and around this space- They’re largely confident that at a federal level and there are 19 federal lawsuits as of now, but that at a federal level, it’s not like the government is gonna proactively come in and start to impose regulation. 

Trump Jr. is an advisor to Kalshi and Polymarket, and I just, I haven’t found anybody who thought that under this administration you have all that much regulatory risk at a federal level. But the state level’s a totally different story. You have Maryland I think Kalshi has had a couple losses in lower level courts. 

They’ve had some wins in New Jersey and Nevada. It’s a scattered [00:06:00] mess out there, I think at a state level. And so that, back to your maybe original question of when we’re talking to teams and they’re looking for our thoughts on this, I think the first question we’re asking with them is how’s your state looking at this? 

Are they looking at it at all? And if they are, what kind of view do they seem to be taking?” But in the interim, you probably need to leap in because if it’s something that you can do, the dollars are certainly there. I keep saying Kalshi and Polymarket, right? But DraftKings, FanDuel, Fanatics have all launched their own prediction markets. 

I think they’re on the smaller side at the moment, but they’re gonna grow. So you have this really healthy bidding environment for potential partners, and then it comes back to a comment you made, which is really, okay what kind of existing partner do I have in this space, [00:07:00] and what approach do I wanna take? 

Do I wanna go to them and basically give them kind of an unofficial first right of refusal on taking the category? And by doing that, I’m signaling to them, because this all could be viewed a little bit as a gray area, especially if your partner has exclusivity on sports betting. You’re giving them that really friendly but firm signal that this is a new category in your view. 

Do they want it? You would wanna give them a fair shot at it and see where that goes. Of course, you wanna go into that conversation knowing how valuable you think it is, and are they willing to pay enough for you to give it to them? But it opens the door based on that conversation to then start having some other conversations. 

And to your point on crypto and financial services, at that moment teams had to decide [00:08:00] what kind of relationship Do we have with our existing partners, and how much do we want to take a harder line or a harder stance in just saying, “You don’t have the rights to this. We’re gonna take it fully to market. 

You can bid with everybody else,” or, “Hey, you’ve been a great partner. Let’s work through this together, see if we can include it in your current deal, but you’ll have to pay for it.” 

Charles Rolston: If you go back to the beginning of the golden age of sports betting post-legalization, you saw a number of different bidders for these category rights come into play. 

Obviously FanDuel and DraftKings, who had a healthy headstart on market share from having their DFS platforms. But even Bet365, MGM they were also willing to splash a lot of cash to be able to grab the attention of sports fans who are obviously driving, a significant amount of the [00:09:00] overall handle with professional sports. 

What we’ve seen so far is that a lot of these renewals in the traditional sports betting category have gone backwards and started to dry up, and you’re really seeing only FanDuel and DraftKings commanding a lot of these these sports betting categories at the professional sports level. 

Let me ask you this. If the money’s not there in the sports, traditional sports betting category, do you run to this new environment where Kalshi and Polymarket are really fighting for market share in a two-horse race and try to get the highest possible investment out of them? 

Jeff Nelson: I think you have to. I think the way that we’ve looked at this when internally kind of batting around what our guidance to clients should be is why wouldn’t you run toward this? And the two answers are either you risk upsetting your current sports betting partner, and even if that category is maybe going backward a little bit, you don’t wanna end up with nothing. 

But [00:10:00] I think that risk is mitigated by the fact that your current partner has almost certainly started their own sports prediction market platform, as we’ve talked about. And so they recognize that this is new and important, and more than likely they’re gonna recognize that this is not in their existing agreement. 

And as long as you have a decent relationship there I don’t think the risk of upsetting them by saying, “Hey, we need to either bring you on board for this category or we’re gonna go to a Kalshi or Polymarket,” I don’t think the risk is that high. And then there’s the other risk, which is something you called out earlier, right? 

An FTX Miami Heat example where because of regulation or because one of these companies somehow implodes, which I don’t think is all that likely, at least among the bigger players. But the other reason would be to avoid the PR disaster. [00:11:00] I would argue that Miami Heat FTX example with the naming rights, yeah, it’s a momentary issue, but do we think that’s hurt the Miami Heat brand? 

Do we think that’s something people really still linger on? They got, if memory serves, a pretty healthy check up front for that deal. I would say the risk here is less than it was with crypto in terms of that kind of PR disaster. So if those would be the two reasons you wouldn’t do it, I don’t think we see that much concern with either. 

So I think you have to embrace the category and you should fill it now while you have that healthy number of bidders all trying to gain market share.[00:12:00]  

Charles Rolston: Yeah. How about we talk about some current deals? I was watching UFC 324 in an absolutely amazing headliner fight with Paddy Pimblett, and I saw Polymarket absolutely everywhere. The NHL has gone in deep with multiple partnerships with Kalshi and Polymarket. Teams are starting to jump at this too. What have you been seeing? 

When you’re watching sports, are you seeing every other commercial be something related to a prediction market similar to what we saw when sports betting was investing so heavily? 

Jeff Nelson: Not yet, but it feels like we’re about to, if that makes sense. Of course, the big news recently was that the Super Bowl is not going to have any sports prediction markets or any prediction market ads. 

At least that’s what’s been reported. And so that’s thrown maybe a momentary splash [00:13:00] of cold water on everything. But the NFL is the most risk-averse league traditionally, right? Wanting to protect the shield. And so you look at the NHL having two partners already. Again, I’ve talked to people in and around this space, and I’ve been told that the other leagues are all at a point now where they’re pretty comfortable with it, where their fears about it have been assuaged. 

And so It, it seems like we’re on the precipice of that moment where everybody’s gonna get very aggressive in advertising and trying to gain market share. And I’ll actually throw a question back to you. Do you think that’s also gonna come with all sorts of like promos and incentives to sign up for one versus the other? Or is the prediction market space more limited in that respect? 

Charles Rolston: That, [00:14:00] that’s a tried and true strategy that’s been employed by the traditional sports betting platforms for years. You see those promos start to dry up because they realize that, if you’re playing on FanDuel, probably that person has money in their DraftKings account and in their Caesars account. 

And realistically the cost of customer acquisition is just way too high to be able to offer a $1,000 free bet like they were doing in some states, very often after post-legalization. So I think that you might see, I, I’m not positive on the restrictions around specific event promotions that a prediction market can actually do. 

Because again, a lot of this is peer-to-peer based predictions rather than it being against a actual house. I know in some cases that obviously is the case. But again, there’s people taking both sides of this. And offering a promo might cut into the take that, a Kalshi and a Polymarket might be able to generate. 

So I think that if the regulatory [00:15:00] environment allows for, further promotions for actual events instead of just sign-up bonuses, you’re gonna see that. That’s probably 1A in terms of the playbook on how to keep people on your platform over another. I think what else is interesting in what we’ve seen with what the NHL has done, with what UFC has done is that it’s really given some of these other leagues, that permission to experiment. 

There’s enough that are playing in this space right now to, if you’re an NBA team and you have the ability to go out and get one of these partners, to really jump on it, just because there is a first-mover advantage. I understand if you are the New York Knicks, the New York Yankees, the LA Dodgers and you are a big market team that can command top dollar regardless of, how much budget has already been allocated towards other platforms, you can afford to wait because Kalshi and Polymarket are saying, “Hey, we wanna make sure that we spend- what we need [00:16:00] to spend in order to grab these top brands. 

But if you are not one of those, there’s certainly a first mover advantage because, again, these are finite budgets. So the money that they’ve already spent, they’ve probably been paying a premium for these sponsorship categories in order to break through, get attention, and have those already in their roster. 

But if you’re somewhere in the middle and you’re waiting here, you might, you might be passed up as budgets start to tighten and they realize they need to allocate a significant amount to some of these bigger brands that are still waiting to advertise their category as being available. 

Jeff Nelson: Yeah. The other reason I think our view is if you’re a team, you should probably figure this out sooner than later or run to this is because if I were on the other side, if I were one of these prediction market platforms California has been the Holy Grail as an example in sports betting. 

When will it be legal? What do you do to set yourself up for that day so that you can grab as much early [00:17:00] market share as possible? All of a sudden, you can go to California right now, and I think you can use Kalshi or any of these apps, and you can do prediction markets in sports. And so if I am one of the players in this space, I am trying to allocate as much money as I can to the partnerships that I think will be most influential in a place like California, and maybe that means I start to trim my budget on what I’m willing to do in other less populous states or states where sports betting is already legal and a lot of the market has already gotten to the habit of just opening FanDuel or DraftKings, and can I really get them into the habit of now doing this different type of trade instead of bet? 

I think the strategy there would be to attack the markets that have been opened up that [00:18:00] where traditional sports betting is not legal and allocate as much budget to them as possible. 

Charles Rolston: Yeah, Jeff, as I mentioned the NHL has jumped into the deep end on this. There’s individual teams with deals with Kalshi and Polymarket. 

The UFC, as I mentioned, is all over it. Even CNN has a data integration partnership with Kalshi. Now, we’re getting to the prediction segment of this prediction markets discussion, so I’m gonna ask you, how many teams do you think, what percent of teams do you think will have a prediction marker partner in the next 12 months? 

Jeff Nelson: I feel really confident that it’s a majority. But again, if risk aversion is underlying decision-making on this- Maybe it’s 75% a year from now not 100% or not quite u- up in that 90, 95% range. But I think within the next year, let’s say [00:19:00] 75% of teams have a deal, whether that’s just expanding the deal they have right now with FanDuel, DraftKings or bringing in a Kalshi, a Polymarket, a Robinhood, somebody of that ilk. 

But I would love your prediction on whether or not when teams do these deals, do they stick to sports? Do they promote the sports market, or are they promoting all the other different markets that you can trade in, like politics as you mentioned with CNN or other world events, important or trivial? 

Charles Rolston: I’d love to think so because honestly, for me personally, that’s what really interests me about prediction markets, and it’s not just the [00:20:00] access to normal, money line or over/under type betting or even props. It’s really just all the nuanced and granular markets that, you can make some type of prediction on. 

We could open up a market right now if there was enough liquidity to ask the public what percentage of pro teams does have a prediction market partnership in the next 12 months. I was flying out into Miami Airport during this storm a couple days ago, and I was looking to see if there was any markets that was gonna tell me what percentage of flights would be delayed, interrupted, or canceled coming out of Miami. 

And I don’t even go to, I don’t even go to the weather app anymore. I’ll just go straight to Kalshi and Polymarket to help inform, some major life decisions. So I think it’s really interesting. The only caveat to that is that- Since sports predictions actually came to each of these platforms, they have absolutely dominated the amount of handle that goes through. 

I don’t even know if handle’s the right word for these prediction markets, [00:21:00] but sometimes depending on the events that are happening over the course of that week or month they they’re 90 to 95% of the dollars that are transacted over the platform. And obviously that’s gonna change as, more of the political prediction markets, start to heat up as we get closer into election cycles and things like that. 

But as it stands right now, people really are using these platforms as a sports prediction platform and, the other kind of more interesting markets that are available it’s nice to have the, some type of prediction and, some type of public knowledge that’s coming to a consensus on whether it’s going to be a yes or no. 

But ultimately, I just do not think that there’s enough money transacted there to be able to be promoted by the teams. I think if I’m a brand marketer at Kalshi or Polymarket, I’m telling my teams, the ones that I have partners- partnerships with, “This is what’s driving people to the platforms. This is what’s keeping them on, keeping their dwell time highest, and making sure that they’re constantly [00:22:00] redepositing. 

I don’t even want you to waste your time with some of these other, nuanced markets.” Now, not to say in the media space when we see commercials and we see eventually a Super Bowl commercial, will they be advertising all the other interesting markets that you can make a prediction on? 

I think so, because I think that is gonna pique the curiosity of people and get them to the platform. But in terms of the daily drivers it’s gonna be sports. 

Jeff Nelson: I think our summary here is that this is coming this is here, I should say. This is here. The majority of teams in the next year are gonna have a partner. If you are listening to this and you’re from a team, we would recommend you, if you haven’t already model out what the value of this category should be worth relative to your sports betting partnership. Talk to your sports betting partner. See if they can make you that [00:23:00] godfather offer to grab the category before you truly take it to market. 

And if they don’t, take it to market and fill the category sooner than later, especially given these companies are gonna get smarter and more strategic every day on how they’re spending their money and how they track whether the spend of that money is yielding increased market share. And make sure you have your lawyer your general counsel close by during all of this, and how you write the contracts and how you think about how it is playing out in your state and whether regulation is or is not potentially gonna come via the courts or your legislature. But as you follow all of that, get a deal done, right? 

Charles Rolston: I couldn’t have said it better myself. This category is ripe for the taking, and make sure that the [00:24:00] lawyers are going to stay busy, because that’s probably going to be the most interesting piece of this at the federal level, but also individually as it leads to contracts and exclusivities with current partners. 

So if you made it this far, thank you again for listening to Navigating Sports Business. I’m Charles Rolston, joined by Jeff Nelson. You know where to find us, www.NVGT.com. But please do not hesitate to reach out, and we’ll see you on the next episode. 

Jeff Nelson: Charles, before we go I thought it would be fun for us to look on… I have Kalshi up. Look on Kalshi and place a trade. I would like you to tell me, where will Taylor Swift and Travis Kelce’s wedding occur? Rhode Island, New York, Pennsylvania, Tennessee, or [00:25:00] Ohio? 

Charles Rolston: I’m partial to The Bahamas, and I think that would be a beautiful setting for a wedding because I had mine there last year. 

Jeff Nelson: It’s not an option, but now that Shannon’s happy, come on, what do you think? 

Rhode Island is the heavy favorite. 

Charles Rolston: As most people know, I’d love for it to be Ohio. Put it in Athens, Ohio, where I went to school. Shout out Ohio University. That would be a beautiful setting for a wedding, and we could all go to Court Street after to celebrate. But how what percent is Ohio? 

Jeff Nelson: If I place a dollar bet on Ohio, it pays out $13. Big time long shot. Should we do it? 

All right, a dollar on Ohio. 

Charles Rolston: You know what I wanna do? We need to call somebody at Kalshi and get you as an option for who will be groomsmen for the wedding of Travis Kelce and Taylor Swift. You’ll be fighting for that spot with Patty Mahomes, Kumar Ferguson, and Austin Swift But let’s get you on there. 

Jeff Nelson: I would love to [00:26:00] be on there. 

Charles Rolston: Thanks everybody. Thanks for listening. We’ll catch you on the next episode of Navigating Sports Business.