DraftKings Prediction Markets Entry Could Differ From FanDuel, Says Analyst
Sports betting industry analysts are wondering how DraftKings, FanDuel's closest rival, would react to news that Flutter Entertainment's (NYSE: FLUT) FanDuel is working with CME Group (NASDAQ: CME) to offer financial event contracts to the sportsbook's customers.
Jefferies analyst David Katz discusses the problem in a recent report to clients, offering some suggestions while pointing out that DraftKings' approach might be different from FanDuel's. According to him, DraftKings would probably move "strategically" in the prediction markets, just like its rival.
According to Katz, the Consumer Federal Trade Commission (CFTC) issues designated contract market (DCM) and futures commission merchant (FCM) permits, which are required for US prediction market operators. Because CME already has those approvals, FanDuel did not have to wait out a potentially drawn-out regulatory process or buy a business having those permits.
“Our industry sources note that FLUT’s partnership with the CME Group appears to be well thought out, with the company avoiding the need to acquire a costly DCM, benefiting from the solid reputation of the CME Group, avoiding the legal conflicts of Kalshi, and does not yet potentially provoke state gaming regulators with a move into sports contracts,” notes Katz.
DraftKings May Take a Different Approach
DraftKings may use a different prediction markets strategy than FanDuel. For instance, the former's filings with the National Futures Association (NFA) suggest that it may independently seek DCM and FCM permits, which has advantages and disadvantages.
To go into prediction markets, DraftKings may potentially think about making an acquisition. The DCM-licensed private prediction markets company Railbird was reportedly in talks with the sports betting behemoth last month. As of yet, nothing has came of those discussions.
The acquisitions of Jackpocket and Simplebet demonstrate DraftKings' talent for leveraging acquisitions to expand into new markets or strengthen market positioning.
Although prediction markets are crucial
Traditional sportsbook providers may be compelled to enter the prediction markets sector as Kalshi, Polymarket, and Robinhood, among others, take advantage of football season to offer more contracts for sporting events to customers. According to Katz, it's an interesting area, but it doesn't change the general investing thesis for businesses like DraftKings and Flutter.
Prediction market risks must also be taken into account by such operators. Specifically, the scrutiny they might face if they operate in jurisdictions that are against the expansion of gambling or where tribal operators are in charge.
“Despite the potential allure of prediction markets, we have reservations about the sub-market for now, given the potential to impact relations with both existing legal state regulators, and potential new state opportunities, most notably California tribes and Texas political bodies,” concludes Katz. “Our impression is that DKNG would similarly exercise caution in any potential endeavors around predictions.”
