Look Before You Leap

For investors looking at near-term stock decisions, the most important factors in the U.S. may not come from anticipated changes in earnings this year, as inferred from first-quarter releases.

Instead, the important factors are coming out of Congress and state legislatures, courts, and, on any given late night or pre-dawn morning, the keyboard of America’s seemingly most impulsive social media influencer, Donald Trump.

This legislative risk, as it’s called, isn’t new for gaming, among the most regulated of all industries.

What is new is a bifurcation in which the greatest part of the industry, physical casinos, is nearly mature, prompting companies and investors to trust a good part of their fortunes and futures in the hellaciously fast-changing world of technology.

Nowhere is this rush into the unknown more immediate than the so-called prediction markets, where wagers are called contracts and the constitutional rights of states to govern gambling is challenged by a federal agency that exists to regulate the hedging of commodities.

As is being reported daily, advocates of this brazen grab are running into opposition from legislatures and state regulators asserting their authority. So far, the states have been winning in lower courts, though, ultimately, the matter will be decided by the U.S. Supreme Court.

Internationally, absent the peculiarly U.S. concept of states’ rights, thus with potentially greater clarity, national governments are likewise moving to rein in or even ban prediction markets.

In the meantime, prediction market companies are raising money from investors, aligning with established gaming companies and even forming relationships with sports teams and leagues.

In other words, everyone is positioning to compete in this space in case it remains open for business.

For investors, we offer some words of caution. Even if prediction markets become pervasive, they might not be gold mines.

For one, competition will dilute opportunity. When everyone from DraftKings to Robinhood to Kalshi can get into this type of sports betting, it might not be a needle-mover for many.

A second reason, which investors should have learned by now, is that sports betting is not a hugely profitable business anyway. It has always been more an amenity for casinos than a profit center. Now, in the electronic age, operators spend so much money competing for customers that profits have been slim at best.

Of course, predictions platforms draw a distinction, saying their bettors—er, contract buyers—are not wagering against the house and its set odds, but that their platforms merely facilitate peer-to-peer contract purchases and sales.

However, gaming attorney I. Nelson Rose recently quoted a Massachusetts case in which the judge found that “Kalshi has an affiliated entity that places buy and sell orders, ensuring that both yes and no contracts can be purchased for any given event at all times.”

Concluded Rose: “So Kalshi would have to pay winners out of its own pockets, just like a bookie.”

Regardless, if their activity “clearly is the dictionary definition of gambling,” then so are commodity trades, Rose said.

Finally, as someone once said, the internet is the greatest discounting invention of all time. The nature of the business is to drive down costs to the end user—thus driving down profits to the providers.

Caveat To Our Caveat

On the other hand, if prediction market wagering does stand and someone invents a slot-like game in which a spin of the reels is called a contract, then, you should excuse the expression, all bets are off.

That might seem far-fetched, but not in the U.S., where so far, slot machines have been declared lotteries (where a central computer draws the winning combinations), bingo (where a central computer similarly draws a number), and pari-mutuel racing (where that old central computer draws the results from a library of previously run horse races).

So why can’t a central computer draw numbers that are called contracts?

Off The Radar Screen

Sometimes, the worst thing that can happen to a person or a company is success.

That may be the case with the data companies Sportradar and Genius Sports.

Both companies have enjoyed riding the growth of digital sports betting by providing the data that everyone in the business needs, from operators to odds-makers to sports leagues to gamblers to regulators.

Now, in the search for ever greater growth, they have been complicating their businesses with acquisitions and new ventures.

Sportradar presents the latest example, as it has just announced “a dedicated brand delivering a fully integrated ecosystem of cross-vertical gaming experiences to global operators.”

That gobbledygook is a way of saying the neutral sports data provider is going to become a gaming supplier, too.

Now, maybe Sportradar’s move will be a stroke of genius, opening a huge new market based upon its data.

But maybe it will complicate the company, defocus management and subvert the neutrality upon which Sportradar has been built.

To use another old line, sometimes the best road to success is to practice the KISS principle: Keep it simple, stupid.

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.