Predictive markets set to make sports betting a big issue again

A ceasefire over sports betting in California may be ending after DraftKings and FanDuel recently adopted business models that threaten the political power of the state’s gaming tribes.

For the last couple of years, the ubiquitous sportsbooks (which began as daily fantasy platforms) had been trying to cozy up to the tribes after a bruising ballot box battle over sports betting in 2022 seemed to overwhelmingly establish that Indian Country holds all the keys to the lucrative Golden State gaming market.

FanDuel hired several prominent tribal figures to its staff, and both companies conspicuously tried to curry favor by making appearances at Indian gaming conferences, where top executives promised legal sports betting would only come to California with the express permission of the state’s wealthy and influential gaming tribes.

But then came the meteoric rise of prediction markets, which has upended and divided the U.S. gambling industry and caused both DraftKings and FanDuel to rethink how they operate.

Prediction markets, like Polymarket and Kalshi, define themselves as financial exchanges where customers can buy and sell predictions on future events, known as event contracts.

Prediction markets offer contracts on a litany of events, from who will win the next presidential election to how high inflation will rise over the year to what the highest temperature will be in Los Angeles today. They also offer contracts on who will win sporting contests.

But unlike typical sports betting, which is regulated at the state level, prediction markets are regulated at the federal level, by the Commodity Futures Trading Commission or CFTC. That means you can purchase a contract on the outcome of the next Lakers’ game today, from within the confines of California, even though sports betting is expressly illegal here. The state’s gaming tribes call prediction markets sports betting by another name and have submitted briefs in support of a lawsuit challenging Kalshi’s operations.

Prediction markets, however, also represent a threat to traditional sportsbooks who have to secure approvals to operate on a piecemeal, state-by-state basis. Over the last year, sportsbooks have watched as prediction markets have exploded in popularity and become an intense focus of gaming trade publications as the burgeoning disruptors seek to rearrange the gaming industry’s pecking order.

Not wanting to be outflanked, both DraftKings and FanDuel effectively decided if you can’t beat ‘em, join ‘em – and launched their own prediction markets last month.

The rollout of FanDuel’s prediction market has been limited, with service available initially in only five states: Alabama, Alaska, South Carolina and the Dakotas. FanDuel says it will expand, but it hasn’t said to what other states. DraftKings, on the other hand, immediately began offering event contracts in 38 states, including California and Texas, where sports betting is also illegal.

That news has not gone over well with California’s gaming tribes.

Victor Rocha, the influential conference chair of the Indian Gaming Association who acts as something of a de facto spokesman for the state’s gaming tribes, posted on X, “California and DraftKings are at war again. We will use every resource available to choke the oxygen out of these rat bastards. It’s a promise, not a threat. Bookmark this post.”

Prediction markets have existed for decades, but their recent growth has coincided with a shortage of commissioners at the Commodity Futures Trading Commission. The five-member commission currently only has one commissioner, its chairman, Michael Selig, who was only confirmed by the U.S. Senate last month. Selig has not taken a definitive position on whether purchasing a contract for a sporting event is the same as sports betting. He testified to the Senate Agricultural, Nutrition and Forestry Committee that the matter should be left to the courts.

“California and DraftKings are at war again. We will use every resource available to choke the oxygen out of these rat bastards.”

In the absence of regulatory guidance, New York Assemblymember Clyde Vanel, a Democrat from Queens, has introduced legislation to create a statutory framework for prediction markets. His bill, AB 9251, would prohibit prediction markets operating in New York from taking event contracts on sporting events.

Whether New York can actually do that in light of federal preemption is an open question. California currently has no comparable pending legislation. And depending on how things ultimately shake out, that could potentially pose a problem for the tribes.

If prediction markets are allowed to take hold in California (and/or elsewhere) while we await a court ruling, they could perhaps become too big to fail, a notion being seriously discussed in some circles.

That potential future – however remote it may appear to be – would represent an end around of the tribes, undermining their political power and encroaching upon their brick-and-mortar casinos, which are more vulnerable than they may seem to be.

Despite their success and popularity, California’s tribal casinos, like physical casinos everywhere, are bracing for the presumed inevitability of iGaming or online gaming, in which you can play slots and table games on your phone.

Online sportsbooks and prediction markets, with their iPhone and Google Play apps, are perceived to represent the first domino leading to legalized iGaming in California.

If the casino tribes cannot ensure that they play a substantial role in online gaming in California, they risk losing the franchise that has lifted them from poverty and given them tremendous political clout.

The rise of prediction markets – and DraftKings and FanDuel’s full embrace of their business model – doesn’t necessarily mean another bare-knuckle fight over sports betting is imminent.

Indeed, some tribal leaders see the encroachment of prediction markets as an incentive to work faster on a deal. There appeared to be little urgency after the 2022 election to make something like that happen, particularly on the part of the tribes, who were universally viewed as calling all the shots on how and when legal sports gaming would come to California.

But with the introduction of a disruptor as destabilizing as predictive markets, the political calculus may now be changing – and the longer sports betting remains off the table in California the longer the state loses out on potential sports betting revenue.

That revenue could theoretically be lost forever if prediction markets become entrenched in the state.

But with the introduction of a disruptor as destabilizing as predictive markets, the political calculus may now be changing – and the longer sports betting remains off the table in California the longer the state loses out on potential sports betting revenue.

If this sentiment prevails, it could spur the state’s gaming tribes to move quickly to cut a deal with the major sportsbooks eyeing California, which include not just DraftKings and FanDuel but also entities like BetMGM, Bet360 and Fanatics.

“(E)very day we delay, we give up leverage and invite the state or the courts to step in and decide for us,” wrote Jeff Grubbe, the former chairman of the Agua Caliente Band of Cahuilla Indians, in a recent post on LinkedIn urging California’s gaming tribes to act “right now” to develop a plan for sports gaming in California.

Agua Caliente operates three Riverside County casinos in Palm Springs, Cathedral City and Rancho Mirage, all in the Coachella Valley.

“California Tribes have earned the right to lead the largest gaming market in the country,” Grubbe wrote. “The question now is whether we seize this moment—or let it pass and spend the next decade fighting to get back what we gave up.”

Incidentally, Fanatics also launched its own prediction market in December. It’s only been rolled out in 10 states so far but the sports apparel company, which got into sports gaming in 2023, has said it plans to expand to California soon.

Of course, that’s not the only way stakeholders see the situation. Others share the aggravation of Rocha, the conference chair who promised to do everything to choke out DraftKings in a scorched earth defense of tribal interests.

“They acted way too early without thinking through what the ramifications are,” Rocha said of DraftKings and FanDuel. “And we’re just licking our chops.”

His reaction suggests the debate over sports betting in California is poised to grow contentious once again, and if that happens there’s no telling where that could lead. As the 2022 election showed, both the sportsbooks and the tribes are willing to put their money where their mouth is, and the stakes are undeniably high for everyone involved.

Rocha predicts there will be a contentious public debate over sports gaming next year. How contentious is yet to be determined, but Jeremy Kudon, a partner with legal heavyweight Orrick’s New York City office who directs lobbying strategy for an alliance of sportsbooks, recently told the Sports Business Journal he believes this will all lead to the tribes running a ballot measure effort in 2028.

Rocha told Capitol Weekly the only thing DraftKings and FanDuel’s recent foray into prediction markets will do is help the tribes separate the honest brokers from the bad actors.

“They’re not thinking about the long-term consequences,” Rocha said, alluding again to the tribes’ stance that they control the introduction of sports betting in California. “This,” he said, “is pure greed.”