Ronnie Wexler 00:00 

Hi, it's Ronnie. Welcome back to the Barclays Brief. It's Monday, April 13th, and I'm here in the studio with our U.S. gaming analyst, Brant Montour. Brant, great to have you here for your first time on the pod. Welcome. 

Brandt Montour 00:08 

Awesome to be here, Ronnie. Thanks for having. 

Ronnie 00:15 

So, listen, I invited you for a reason. I'm totally overwhelmed by the way prediction markets have become all the rage lately. They're everywhere I look. And now hearing what the Polymarket odds of something are when discussing financial markets or political outcomes, it's pretty much become ubiquitous. And this “wisdom of crowds” approach is proving powerful in a lot of important ways. Can you please walk us through the evolution of prediction markets, how we got here and why the growth has been so rapid? 

Brandt 00:43 

Yeah, it's probably the most fascinating theme to emerge in my space in ten years. I mean, it’s up there with the US legalizing sports betting, you know, what prediction markets are essentially exchanges that you can bet on, you know, either side of a market of a specific thing happening, an event, you know, a basketball game, and you can watch the chance of that thing occurring in, in real time, which as a, you know, which as a gaming analyst, you know, we know a lot about consumers and their dopamine hits. 

Well this plays into that. But the output of this market is a constantly evolving prediction value if you will. Right. And some people call it “a truth machine”, I'm not going to opine on that. But it's very easy to see why. You know, why it's becoming so popular so fast. I mean, that the media, right, they want to combine it with a news story in that combine. 

Right. You're talking about an event, a news story. You're going to put a percentage chance of that event coming or happening. You put those together as a very ingestible piece of content or a product for your consumers. 

Ronnie 01:42 

It's a lot of free marketing for the prediction market companies. 

Brandt 01:44 

I mean, and the prediction markets know that, right? They've been playing into that. The banks, the banks are also, you know, net proponents, it seems so far, because it's kind of hard to hedge these exact events happening. You have to use right, liquid financial products that already exist. And there's a tracking error there. It's not perfect correlation. So that's you know, that's appealing for them. And then of course politicians are getting involved because of the potential recent fallout. 

Ronnie 02:06 

Okay. So these markets are clearly going from niche markets to mainstream. They definitely feel mainstream to me in your eyes, how big can these markets be? What's the TAM here? 

Brandt 02:15 

Yeah. So good question. You know looking at the volumes right now if annualized volume run rate for prediction markets are somewhere between $125- 150 billion of total volume, that's like dollars staked. 

And you can think about that in a very small percentage point amount of revenue, from that in terms of the take rate. So you're talking about low to mid-single billion dollars of revenue right now for the patient space. Overall, you can easily double that on just sports in our view. And then I would even round that up based on sort of how adults have that sports historically. 

But you could even round that up because this product engenders, more activity, more action, people, you know, maybe used to put a bet down in a game and now, you know, they feel a need to trade it the whole game, maybe traded before the game and put down multiple bets and closed those bets. And it that really kind of encourages that kind of behavior. 

And then there's this sort of, you know, non-sports TAM. Right. Where I don't know if Taylor Swift is going to drop her album tomorrow. That's not my expertise. But someone does know that and wants to bet on that. And I think the prediction markets have a vision of like everybody betting on everything all the time and it becoming this sort of new age form of investment. 

We're not going to opine on that. But you clearly see the moonshot angle that it could be very big. What's really interesting is, you know, it sound like I'm a I'm a big fan of this. It's actually not impacting our existing digital companies as much as you'd think in terms their businesses. And that's because if you're in a New York or a state where sports betting is legal, you know, the Kalshi’s of the world prediction market product doesn't really stand up perfectly with those with those products. 

Right? Those products have more breadth and more options. And so, you know, I think that historically we've seen a lot of the sports gambling, sports betting professionals go to these markets first and retail don't really switch over. So a lot of this is from states where it's not legal, but you know, prediction markets have a lot of hype. 

And you know they are taking future growth away from the incumbents. And so you've seen this massive shift of valuations from public players DraftKings and FanDuel. They've lost about, you know, high $40s, $49 billion of of equity valuation between the two of them since what we call Black Monday, which would be the Monday that, Kalshi launched Parlay betting in the early NFL season last year. 

And then the private market valuations for the two big prediction market platforms are around low $40s. So it's almost been a perfect shift from public equity valuations to private equity valuations. 

Ronnie 04:44 

Okay. So this market is on its way to being a massive market. The value has moved from public to private from a valuation perspective of late. Just put a finer point on the difference between prediction markets and regular sports betting for me in the listeners, because I think that's important. 

Brandt 05:01 

Yeah that is important. So prediction markets like I said, the prediction markets are an exchange, prediction markets, you know, envisioning a world in which, you know, or a market that, you know, is peer to peer, right. You are betting against someone else.  

Ronnie 05:13 

When I lose, I should just feel better because I'm just losing to another person versus some company or... 

Brandt 05:17 

You're losing to someone that you may have an edge, but at least it's a fair edge against you. Whereas a bookmaker clearly is, you know, not as appealing to some folks. I think that that's an interesting topic because, you know, these markets aren't these prediction markets aren't all peer to peer yet. That's one. Two is that in the UK we've had you know, there's been an exchange in the UK for 25 years. Right. And that exchange makes up about 9% of the total market of sports betting in the UK. 

And you're like, well why isn't it, why isn't it bigger? Is that the ceiling? It may be the ceiling. What happens is retail bettors eventually leave those markets. Okay. And the reason why is because sportsbooks can provide more depth, more breadth of markets. They don't have to go find, or they have to build liquidity in each one of these markets. 

They are the liquidity. And then they also know you as a better. They know you're not a professional bettor a lot of the time. Right? And so they're able to give back promotions and freebies to you to keep you in the system. So, you know, it's hard for us to envision prediction markets ever having as good of a product as the digital bookmakers are able to provide. 

Ronnie 06:22 

Let's talk about the regulatory dynamic, because this feels pretty important to me. You recently wrote a piece about how state and federal opposition is mounting. Take us through some of the issues and arguments on both sides, please.  

Brandt 06:34 

Yeah. Look, the states currently regulate all gambling, right? States for a long time, gambling, including sports betting. And so that includes taxes. 

That includes problem gambling. It's all kind of very important guardrails that have been evolved and put in place over the last decades. Prediction markets are trading contracts via swap. And they're you know, they're underneath the jurisdiction of the CFTC, which is which is federal. And so there's countless lawsuits right across the country right now between states and prediction markets and states versus the CFTC themselves. 

So as of today, prediction markets, they're marketing themselves as sports betting. Right? Even though that, you know, they're saying that they're traders, they're trading institutions or trading markets, but they are you know, they're marketing themselves into the consumer sports betting.  

Ronnie 07:17 

All right. We've seen a lot of things hit the mainstream of late that had a lot of momentum for a period and then sort of fizzled out, particularly from a consumer lens perspective. 

Is this a fad in your eyes, or are we really going to live in a world where, from here on out, everybody's just going to want to wager on everything? 

Brandt 07:37 

No, it's not going back in the bag. The cat is out.  

Ronnie 07:39 

Can I make a bet on it?  

Brandt 07:41 

And then you can watch it real time. It's been trading during our call. 

Look, you know, watching a real-world event play out on a market in real time. I think has sort of endless streams of dopamine for folks. So, no, I don't think it's going away. And I think that there is staying power for both sports, which is the easy part. 

That was the easy part to scale. That's the one that we're that there's, you know, an installed base of of users that already do this. I think that prediction markets, frankly, have opened the door for a whole new subculture of professional sports gamblers that are doing it in a different way than they used to. 

I mean, back in the day, you know, if you were a professional gambler, you know, you're the hardest part of your day was getting the action down and you bet over $10 or $15,000 in a market and you're getting cut off, right? You had to literally have beards running around placing your bets for you. 

And now, you know, this is a sanctioned activity. You know, you've got, you're doing it legally. And they they'll take as much action as you want to give.  

Ronnie 08:40 

So it feels like this is heading into megatrend territory. Let's look at it through that lens and think about it from an investing perspective. How do you make this bet in traditional financial markets, and how is that exposure priced in your view? 

Brandt 08:51 

We look at a lot of stocks and you know through the lens of upside downside right. And in this scenario you know the downside is pretty much priced in right a lot of the growth is really been sort of taken away from these guys. That's what the stocks are telling you today. Whereas look there's a lot of upside scenarios that work out. 

Either you know the regulatory binary could go back into their favor, but also they're going out on the offensive and trying to build their own prediction market platforms. Either of those positive scenarios, there is nothing in the stocks for those. And so, you know, look, when you think about like, all right, well why wouldn't I invest now? Well look there's a time horizon element here and it's going to take, it could take 1 to 2 years to get clarity on that. 

You know, on that competitive environment, on that regulatory backdrop. And so that's a long time to wait. I mean, the investors that I speak with, like they think this is a very attractive risk reward, but the time horizon is the problem. And I think that's the problem is, you know, what is your time horizon? What's your end game? And can you stomach the weight? 

Ronnie 09:55 

Brandt. Fantastic to have you here. I definitely learned a lot. And I would bet that you'll be back soon. 

Brandt 09:58 

Thanks, Ronnie.  

Ronnie 10:00 

Thank you. In summary, there's something very significant happening here that continues to amaze me how people use these prediction markets as a live signal to process news, politics and markets in real time. 

It's going to take a while to find the right end state, but I feel like this is here to stay and worth paying attention to as an investor. Thanks for listening. Please hit subscribe wherever you listen to your podcasts, and we'll be back at the same time next week.