A question & answer session from Truist with an employee involved with the June 2000 launch of the Betfair exchange provided fresh insight on what it will take to win in the predictions business.
Tom Johnson is the founder and CEO of HoldCrunch, an analytics company that tracks online sports betting data, including the equivalent of handle at Kalshi. The interview focused on Johnson’s experience with Betfair, which he joined six months before launch.
Putting legal issues aside – which is a big contingency for predictions since most assume the issue will wind up before the Supreme Court in ~two years – Johnson gave two scenarios on who will win the predictions battle.
The most likely outcome is “one big winner” with an exchange focused on moneyline markets that retail traders will flock to while building a database of customers in those states without legal online sports betting, he said. If the market wants more options like spreads, totals and parlays then there could be multiple winners that find the right product mix just like in the online sports betting market.
Why is winning retail traders key?
Simply put, the business model for sports predictions is making revenue off retail customer losses, Johnson said.
“Everyone will gravitate towards the business that owns the retail customer relationships,” he said. “That’s where the money can be made and the opportunity lies.”
Liquidity and volume are abstract terms, Johnson said, and neither guarantees returns. Winning the product that retail customers love could help that exchange reach a scale that gives them pricing power over the market makers.
For example, Betfair implemented a 40% tax on market makers in 2008. Despite pushback over the fee, the market makers did not leave because other exchanges did not offer the retail exposure that Betfair did.
Right predictions product needs 12 months
The race to be the leader in predictions is underway, but it is still in the early laps considering the market is awaiting the launch of some big names including FanDuel, DraftKings and Polymarket.
If any product comes close to an American version of the Betfair exchange in states without legal sports betting, Johnson said, it will not take long for them to dominate.
“I think others have 6-12 months to catch up or risk losing a large chunk of the moneyline market,” Johnson said. “Betfair achieved unassailable network effects over 12 months. Everyone began copying Betfair features 6 months in when they realized what a successful exchange should look like, but it was too late.”
The right predictions product will be big enough to influence states to legalize sports betting, he added.
Kalshi’s slower growth attributed to product
Johnson noted that Kalshi‘s daily handle equivalent, not volume, is around 80% of New York. That puts it as a reasonable size, but the product is not growing at the same pace that Betfair did.
“Betfair handle grew exponentially within months of launch,” Johnson explained. “Kalshi handle has only ticked up slightly as a [percentage] of NY over the last month or so. The reason can’t be competition; Kalshi is operating in markets without sophisticated legal sportsbooks to stop them acquiring and growing customers, the reason must be Kalshi product.
Yes/no markets, half of Kalshi’s offerings right now, appeal to different customers than the Betfair customer, he added.
That said, Kalshi is better priced right now than sportsbooks, Johnson said, with about a 3.5% advantage after fees.
