Sports Betting: Take A Gamble

Sports Betting: Take a Gamble

“Gambling is inevitable. No matter what is said or done by advocates or opponents of gambling in all its various forms, it is an activity that is practiced, or tacitly endorsed, by a substantial majority of Americans.” - Commission on the Review of the National Policy Toward Gambling (1976)

Sports betting is one of humanity’s oldest recreational activities and has been closely intertwined with the earliest origins of organized sports. As early as 4000-3000 BC, ancient Egyptians bet on dice, board games, and feats of skill, and betting was an integral part of the first Olympics in 776 BC (The Business of Sports Betting).

How spectators engage and wager on the outcomes of sport has taken on many forms since that first Olympic Games. Today, adults in most countries and states have the ability to bet with just a few taps and have a plethora of manners to express their gambling conviction.

Despite most adults' familiarity with modern sports betting, in the U.S., it was only in 2018 when a regulatory change opened the gates for online sportsbooks and daily fantasy sports (DFS) companies such as DraftKings and FanDuel. While these two giants have taken over most of the online sports betting industry, new alternatives are emerging in unregulated tangents of this market to vie for customer attention: sweepstakes and prediction markets. This week, we will discuss the history of the sports betting industry, the market dynamics, and the opportunities for new entrants.

History of Sports Betting

The foundations of modern sports betting were established in 18th century Britain, due to the growing popularity of horse racing. The late 1700s saw the emergence of the first professional bookmakers such as Henry Ogden who introduced the concept of offering different odds for different horses based on their perceived chance of winning.

In 1866, Joseph Oller introduced the concept of parimutuel wagering, a system in which bettors wager against each other rather than the “house” (fixed odds set by a bookmaker), in order to sidestep France’s regulatory barriers at the time. By 1891, the system was legalized.

In the early 1900s, the U.S. had begun to take a very different approach from their counterparts across the world. After the Black Sox Scandal in 1919 when eight Chicago White Sox players fixed the World Series, states started to outlaw gambling. Illegal betting, often run by organized crime, began to grow in its stead with some limited forms of gambling (e.g., by the late 1930s, 21 states had legalized horse racing tracks with parimutuel betting).

A major breakthrough occurred in 1949 when Nevada became the first state to legalize sports betting to boost tourism and state revenue. After seeing its success, two years later, the federal government imposed a 10% tax on all sports bets. This put a serious handicap on legal sportsbooks, making legal bookmaking barely profitable and driving action underground. While the tax on sports bets was eventually reduced from 10% to 2% in 1974 and again to 0.25% in 1983 for Nevada, illegal gambling still made up the lion’s share of the sports betting market nationally.

Between the 60s and the 90s, the federal government took multiple actions to curb illegal gambling such as the Federal Wire Act (1961), the Travel Act (1961), the Sports Bribery Act (1964), and the Illegal Gambling Business Act (1970). Despite these laws, illegal bookmaking and underground sports betting continued to flourish.

Despite a federal Commission on the Review of the National Policy Toward Gambling in 1974, which unequivocally emphasized the persistence and permanence of gambling in the U.S., pragmatism turned to fear in 1992 when the federal government passed the Professional and Amateur Sports Protection Act (PASPA). This was primarily driven by fears about organized crime and corruption of sport, the growing political influence of professional sports leagues, and concerns over the integrity and public perception of sports. This marked the beginning of a 25-year-long prohibition of sports betting outside of Nevada, Delaware, Oregon, and Montana.

Across the pond, the European sports betting market took a different, more cautiously optimistic approach and benefited immensely from the continuous learning and managed scaling of regulated sports betting. While the continent is best described as a “patchwork” of regulatory measures, competition has been encouraged and held together by harmonized EU-wide consumer protections.

Strikedown of PASPA in 2018

The American sports betting landscape underwent a revolutionary transformation on May 14, 2018, when the Supreme Court struck down PASPA as unconstitutional in a case brought by New Jersey. This landmark decision allowed individual states to legalize and regulate sports betting within their borders, triggering rapid expansion across the country. In 2024, there was ~$135bn bet on sports in the U.S.

Sports betting in the U.S. is largely a duopoly, with Draftkings and Fanduel making up a majority of revenues. Forecasts estimate that their combined market share is between 67-80% of the U.S. online sports betting market. For the 2024 Super Bowl, these two companies made up 62% of all betting dollars deposited.

Alternatives to Traditional Sports Betting Emerge

Similar to the emergence and popularity of parimutuel wagering in France in the late 1800s to sidestep regulation, a few new betting structures have quietly been scaling in the U.S. the last few years: sweepstakes and prediction markets.Despite the dominance of regulated sportsbooks and DFS platforms, these alternative methods for betting are gaining steam due to:

1. Reach in states without regulated sports betting: Sweepstakes sportsbooks is generally legal in most states where traditional sports betting is not, due to a different legal classification. However, in states like California and Alabama, there have been multiple lawsuits challenging their ability to operate.
2. User acquisition and diversity: Despite the similarity in practice between sweepstakes sportsbooks and traditional sportsbooks for the end user, based on our research, these apps are generally able to acquire users for a fraction of the cost, indicating that they are able to acquire users that are not traditional “sports bettors” that apps like DraftKings and FanDuel, who spend thousands of dollars to acquire a paying bettor.

For users, prediction markets are also easier to understand and use because there is no black box of “odds setting”. For sportsbooks, odds are set by the bookmaker (the “house”). These odds are fixed when a user places a bet and includes a built-in margin (typically around 10%). For prediction markets, odds (or the prices of “shares” in an outcome) are purely determined by the supply and demand amongst market participants. Meaning that for prediction markets, there is no house setting the odds, rather, prices are reflective of the collective sentiment (skill and knowledge) of the market participants. Fees are typically lower (and typically resemble transactional fees rather than margin built into the odds set) and users can buy or sell positions any time before the event finishes.

Our Perspective

While the risk of some form of regulation is high, we believe that sweepstakes sportsbooks and prediction markets will be regulated similarly to that of DFS. This means that these markets will likely not be addressed at the federal level, rather states will be able to determine the licensing requirements and set their own requirements around licensing fees, user or revenue thresholds, and taxation.

We believe that a full ban is very unlikely.

Further, we believe that this market will continue to be encouraged by the large sportsbook and DFS players looking to expand their reach. Similar to how the largest and fastest-growing online lottery operator, Jackpocket, was acquired by DraftKings in 2024 for $750m, we believe that these established players will be actively looking for a final regulatory decision before snapping up sweepstakes and prediction markets players, who could potentially improve their delicate unit economics.

Takeaway: Despite only becoming legal 7 years ago, online sports betting is a >$11bn market in the U.S. alone and is anticipated to grow ~11% YoY from 2025 to 2032. In addition to the rapid growth of the regulated sports betting industry, alternative wagering channels such as sweepstakes and prediction markets are emerging to compound the regulated market’s rapid growth. While there are concerns about exactly how these markets will be regulated, we believe that it is given that these operators will be allowed to continue to operate (with some requirements around licensing fees and taxation).