Thoughts on the Market: Making a Bet on the Future of Betting

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: Making a Bet on the Future of Betting
• Release Date: March 19, 2025

Introduction

In the March 19, 2025 episode of Thoughts on the Market, hosted by Morgan Stanley, Mike Cypress and Stephen Grambling delve into the evolving landscape of the US sports betting industry. Titled "Making a Bet on the Future of Betting," the episode explores the significant growth of sports betting following its legalization, the emergence of betting exchanges, and the disruptive potential of prediction markets within the industry.

Evolution of US Sports Betting

Mike Cypress opens the discussion by highlighting the transformative shift in the US sports betting market post-2018. "Sports betting used to be against the law in most of America outside of Nevada. That changed in 2018 when the U.S. Supreme Court declared a federal ban on sports betting to be unconstitutional," he explains (00:10 ). This landmark decision led to a rapid expansion, with 38 states, along with Washington D.C. and Puerto Rico, legalizing some form of sports betting.

Stephen Grambling adds context to the current organizational and regulatory framework. "[...] each state forms its own framework across taxes, what sports can or can't bet on and regulations around advertising," he states (00:56). This decentralized approach has contributed to the industry's substantial growth, with revenues soaring from $11 billion in 2023 to a record $13.7 billion in the previous year, according to the American Gaming Association.

Betting Exchanges: An Overview

The conversation shifts to betting exchanges, a pivotal component of the modern sports betting ecosystem. Grambling defines betting exchanges as platforms where individuals can place bets directly against each other rather than against traditional bookmakers. "These exchanges match opposing bets and then take a commission on the winnings and typically offer better odds by eliminating traditional bookmaker margins," he explains (01:55).

Betting exchanges are noted for their competitive edge, offering commissions between 2% to 5%, compared to the 5% to 6% spread seen in traditional single bets. However, their market presence remains relatively modest, with single bets accounting for approximately $900 million in legalized states and an additional $800 million in states where sports betting hasn't been legislated (01:55).

Prediction Markets and Their Potential

Mike Cypress broadens the discussion by introducing prediction markets beyond traditional sports betting. "Prediction markets are a type of marketplace where event contracts trade. Sometimes they're called forecast markets or even information markets," he explains (03:30). These markets allow participants to trade contracts on various events, ranging from political outcomes to economic indicators, with the price of each contract serving as a probabilistic forecast.

Grambling acknowledges the versatility of prediction markets, noting their historical presence in areas like weather forecasting on exchanges dating back over 25 years. Recent technological advancements, mobile trading platforms, and increased retail investor participation are driving renewed interest and growth. "The 2024 election sparked people's interest in event contracts and that's persisting post-election," Mike observes (04:33).

Legal Landscape and Regulatory Considerations

While prediction markets have a well-established presence in certain sectors, their application to sports betting introduces new regulatory challenges. Cypress points out, "One area of open debate though is around the legality of sports event contracts, where we expect regulators to provide some clarity around that in the months ahead" (05:45). The episode underscores the need for clear regulatory guidelines to facilitate the seamless integration of prediction markets into the sports betting framework.

Impact on the Sports Betting Industry

The potential disruption caused by prediction markets is a focal point of the discussion. Grambling outlines a dual perspective: existing sports betting operators may face increased competition from prediction markets, but there is also significant upside potential. "A new regulatory framework could also open up new states. So the states that I referenced before that are still out there, that haven't been legalized all of a sudden become fair game given the size of these new states," he notes (06:32).

The sheer economic scale of remaining large markets like California, Texas, and Florida presents substantial growth opportunities. Morgan Stanley analysts estimate that the introduction of prediction markets could contribute "potentially in the hundreds of millions of dollars in incremental EBITDA" for incumbents navigating this evolving landscape (07:16).

Conclusions and Future Outlook

As the episode concludes, both Cypress and Grambling emphasize the transformative potential of prediction markets within the sports betting industry and beyond. Cypress envisions a future where prediction markets not only disrupt traditional betting but also offer valuable information insights for both retail and institutional investors. "I do think that's going to require participation from both retail as well as institutional investors that can help fuel a robust and liquid marketplace," he remarks (05:56).

Grambling remains optimistic, highlighting the balance between competitive risks and substantial growth opportunities. The collaboration between technological innovation and regulatory evolution will be critical in shaping the future of betting in the United States.

Notable Quotes

• Mike Cypress (00:10): "Sports betting used to be against the law in most of America outside of Nevada. That changed in 2018 when the U.S. Supreme Court declared a federal ban on sports betting to be unconstitutional."

• Stephen Grambling (00:56): "Each state forms its own framework across taxes, what sports can or can't bet on and regulations around advertising."

• Stephen Grambling (01:55): "These exchanges match opposing bets and then take a commission on the winnings and typically offer better odds by eliminating traditional bookmaker margins."

• Mike Cypress (03:30): "Prediction markets are a type of marketplace where event contracts trade. Sometimes they're called forecast markets or even information markets."

• Mike Cypress (04:33): "The 2024 election sparked people's interest in event contracts and that's persisting post-election."

• Mike Cypress (05:45): "One area of open debate though is around the legality of sports event contracts, where we expect regulators to provide some clarity around that in the months ahead."

• Stephen Grambling (06:32): "The potential upside opportunity, we think actually outweighs the competitive risks and we quantify this as being potentially in the hundreds of millions of dollars in incremental EBITDA."

• Mike Cypress (05:56): "I do think that's going to require participation from both retail as well as institutional investors that can help fuel a robust and liquid marketplace."

Final Thoughts

This episode of Thoughts on the Market provides a comprehensive analysis of the current state and future prospects of the US sports betting industry, with a particular focus on the disruptive role of prediction markets. By intertwining regulatory insights, market data, and expert opinions, Morgan Stanley offers listeners a nuanced understanding of the opportunities and challenges ahead in the ever-evolving landscape of betting.