Underdog, a company traditionally known for its daily fantasy sports, is handing back its DFS licenses in seven states as it shifts focus to federally regulated prediction markets. This week, the New York-based firm ceases its fantasy offerings in Maryland, Massachusetts, Michigan, Mississippi, New Jersey, Ohio, and Pennsylvania. The move comes after regulators in these states deemed the company’s prediction market platform incompatible with state-licensed fantasy sports.
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Regulatory Pressures Force Strategic Shift
It’s a big decision for a company that began its journey in the fantasy sports sphere back in 2020. Underdog’s founder and CEO, Jeremy Levine, confirmed that state regulators effectively forced the company to choose between retaining its fantasy licenses or continuing with prediction products regulated by the Commodity Futures Trading Commission (CFTC). “Those states have taken a legal viewpoint we disagree with: if we offer our CFTC-licensed products, we can’t offer fantasy sports in those states,” Levine commented on social media. The company will no longer offer its Best Ball Drafts product among others, pointing to a clear strategic pivot.
For Underdog, this regulatory squeeze is hardly unprecedented. The legal landscape surrounding gambling and prediction markets remains a labyrinthine battleground. Federal laws, like the Unlawful Internet Gambling Enforcement Act of 2006, have historically placed limitations on online gaming activities, while the Professional and Amateur Sports Protection Act was only repealed as recently as 2018. This repeal opened the floodgates for legalized sports betting across the nation, but the distinction between state and federal regulation continues to lead to complex jurisdictional disputes.
Prediction Markets on the Rise
Since its inception, Underdog has been eyeing the changing market of prediction markets. In March, a key acquisition enabled them to launch a federally regulated prediction exchange in July. The platform, which will continue operating in the affected states minus Michigan, underscores a shift in Underdog’s focus. Interestingly, Underdog lists Michigan, alongside Arizona and Nevada, as ineligible for its Prediction Picks. In the rapidly changing field of gaming regulation, it’s a calculated risk.
Prediction markets allow participants to buy and sell shares in the outcome of future events, such as the result of a sports game or even political elections. These markets, overseen by the CFTC, are considered legal in the federal context because they are categorized more like financial products than traditional gambling. With a market potential estimated to grow to $122 billion globally by 2024, according to MarketWatch, these prediction platforms are becoming an attractive vertical for operators like Underdog, eager to diversify revenues and capitalize on a burgeoning industry.
Federal and State Jurisdictional Clash
The tug-of-war between state and federal jurisdictions isn’t new, but it’s creating major ripples in the gaming world. While Underdog bets on the federal jurisdiction of the CFTC, state regulators maintain that sports contracts resemble wagering — thus falling under state laws. This isn’t the first time the industry has faced such challenges. A decade ago, DFS was seen as a disruptor to traditional sports betting. Now, prediction markets are creating a similar upheaval, and Underdog’s bold move illustrates how operators may sacrifice established markets for emerging opportunities.
The tensions between state and federal oversight have been escalating in recent years as more states move to legalize sports betting and other forms of online gambling. The current scenario mirrors the friction that rocked the industry when states began legalizing daily fantasy sports in the early 2010s. At that time, DFS operators had to navigate a patchwork of state laws which classified their offerings anywhere from lawful games of skill to illegal gambling. Companies like FanDuel and DraftKings found themselves in a series of high-profile legal battles, leading to a state-by-state licensing strategy that many operators, including Underdog until recently, adopted.
Comparative Market Context and Financial Implications
To better understand Underdog’s strategic pivot, it’s instructive to look at market dynamics. The U.S. fantasy sports market was valued at approximately $8.48 billion in 2021, with projections to reach $48.6 billion by 2027, according to Allied Market Research. Similarly, the sports betting market has been booming, particularly since the 2018 PASPA repeal, and is projected to grow from $13 billion in 2021 to over $140 billion by 2028, per Research and Markets.
Despite this growth, the allure of prediction markets lies in their distinct regulatory framework and potential for innovation. While they currently represent a smaller slice of the gaming pie, their rapid growth rate and lower regulatory hurdles compared to state-licensed gambling make them an appealing venture. The challenge remains for companies like Underdog to balance the high-reward potential of pioneering this space against the financial loss of exiting well-established markets like DFS in key states.
Looking Toward the Future
Levine, who rarely shies away from speaking on industry dynamics, expressed regret over exiting these fantasy sports markets but hinted at potential return. “We hate doing this,” he mentioned, assuring that Underdog would aim to restore its Drafts product if the regulatory ground shifts. As the market continues to evolve, industry watchers will be keeping a close eye. What happens next? If regulation shifts, Underdog could find its way back into the fantasy sports realm — but that’s a big if.
The future for Underdog rests heavily on regulatory developments and market conditions. Should federal regulations become more favorable or state regulators adapt to integrate CFTC-licensed products more harmoniously, doors could reopen for Underdog’s DFS offerings. Meanwhile, the company’s foray into prediction markets will serve as a litmus test for other operators considering similar moves. Successful adaptation could spur more gaming companies to explore federally regulated prediction markets, further diversifying the industry landscape while posing new challenges and opportunities for both regulators and operators alike. For players, the shift translates to broader gambling options and potentially more innovative, engaging platforms. Whether this will ultimately disrupt the traditional balance of the gaming industry remains to be seen, but the evolution towards a more dynamically regulated market is inevitable.
Eri Gaitu leads the news desk at Best in Slot, tracking breaking developments across the gambling world in real time. From exclusive bonus offers and casino launches to licensing updates and regulatory shifts, Eri ensures readers are always first to know about the changes that matter to their gaming experience.
