35% of bettors are leaving sportsbooks for prediction markets, echoing the regulatory loophole DraftKings built its business on

Prediction markets are eroding traditional sportsbook usage: 60% of bettors say these platforms have changed their sportsbook frequency, while 35% report using sportsbooks less, according to Fullstory. U.S. sports wagering totaled $166.94 billion in 2025 and generated $3.71 billion in state taxes, but the American Gaming Association estimates prediction markets have diverted more than $500 million in potential tax revenue. Kalshi and Polymarket argue their sports-outcome contracts are federally regulated commodities futures rather than gambling, triggering legal and tax disputes with Illinois, Nevada, New Jersey, and Maryland and creating a competitive threat to DraftKings and FanDuel.

Analysis

The relevant earnings risk is not simply lost handle; it is mix degradation. Sportsbooks monetize high-hold parlays and in-play engagement, whereas a migration of price-sensitive or transparency-oriented users toward exchange-style contracts can reduce revenue per active user and force DKNG to spend more on product, promotions, and retention. That creates a negative operating-leverage setup over the next 1-3 quarters if customer-acquisition costs rise before revenue displacement is visible in reported handle.

DKNG is more exposed than FLUT because its valuation remains more dependent on demonstrating sustained U.S. online-gaming margin expansion, while Flutter has greater geographic and product diversification. A legal outcome preserving federal preemption would widen the structural cost advantage of prediction platforms by avoiding state-by-state licensing and tax burdens; states may then respond through advertising restrictions, consumer-protection rules, or pressure on leagues and data providers rather than direct taxation. That second-order risk extends to U.S. sportsbook suppliers such as GENI and SRAD if sportsbook promotional intensity and betting volume soften, although supplier contracts may delay the financial effect by several quarters.

The survey evidence is directionally useful but not sufficient to underwrite a near-term revenue haircut: dual-platform usage could represent incremental event trading rather than direct substitution. The key falsifier is DKNG maintaining active-user and revenue growth without a material increase in promotional expense, alongside stable structural hold; that would indicate prediction markets are expanding the category rather than cannibalizing it. Near-term stock volatility should be driven by federal/state injunctions and CFTC positioning, while the more material 6-18 month issue is whether consumers begin to regard transparent, continuous pricing as the baseline product standard.

Key Decisions for Investors

• Initiate a modest 3-6 month pair: long FLUT / short DKNG. The trade expresses relative U.S. sportsbook margin pressure while retaining exposure to online-gaming growth through the more diversified operator; reassess if DKNG reports stable promotional intensity and active-user growth that exceeds FLUT by more than 5 percentage points.
• Avoid adding outright DKNG long exposure before the next earnings release unless management quantifies prediction-market overlap, retention trends, and promotional-spend impact. A sequential increase in sales-and-marketing as a percentage of revenue without corresponding revenue acceleration is the signal to increase the short leg.
• Set legal-event alerts for federal decisions affecting CFTC preemption and state enforcement actions. A definitive ruling allowing state taxation or exclusion of sports-event contracts would be a catalyst to cover DKNG shorts and reassess a tactical long, since it would remove the challenger’s regulatory cost advantage.
• Monitor GENI and SRAD for leading indicators rather than shorting immediately: sportsbook operator commentary on wagering volumes, in-play engagement, and data-rights renewals matters more than survey-based substitution. Consider bearish exposure only if multiple operators guide to weaker U.S. betting growth or lower marketing ROI.