Erosion of Structural Hold and Prediction Market Risks in US Sports Betting: Investor Caution Amid Diminishing EBITDA Margins and Emerging Competition

The U.S. sports betting industry, once a beacon of high-margin growth, is now grappling with structural hold erosion and the disruptive potential of prediction markets. As operators like DraftKings, Flutter, and Caesars Entertainment strive to stabilize their EBITDA margins, investors are increasingly cautious about regulatory headwinds, rising promotional costs, and the encroachment of non-sports betting segments. This analysis unpacks the forces reshaping the sector and their implications for profitability.

Structural Hold Erosion: A Lingering Threat to Margins

Structural hold-the percentage of wagers retained by operators as profit-has been a critical metric for assessing the health of the sports betting industry. According to a Deutsche Bank report, as summarized in a CDC Gaming article, the industry's structural hold percentage remained flat at 9.4% in October 2024, unchanged from the prior year despite earlier gains in 2024. This stagnation contrasts with operators' ambitious targets: DraftKings aims to push structural hold to 11% in 2025, while Flutter seeks a long-term gross hold of 16%. However, these goals face headwinds. Rising promotional spending, particularly during football seasons, has diluted margins, with some states witnessing aggressive discounting to attract users.

Regulatory pressures further complicate the picture. States like Illinois and New Jersey are implementing higher tax rates, which could create significant EBITDA headwinds. For instance, Illinois' new tax structure is projected to reduce DraftKings' 2026 EBITDA by $79–80 million, representing over 5% of its projected earnings, according to an Investing.com SWOT analysis. Such changes risk driving users to offshore platforms, exacerbating margin erosion. To counteract these trends, operators are curtailing promotions and investing in AI-driven cost optimization, but these measures come with trade-offs, including potential customer attrition, as noted in the Investing.com piece.

Prediction Markets: A Double-Edged Sword

The expansion into non-sports prediction markets-covering political, entertainment, and economic events-has introduced new risks. DraftKings, for example, acquired Railbird Technologies to enter this space, aiming to launch DraftKings Predictions as a mobile app for event contracts, according to a Benzinga preview. While this diversification could unlock new revenue streams, it also raises concerns. Bank of America Securities analyst Shaun C. Kelley warns that prediction markets may disrupt DraftKings' long-term earnings model, particularly as volatility in sports outcomes and regulatory uncertainties complicate profitability, a point also reported by Benzinga.

Kalshi, another player in this arena, has faced legal challenges from state regulators in New Jersey and Nevada, which issued cease-and-desist orders over unlicensed operations, according to a CardPlayer report. These disputes underscore the regulatory ambiguity surrounding prediction markets, which are federally regulated by the CFTC but face pushback from state authorities. For operators, the costs of compliance and legal defense could eat into margins, especially as they navigate overlapping jurisdictions, as Sports Betting Dime reports.

Meanwhile, Missouri's entry into the sports betting market-projected to generate $3.88 billion in handle during its first year-adds competitive pressure. While this growth could benefit the industry overall, it also means operators must invest heavily in customer acquisition and infrastructure to capture market share, further straining margins, according to a GlobeNewswire release.

Investor Caution and Strategic Mitigation

Investors are increasingly wary of these risks. A Morgan Stanley note highlights three key concerns: a cooling labor market, mixed corporate earnings, and inflationary pressures, all of which amplify the need for hedging strategies. For sports betting operators, the path forward hinges on balancing innovation with margin preservation. Companies like Caesars Entertainment are prioritizing operational efficiencies and AI-driven cost reductions, while others, such as FanDuel and BetMGM, have adopted a more disciplined approach to promotions, as previously summarized by CDC Gaming.

However, the long-term outlook remains uncertain. As handle growth slows in mature markets, operators will need to rely on new state legalizations and diversification into prediction markets to sustain revenue. Yet, these strategies carry inherent risks, from regulatory friction to customer acquisition costs. For now, the sector's ability to navigate these challenges will determine whether it can maintain its appeal to investors-or become a cautionary tale of margin compression.