Does Kalshi Have a Moat?

Ever since my pitch on Sportradar (NASDAQ: SRAD), I have been fascinated with prediction markets, most notably Kalshi. Kalshi has taken the gaming market by storm, rapidly amassing market share, and has so far been the clear winner among U.S. prediction markets.

I recently read The Platform Delusion by Jonathan Knee, where Knee argues that people (particularly investors) attribute the seemingly unstoppable success of tech giants to their “platform status.” He believes the word “platform” itself has become a buzzword and has led many to overrate the competitive advantages of a business (especially network effects), creating the “Platform Delusion.” Through various empirical examples, Knee shows that without economies of scale or customer captivity, a network effect alone is often not an adequate barrier to entry against competition.

I particularly enjoyed Knee’s chapter on Uber and Airbnb, where he argues that Airbnb benefits from a structurally superior business model compared to Uber because of its customer captivity: nothing prevents Uber riders and drivers from using multiple competing ridesharing platforms. Upon reading his analysis of Uber, I immediately thought of Kalshi.

Since reading the book, I’ve been struggling to identify why Kalshi might have customer captivity (beyond a brand-power argument). I understand the economies of scale and network effects that Kalshi benefits from: every marginal user creates a potential counterparty for every existing Kalshi user. However, it is unclear to me how this alone deters new entrants. The average sports bettor uses several platforms (similar to how the average Uber driver drives for several ride-sharing apps). The implication is that while the network effect does exist for Kalshi, it doesn't prevent its users from also using other betting apps.

Kalshi is benefiting from massive market growth, but as the market grows, it becomes easier for a competitor to reach minimum viable scale (especially since users don't stick to a single platform). I think Kalshi is partially benefiting from its "gray-market" status right now, as states and the CFTC (Commodity Futures Trading Commission) battle in court to determine who has jurisdiction. Just as Uber intentionally operated outside local regulations in its early days, I believe Kalshi is benefiting from the confusion around its legality. Recently, New Jersey asked the Supreme Court to settle the debate. If the Court takes the case and rules that Kalshi falls under CFTC jurisdiction, I suspect this will "open the floodgates" to competitors. I struggle to understand how Kalshi could outcompete other prediction-market platforms aside from issuing more promotions or lowering take rates.

I emailed Jonathan Knee to ask for his opinion on my thoughts. While he said he wasn't close enough to Kalshi to opine on my views, he mentioned that I was "broadly thinking about it right." He pointed to another chapter in his book analyzing online travel agencies (OTAs). He said that the main reason Booking and Expedia have a duopoly in a fairly low-tech space and are able to maintain reasonable take rates is the fixed cost of marketing a national consumer business. This dynamic definitely applies to Kalshi, which has recently had advertisements absolutely everywhere. However, I question the sustainability of this competitive advantage, especially given that many potential competitors are established businesses such as DraftKings and Flutter Entertainment.

While this may sound overly bearish, I do believe Kalshi is an innovative business with a good model, and I could be completely wrong. I tend to err on the side of skepticism when businesses tout having a moat.