Prediction Markets — a review of 2010

In the twelve months since I last wrote about prediction markets, the industry has matured. I wanted to take a look back at what’s happened in 2010, and think a little of what I expect in 2011.

Theme 1 — Software vendors moving up the value chain

The biggest theme to me is that the traditional software vendors (ConsensusPoint, NewsFutures, Crowdcast, Inkling Markets) have all been moving up the value chain. Where they used to provide software, they all provide a much more consultative service as well. For example:

• Newsfutures, which always had a much more consulting-style approach, merged with another consulting group to become Lumenogic. Prediction market software is hardly mentioned; they pitch consulting and strategy.
• Consensus Point has hired additional senior people, and David Perry has left. Their pitch features the consulting services much more prominently than it did in the past.
• Crowdcast has been trying to go even bigger, taking venture capital investment. And like the others, features more “solutions” than just licensing software. (Leslie Fine was a terrific hire for Crowdcast, and board member Dr. Andrew McAfee is a top thinker in the “Enterprise 2.0” movement.
• Inkling Markets still has a great angle in the market. They appear to be a go-to company to run pilot prediction markets, and are then perfectly positioned to establish a long-term relationship if/when the trials go well. I get the sense that they tend to do less consulting work than the other companies, but will do so for larger clients. I also want to make a special mention of Inkling’s blog, which is the best one of all the prediction market companies.

Theme 2 — Free (broad) prediction markets can’t survive alone

If you think you can build a strong business on a free prediction market, you’re kidding yourself. HSX, which is great, it’s focused on a single industry and even then it’s an outlier. It exists because they’ve built a solid business selling analysis to movie studios. (Alex Costakis, the long-time CEO, left this year after Congress made it clear trading movie futures wasn’t going to happen. This meant that Cantor Fitzgerald had little reason to keep investing in trying to make a load of cash from extending HSX to do this.)

HubDub, a more generalist/news prediction market, was completely shut down because it wasn’t going to make enough (or really, any) money. Nigel, Lesley and team changed focus to fantasy sports and they seem to be doing quite a bit better.

So while I believe that very niche prediction markets associated with particular industries can thrive, it takes a lot of work to build a real business from it. And broad-based prediction markets aren’t going to make anyone any money, though they could be an investment to build traffic. (HubDub had a lot of user engagement, they just couldn’t build their prediction market into a business.)

Theme 3 — Real-money prediction markets (aka betting sites) are going strong

BetFair IPO’d in October of this year, (BET) and had targeted a £1billion market cap. They’re a very strong business, and are very well positioned if/when the US legalizes any form of betting or online gaming.

Smarkets is a startup in the betting/prediction markets market, and just recently passed £2million traded on the site. (They grew from £1million to £2million much more quickly than they grew to their first £1million.) I’ve known the CEO, Jason Trost, since he and his co-founder Hunter were doing the initial coding and fundraising in their London flat. They have a very bright future ahead of themselves.

Contrary to broad-based play-money markets, real-money betting has a solid business model that scales to become a big business. They are long-term businesses.

Summary — A market maturing

In short, the prediction market industry is maturing. I’m not naive; it’s a small market outside of the real-money betting markets. There is a solid core of strong businesses that have established themselves as the source for software and consulting and I see them continuing to grow as more companies experiment with new management tools and techniques. Niche play-money markets may also thrive, though this still remains difficult to execute.

I foresee that 2011 will be very similar to 2010: more mature and developed solutions from the established prediction market companies. It’s less interesting from an outside perspective, since there doesn’t appear to be much change. But internally I believe these companies will be an interesting place to be as they grow and work with increasingly more interesting and blue-chip clients. (And as I already said, Smarkets has a very bright future ahead of themselves in the real-money betting industry!)

I hope everyone in the industry has a happy new year and my absolute best wishes for 2011.