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Saturday, May 18, 2024

What Will It Take For ESPN To Break Into Sports Betting?

  • ESPN's 10-year, $2B deal with PENN Entertainment isn't without risk for either company.
  • PENN is banking ESPN's brand will be enough to rally its online sports betting business.
Rafael Henrique/SOPA Images/Sipa USA, Ron Chenoy/USA TODAY Sports

There were signs that ESPN was primed to do something big in sports betting. 

In the days before Tuesday’s announcement of a deal with PENN Entertainment, ESPN registered accounts on multiple social media platforms. An ESPN spokesman said days earlier, “We’re not commenting on anything betting related.”

Now, ESPN — whose corporate overlords at Disney resisted ties to sports betting — is embracing it in a way no network has since the U.S. Supreme Court legalized sports gambling nationwide five years ago.

PENN wasn’t ESPN’s first choice — and neither was the amount ESPN sought, multiple betting industry sources told FOS. But after deals were unable to be struck with bigger players, ESPN was ultimately willing to settle for about 50% less than it had ambitiously asked for in a 10-year deal. 

At a time of talent cuts and subscriber losses — both on linear TV and ESPN+ — the deal guarantees ESPN $2 billion years over the next decade. All that money, however, doesn’t mean there are no drawbacks for the sports entertainment giant. 

FOS answers five questions that will determine whether this new betting venture will be a success or a flop when it launches in November. 

Is A 20% Market Share Realistic?

Upon its debut this fall, ESPN Bet will hold some power of incumbency, with 16 state licenses carried over from PENN Entertainment’s Barstool Sportsbook, providing the foundation for the rebranding.

That’s the good news for PENN and ESPN: a broad geographic footprint stretching from Massachusetts to Arizona.

The tougher news is that FanDuel and DraftKings firmly hold a duopoly on the online U.S. betting market, collectively controlling more than 70% of the market. Including Caesars and BetMGM, the combined national market share reaches 90%. 

Barstool Sportsbook, conversely, holds roughly 2% of the market, according to SVB MoffettNathanson.

That figure is a long way off from the 20% national market share PENN wants with ESPN Bet, which represents the baseline for ESPN to earn additional stock warrants in PENN.

“You’ve got to have scale to compete. … We’re ready to compete at a scale level,” PENN President and CEO Jay Snowden said. “We’re not doing this deal to be 4% or 5% market-share players. That’s not going to be acceptable for us. It’s not going to be acceptable for ESPN. You should assume if those are the ranges we’re in, that’s not going to work out long-term.”

The deal allows PENN to plug directly into ESPN’s cachet as the largest entity in U.S. digital sports media with more than 100 million monthly unique users, 25.2 million ESPN+ subscribers, and 370 million social media followers. 

Will The Rebrand Help PENN Add States? 

PENN intends to bring ESPN Bet into additional states as they approve sports betting, including long-coveted, populous states such as California and Texas. It will certainly help if PENN can shed the stigma of its previous brand.

Barstool Sports founder Dave Portnoy acknowledged his controversial presence strained PENN’s relationships with state gaming regulators, a dynamic no longer present. 

“We got denied [gambling] licenses because of me,” Portnoy said on social media. “So, the regulated industry is probably not the best place for Barstool Sports and the type of content we make.”

PENN faced questions before its sports betting license was approved by Massachusetts earlier this year. Some Massachusetts Gaming Commission members were concerned about Portnoy —  who has described himself as a “degenerate gambler” — as well as promotions that were fed to Barstool consumers under the legal betting age in the state. 

After The Insider published stories in 2021 and 2022, wherein a total of four women accused Portnoy of sexual misconduct, the Nevada Gaming Control Board launched an investigation into Barstool and PENN. 

Snowden said outside the ESPN deal there are other “creative ways to get into some of the states that we’re not currently in,” such as New York.

Can In-Person Wagers Boost Business?

Beyond the tall task of converting the Barstool Sportsbook app into the ESPN Bet platform, PENN has 19 Barstool-branded retail spaces dotted among its 32 in-person sportsbooks across the country.

Logic would suggest those sportsbooks will end up carrying the ESPN name, but there are plenty of kinks to iron out.

“ESPN folks have not had a chance to visit our properties yet,” Snowden explained on the company’s earnings call last week. 

It’s unclear if Disney is opposed to in-person sportsbooks, but before any decisions are finalized, PENN has an agreement with Barstool to make the changeover. 

“We’re working cooperatively together on a number of transition issues,” Snowden said. “And with regards to what does that end up being or looking like? That’s TBD.”

While online sports betting is far and away the biggest revenue driver for operators, it would still be somewhat surprising if PENN were unable to capitalize on the ESPN Bet branding in-person.

“We’re going to go through a process and there could be potentially some ESPN-branded retail sportsbooks on plan,” Snowden concluded. “And if not, we still have what we believe to be best-in-class destinations on the retail sports betting side and sports bars connected to almost all of them.”

Will Fanatics Present A Challenge?

While PENN is looking for 20% of the market with ESPN’s help, Fanatics is making its own entry into the market. 

Before and during the launch, ESPN’s audience will be served with plenty of ads for the online betting product. The issue is that DraftKings and FanDuel have spent hundreds of millions to lock in nearly three-quarters of the U.S. betting market — and only one has been profitable

Success, however, won’t be determined by what goes down in Bristol. It will be PENN’s base in Wyomissing, Pennsylvania, where execs will need to figure out how to leverage ESPN’s reputation — and lead yet another transition for its online sports betting efforts. 

Beyond the 2020 rebranding to Barstool Sportsbook, another transition occurred behind the scenes over the last year as PENN transitioned from international betting technology firm Kambi. 

PENN paid $12.5 million to get out of its Kambi contract, and the migration to its own platform was completed just last month. The move was aimed to improve reliability and user experience — something desperately needed to lure in new bettors. 

Months after announcing its intention to launch its own sports betting product, Fanatics entered into an agreement to purchase PointsBet’s U.S. business for $225 million in June. When the deal officially closes after regulatory approval, the Fanatics Sportsbook will have licenses to operate in 16 states, the same number PENN has now. 

With a valuation of $31 billion and access to capital, Fanatics can spend lavishly to become a player in the market. PENN’s market cap is at $3.6 billion with $1.27 billion in cash on hand per the company’s latest quarterly report — about half as much cash and cash equivalents as of September 2021.

But PENN has one advantage: ESPN has been a brand sports fans have known for more than four decades, and Fanatics needs to convince bettors that it’s more than just a licensed sports apparel company. 

Can This Deal Hurt ESPN?

While ESPN entered into partnerships with Caesars Entertainment and DraftKings three years ago, it was skittish about a larger push into legalized sports betting. 

After its growth spurt in the 1990s that was fueled by the popularity of “SportsCenter” and its increasing inventory of high-end sports rights from MLB to the NFL, ESPN expanded. It added more networks — including ESPN Radio in 1992, ESPN2 in 1993 and what became ESPN.com in 1995 — as it backed up its former tagline “The Worldwide Leader in Sports.”

But ESPN also lost $150 million on ESPN Mobile, a service that was shuttered in 2006 after only a year.

Steve Bornstein, who became ESPN CEO at age 38 and later the president of ABC Television, was pivotal in the network’s rise. Bornstein departed for NFL Network in 2003, two years before ESPN Mobile launched.

“I never liked the mobile play for ESPN only because it was outside their core competency,” Bornstein said. “When your phone doesn’t work, you want to blame the carrier. You don’t want to blame ESPN.”

And that was just a cell phone. When you mix sports and money, ESPN and PENN could be facing a lot of angry fans if there are repeated technical issues — like when PENN’s Barstool Sportsbook crashed before Super Bowl LV. 

Then there’s the issue of attracting fans who either don’t care about betting or live in states where it’s not yet legal. 

“ESPN will act as a fantastic acquisition vehicle, but there has to be a fine balance in how they promote sports betting — too much and they risk alienating their non-betting viewers,” said Matt Howard of Propus Partners. “The best product will win, and player retention will separate the books that take market share from the rest.”

The deal also allows ESPN to continue to run ads from other betting companies.

“If I was running DraftKings, I am certainly not going to spend as much as I did on ESPN,” one industry insider told FOS. “ESPN’s biggest issue is that when you don’t become Switzerland and you take a side, the other guys are only going to advertise if it makes sense. The minute it becomes a close call, you’re not giving money to them.

“The biggest risk is that PENN’s tech doesn’t work. The second-biggest risk is that the two of ESPN’s biggest spenders [DraftKings and FanDuel] are now your competitors.”

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