Penn Entertainment has talked up its ESPN Bet project but faces a tough task, while the prospect of more betting advertising on mainstream TV could lead to a backlash.
The partnership that will see Penn Entertainment operate ESPN’s online sports betting brand ESPN Bet is by some distance the most high profile (and expensive) of all the joint ventures between a sports media group and an online gambling group.
The deal will see Penn pay around $1.5bn-$2bn for the opportunity to operate the brand over a 10-year period. The news has been broadly welcomed, but mainly because it brings to an end the speculation of the past few years about who ESPN would partner with for its online sports betting portal. When it comes to how the industry views its potential for success, opinions go from middling to giving it little chance of succeeding.
In fact, if the reactions from commentators and analysts were taken as a gauge of likely success, then the odds really are not looking good for ESPN Bet. The tenor of the stories that have come out about the deal since the announcement was made in early August add to this impression.
Words like ‘despair’ and ‘desperate’ have appeared regularly in describing how both parties just wanted to get the deal done. This is understandable. For Penn, the failure of its Barstool Sportsbook venture meant it had two choices.
As the Deutsche Bank analyst team posited, it could either “step back from the B2C interactive business, collect skin fees, like Boyd Gaming, and minimize B2C losses, or engage further, and essentially double down with a new strategy”.
Penn chose the latter, while for ESPN and its parent group Disney, the move is also a reflection of the pressures it is feeling with regard to dwindling subscriber numbers and cord cutting among millions of U.S. households.
As the House of Strauss newsletter explained, “ESPN’s tethered to the shrinking cable bundle and needs some chance at growth somewhere”, before adding that Disney will “frame it as one that pleases investors because it represents possibilities (italicized words by House of Strauss).”
In hindsight it’s also clear that ESPN should have struck a deal with DraftKings or one of the other suitors that were hovering two or three years ago, when operators’ shares were riding high and access to capital was far cheaper.
Analysts and commentators have been quick to remind their audiences that sports betting partnerships between media corporations and bookmakers have a pretty awful record.
Indeed, Fox Bet most recently, Bally Sports’ regional sports venture or the PointsBet-NBC tie up were costly and unsuccessful; while a few years ago in the UK Sun Bets, despite being promoted by the highest circulation daily newspaper in the country, was quickly shuttered after racking up substantial losses.
Those projects did not succeed for any number of reasons, but they also show that while having sizable audiences that are deeply engaged in sports is a good starting point, turning them into regular sports bettors who wager every week takes skills that media companies and bookmakers have not shown that they possess (up to now anyway).
Another obvious point to make is that a large proportion of ESPN’s audience will already have betting accounts or are simply not likely to become regulator punters. As the Wells Fargo analysts commented, bettors “are already familiar with ESPN’s brand, but likely trust their existing operator”.
Still, an integrated and fully functioning ‘watch and bet’ app offering ESPN viewers the ability to watch live sports with odds and markets available to them at the same time would be one way for ESPN Bet to differentiate itself from the competition.
But reaching that stage – where live sports meets live betting products in a fully connected, seamless and friction-free environment – is some time away. One need only look at FuboTV to see how difficult it is to combine live sports with full online betting functionality, while acquiring thousands of customers at the same time.
Penn believes it can get to 20% market share with ESPN Bet in the next three to four years and has committed to $150m in marketing spend with the network and the same amount with external outlets.
But Deutsche Bank also estimated that Penn’s digital losses in the second half of the year will “exceed $100m” and exceed $250m in 2024. Ominously, they add that market “share goes to those who promote and spend the most” and while usual caveats apply, “the experience of peers speaks to losses far in excess of what we are forecasting to establish the critical mass Penn is targeting.”
To add further context, they provided the following table of the losses incurred by the operators chasing FanDuel since launch.
|Launch to Q223 cumulative EBITDA losses ($bn)||Q223 Sports betting GGR market share||Q223 iCasino GGR market share|
Source: Company reports and Deutsche Bank
The fact that ESPN is now fully invested in the online sports betting space arguably is a positive for the sector and its image. As Charles Gillespie, CEO of the affiliate group Gambling.com, commented during its second quarter earnings call, “it destigmatizes” the industry further and is a meaningful step in it “going fully mainstream”.
But depending on how often viewers will be subjected to the ESPN Bet logo appearing on TV or its odds mentioned during live broadcasts, there is also potential for further anti-gambling backlash.
Keith Scott Whyte, executive director of the National Council on Problem Gambling, told CDC Gaming: “Overall, ESPN’s new betting partnership creates additional risks, particularly in increased promotion of sports gambling to young people and perhaps an expectation that sports and betting go hand in hand.”
Whyte adds that many of its viewers “are youth under the legal gambling age” and “research has shown that early exposure to gambling increases the risk of developing a gambling problem later in life”.
“As the largest and most trusted brand in sports broadcasting”, ESPN must promote “responsible gambling messages alongside all of its gambling-related content” and maintain “a clear separation between sports coverage and gambling promotion”, he adds.
ESPN Bet might confound the skeptics and prove to be hugely successful. But while the stakes are high for Penn, they could be raised another notch when it comes to the noise and criticism surrounding the industry’s presence across U.S. media.