ESPN’s New $2 Billion Sportsbook Makes Its Debut — But Will It Succeed?
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ESPN’s New $2 Billion Sportsbook Makes Its Debut — But Will It Succeed?
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Friends,
ESPN’s new sportsbook “ESPN BET” is set to make its long-awaited debut tomorrow.
As a reminder, in August, ESPN signed a licensing deal with Penn Entertainment to rebrand Barstool Sportsbook as ESPN BET. They agreed to pay ESPN $1.5 billion in cash over ten years and granted the worldwide leader in sports $500 million in warrants as part of the deal. And Penn’s stock popped 10% overnight as CEO Jay Snowden touted ESPN’s ability to help Penn lower its customer acquisition costs.
But is ESPN’s brand strong enough to make a difference in the sportsbook space?
FanDuel and DraftKings have spent tens of billions over the last decade, signing up millions of users in the United States. Michael Rubin and Fanatics have poached top executives from all over the industry for their newly-launched sportsbook. And Penn’s first go-around with Barstool Sports certainly left a sour taste in investors’ mouths.
When Penn Entertainment paid $163 million for a 36% stake in Barstool Sports in 2020, many people (including myself!) thought it was an excellent idea.
Barstool was doing about $100 million in annual revenue. They had diversified income streams, including seven to eight figures of revenue from audio ads, commerce, digital ads, events, and more. And partnering with a new-age, sports-centric media company like Barstool seemed like a smart strategy to reduce hefty customer acquisition costs.
Things got off to a hot start, too. Barstool’s audience helped Penn drive signups in several newly legalized sports betting states. The company’s stock shot up 1,500% from its 2020 low. Barstool doubled its annual revenue to $200 million, and Penn even agreed to pay $388 million for the remaining 64% of Barstool that it didn’t already own.
For context, sports betting is a notoriously expensive market to acquire customers — DraftKings has said their average customer acquisition cost is $371. Hence, acquiring customers at a cheaper rate through media leverage can be extremely valuable.
Penn-Barstool Deal Recap
2020: Penn pays $163 million for 36% of Barstool
2023: Penn pays $388 million for 64% of Barstool
Barstool Sports Company Overview
Annual Revenue: ~$200 million
Employees: 500
Audience Size: 200 million social media followers
Shows: 100 (including podcasts, live events, and pay-per-view events)
Barstool Sportsbook States: 15
But just a few months after that second deal was signed, Penn Entertainment agreed to sell Barstool Sports back to founder Dave Portnoy for just $1, and the company booked a $633 million loss on the deal — $82 million more than it paid for Barstool.
Now, why would Penn do that? They had just spent over $550 million on Barstool Sports, including $388 million just a few months prior, and they were now willing to walk away from the deal without getting anything else in return.
Well, the truth is the plan wasn’t working. Penn publicly said Barstool’s edgy content upset regulators, making it difficult to enter new states. But the reality is that Penn had peaked with no more than 5% of online market share in any of its 17 states, putting them in 5th place and well behind DraftKings, FanDuel, and BetMGM.
So, that’s where ESPN came in. Bob Iger and Disney finally decided it was time to enter the sports betting market, and Penn convinced its shareholders it was worth taking another stab at the licensing strategy via a deal with a bigger partner like ESPN.
Unique Monthly Website Visitors
Barstool: 8 million
ESPN: 117 million
ESPN Distribution Capabilities
Linear reach: 72.5 million homes (down from a peak of 100M)
ESPN+ subscribers: 26 million (+800,000 gain during Q4)
Social media followers: 150+ million (Most-followed brand on TikTok)
ESPN also has a huge fantasy football database, and ESPN BET will immediately be live in 17 states — Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia, and West Virginia — because of Penn’s existing licenses.
Still, I’m not convinced this deal is as good as everyone is making it out to be.
When I went on CNBC three months ago to talk about the ESPN-Penn deal for ESPN BET, I described it as a “hail mary” for both companies — and I still believe that.
It’s a hail mary for Penn because things didn’t work with Barstool, so they cut their losses by booking a $633 million loss, gave the business back to Dave Portnoy for quite literally $1, signed a $2 billion licensing deal with a bigger player in ESPN, and will try one last time to grab meaningful market share in the sports betting market.
That’s not to say it’s a bad idea. I mean, they didn’t really have another option, and partnering with ESPN offers them the best chance at competing with industry leaders.
For context, FanDuel and DraftKings alone own 73% of the U.S. sports betting market.
U.S. Online Sports Betting Market Share
U.S. Online Gambling Market Share (sports betting + casino gaming)
But this is also a hail mary for Disney and ESPN. Think about it this way — ESPN is the worldwide leader in sports, generating $16 billion in annual revenue and $2.9 billion in annual profit. But they have also lost nearly 30 million cable subscribers over the last decade — 100 million to 72 million homes in the United States. Their streaming service (ESPN+) lost subscribers for the first time ever earlier this year, and ESPN’s underlying economics make the business much less desirable in the future.
This is why Disney CEO Bob Iger has been publicly courting a buyer for ESPN.
Don’t get me wrong; a $2 billion licensing deal is good, especially when Penn Entertainment manages the technology and runs the overall ESPN BET platform.
But my argument is that $150 million per year in additional revenue — Penn is paying $1.5 billion in cash over ten years and $500 million in equity warrants — only increases ESPN’s revenue by about 1% per year. And when you add in the fact that ESPN sat back and watched other companies build multi-billion-dollar sports betting businesses, only to get involved themselves much later (and not own a significant enough piece of the upside via equity), it only gets worse for the company.
So, no, I don't think Penn will reach its goal of owning 20% of the U.S. sports betting market by 2027. Penn Entertainment hasn’t shown an ability to build a good enough product. FanDuel and DraftKings have too big of a headstart, and other DFS-based companies like PrizePicks, Underdog, and Sleeper at least have a unique offering.
Maybe I’ll be wrong. It’s still too early to deem anything a failure — 50% of the United States doesn’t even have access to mobile sports betting yet – and I’d be happy to change my mind. But Penn’s first go-around with Barstool ended up being a dud, and simply rerunning the same playbook with a bigger player won’t guarantee success.
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I hope everyone has a great day. We’ll talk on Wednesday.
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ESPN’s New $2 Billion Sportsbook Makes Its Debut — But Will It Succeed?
It's a shame politicians can look at the gambling industry and see there is still money out there to tax. At best, gambling is a form of recreation. At worse, gambling is an addiction and all that goes with addiction. I admit I get zero juice from gambling. I may as well pitch coins into a fountain. Others like it, a lot. Fine.
Good article about the business and the money.
It's a shame that none of this money can be used to help p.e. in schools. If there was a way of donating/taxing it would help the health of nations more than people watching sport on tv.