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Disney’s ESPN has long been viewed as the crown jewel of U.S. sports betting-media partnerships, but analysts are warning there's no guarantee a big-money tie-up would even be successful.
“There are numerous examples of popular media companies in Europe that were unable to translate their media mind share into betting share, including the Sun in the UK, Eurosport in France and La Gazzetta dello Sport in Italy,” Morgan Stanley analysts Thomas Allen said in a research report, following a reports of talks between ESPN and several major U.S. sportsbook brands, including Caesars and DraftKings.
Allen noted that the media partnerships in the U.S. equally have not led to any clear winners so far, with the Stars Group and now Flutter failing to replicate the rise of Sky Bet in the UK through the Fox Bet venture with Fox Sports.
“While Sky Betting & Gaming is often held up as the example of a successful media brand translating into a successful betting brand, SBG's success was driven by innovative technology and unique mind share in a much more concentrated sports media market than the U.S. today,” Allen said.
The Wall Street Journal reported last week that ESPN is considering licensing its brand to major sports-betting companies for at least $3bn over several years to capitalize on the fast-growing online sports-wagering industry.
“A $3bn deal would imply $120m to $200m of incremental EBITDA would be needed to justify the investment,” Allen wrote.
The report follows a recent tie-up between 888 and Sports Illustrated that saw 888 this week launch SI Sportsbook in Colorado, plus other agreements between Tipico and USA Today, PointsBet and NBC Sports and Caesars/William Hill with CBS.
ESPN already has a marketing relationship with both DraftKings and Caesars.
Lloyd Danzig, managing partner with Sharp Alpha Advisors, described ESPN as a highly unique, ultra-premium asset.
“However, the ongoing flurry of media deals is less about any particular asset and more about anticipated consumer preferences in the U.S. market,” Danzig said.
“Many industry stakeholders are predicting that a more entertainment-focused brand presence and product offering will result in higher conversion rates of traditional media users into paid sports bettors.”
Danzig said the intuition is that the average U.S. sports bettor “psychologically classifies their DraftKings deposit as an entertainment expense, rather than as a capital investment from which to earn a return on their investment.”
Disney is already an investor in DraftKings and owns about 6 percent of the gaming company’s publicly traded shares through its $71.3bn acquisition of the film and TV assets held by 21st Century Fox, which closed in 2019.
In Las Vegas, ESPN built a studio at Caesars’ Linq resort as a base for the network’s Daily Wager sports betting program. According to the Wall Street Journal, any deal would allow the network’s partner to use ESPN’s name for branding and potentially renaming its sportsbook operations after the network.
Allen noted that although ESPN is the largest sports-media asset in the U.S., unlike Sky in the UK at the time of Sky Bet's rise, it shares live sports coverage with a number of other networks: NBC Sports, which has partnered with PointsBet; CBS partnered with Caesars; Fox Sports and Flutter Entertainment; Turner Sports and DraftKings, and regional sports network Bally Sports, now owned by the casino operator.
There is also competition from less traditional sports-media apps such as Penn National's Barstool Sports and the Score, along with streaming services like FuboTV, which is also expanding into the sports-betting market.
Allen noted that although terms of the prior deals were not announced, PointsBet in August 2020 paid $393m over five years for exclusive rights for NBC Sports.
“We see ESPN as potentially delivering more incremental revenue to a legacy casino company than a legacy sports company as it would be attracting a different set of customers, though ability to execute efficiently would be key,” Allen wrote.
The Wall Street Journal also reported that executives with the sports network want to keep ESPN from being directly involved in gambling deals and betting transactions.
Danzig told VIXIO GamblingCompliance there are several factors that sports-betting operators will consider when evaluating a deal with ESPN.
“One is capitalization structure, but others include marginal cost of capital, unit economics and TAM (Total Addressable Market) expectations,” he said. “DraftKings and FanDuel are both currently on pace to spend $3bn on marketing over the next four years, with an ESPN deal likely to extend over a longer duration.”
Danzig noted that the deal size reported in headlines typically includes guaranteed marketing spend and various in-kind payments that reduce the hit to free cash flow.
“If Goldman Sachs is accurate in their projection of a $40bn sports betting TAM at maturity,” Danzig said, “an operator that leverages an ESPN partnership to attain a 7.5 percent market share would generate $3bn in top-line revenue every year.”
“However, the future size of the TAM and the conversion rate of a sports media audience into a sports betting audience at scale are both major variables in the equation, the true values of which only time will reveal,” he added.
