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During an investor conference on Thursday (September 7), CEO Jay Snowden told analysts he was confident that Penn Entertainment has the right recipe for success with its ESPN BET venture, including crucial buy-in from new partners at ESPN and Disney.
“ESPN wants to be in this business for two reasons,” Snowden said. “One, they believe that we can win together. We’ve got alignment. The way we’ve structured this deal, it is not just an advertising buy … there is also significant amounts of warrants every year.”
So, if the stock is not moving, there is no value. If the stock is moving then there is value for Disney and ESPN as well, he said.
“So, there is a lot of alignment there. But there is also this other piece that ESPN has found to be true already before ever launching their own ESPN BET-branded product and that is the fans that consume sports, when you add an element of betting, there is a lot more engagement that happens,” Snowden said.
Snowden said the additional engagement translates into consumers paying closer attention and spending more time with digital products.
“For ESPN, obviously, they are very committed to this through the way we’ve structured the relationship,” he said, “The fact that we are using their brand is sometimes getting overlooked.”
Penn announced a deal on August 8 with the U.S. sports media giant to rebrand its Barstool Sportsbook as ESPN BET. That rebranding is expected to take effect in the middle of the National Football League (NFL) season, likely in November.
Snowden stressed that neither Penn nor ESPN entered the deal to be in fourth or sixth place in terms of the most lucrative online sportsbooks in the U.S.
“We expect to be competitive from the top. That’s not going to be day one, but we expect to compete for the top spot over time,” Snowden told analyst Shaun Kelley at the Bank of America Securities 2023 Gaming and Lodging conference in New York.
Snowden admitted that Penn's previous partnership with Barstool had run its course as “we are not a natural owner long term because of how highly regulated our industry is and we figured out a package that was good enough for all three parties.”
“We had a lot of early success with Barstool. We have 1.5m digital customers today that we didn’t have before Barstool. They stayed with us after we had moved on from Barstool,” he added.
As part of the deal, Penn will pay ESPN $1.5bn over the next ten years, or $150m annually, for the exclusive rights to the ESPN BET trademark in the U.S. and exclusive promotional services across ESPN platforms.
Penn is also granting ESPN approximately $500m in warrants to purchase 31.8m shares in Penn that vest over the ten-year term.
The deal also includes another 6.4m share warrants that are based on the ESPN BET brand reaching certain online sports-betting market share thresholds, starting at 20 percent and ending at 25 percent of the U.S. market.
“ESPN doesn’t utilize their brand without being a top player,” Snowden said. “They’re committed. We’re committed.”
Kelley noted that the Penn deal with ESPN deal meant ESPN terminating two integrated marketing deals with Caesars and DraftKings.
Those deals gave Caesars and DraftKings various rights across ESPN properties, while the Caesars deal also included a Las Vegas studio at the Linq casino. ESPN recently announced it would move its studio back to its headquarters in Bristol, Connecticut.
Disney also owns 4 percent in DraftKings that it acquired in its 2017 deal for 21st Century Fox.
In a separate discussion later on Thursday afternoon, BetMGM CEO Adam Greenblatt attributed Penn’s happiness with the ESPN deal to the fact that “they got out of a high-ticket, fixed-cost commitment that wasn’t performing.”
“That’s not a place where we want to be, so structurally we avoided that,” he said.
Kelley asked Greenblatt if BetMGM was concerned about customers leaving BetMGM to try new operators, such as Fanatics, ESPN BET, and even bet365 in Ohio.
“I think players will always experiment,” Greenblatt replied.
“My expectation is that ESPN BET will launch and will get a ton a samples but the product experience is the same as it is today. The impact of that product experience is visible. I’m happy to compete against that.”
Greenblatt said the reality is a number of operators have already withdrawn from the U.S. market and the tendency has been towards consolidation of market-share among a handful of brands.
“Having said that, our sector is hard and it shouldn’t be underestimated to gain meaningful ground against the incumbents,” he said. “I think it will be extremely challenging. I have great respect for all of those organizations … but we are doing the business and they aren’t.”
In terms of the potential of other states following Ohio’s decision to raise the state’s sports-betting tax, Greenblatt said BetMGM was not seeing any “evidence of contagion.” Earlier this year, lawmakers in Ohio raised the state tax rate from 10 to 20 percent of gross revenue.
“Sure, it was an unwelcome change, and we feel an unproductive change for the health and vibrancy of the regulated versus unregulated markets,” he said. “But we are not seeing any evidence of contagion.”
