ESPN is reportedly exploring a sports betting tie-up that would see the company license its brand to a sportsbook operator for at least $3 billion dollars over the next several years. Caesars Entertainment (NASDAQ: CZR) and DraftKings, Inc. (NASDAQ: DKNG) are among the gaming companies the cable network is said to have engaged in talks (both maintain existing content-based partnerships with ESPN). But Sharp Alpha Advisors managing partner Lloyd Danzig believes “a less recognizable operator with deep pockets, one that wants an accelerated path to relevance in the U.S.,” may be a better fit to partner with the Worldwide Leader (and more inclined to pay the $3 billion-plus asking price).
Our Take: It is not surprising The Walt Disney Company (NYSE: DIS)-owned sports network is looking to cash in on the sports betting craze (beyond their passive investment in DraftKings and the aforementioned content-based pacts)—even after years of trying to prevent gambling from tainting Mickey Mouse’s wholesome image. The cultural climate has changed. Remember, not long ago “the NFL and every other league said sports betting would be the bane of their existence and compromise integrity. And they have all since done an about-face,” Danzig noted.
The company also has the “fiscal responsibility to try and maximize the value of the asset,” iGaming Capital director Melissa Blau said.
At first glance, $3 billion dollars sounds rich. But there is precedent for a sportsbook operator spending billions of dollars on customer acquisition. Danzig reminds DraftKings and FanDuel will each spend more than $3 billion dollars on marketing-related costs over the next four years (say, $200 million per quarter), and Caesars plans to invest a billion dollars over the next two.
There is also a strong argument that ESPN is bringing a particularly unique and valuable offering to market at just the right time and thus will be able to command its asking price. “They are shopping a one-of-a-kind asset in terms of rights ownership [and integrations], brand recognition and user volume at the inflection point of a gold rush,” Danzig said. “They can almost set any price and test the market.”
But not everyone is on board with that thinking. Blau said she was a little surprised by the $3 billion number. “I’m struggling to wrap my head around how [an operator] will be able to extract that much value out of [the partnership],” she said.
A source familiar with DraftKings’ thinking tells Sportico the company has real interest, but not at $3 billion dollars.
ESPN will bring credibility and brand awareness to an operator. But for Caesars and DraftKings (companies with a large established presence), it is their desire to bolster the acquisition funnel and to prevent competitors from gaining a potential advantage that is presumably driving the interest.
The problem is, without the intangibles, it is not clear if either company can make the math work. “If the industry average customer acquisition cost is $500, $3 billion divided by $500 would be 6 million new paid deposited users. It is hard to say an operator could reasonably be expected to add 6 million paid users over the duration of this partnership,” Danzig said. He explained that while an operator would likely achieve a “somewhat high conversion rate for active ESPN fantasy sports users,” they would almost certainly have to acquire many non-fantasy users who are part of the rest of the ESPN ecosystem” to reach that figure.
And the jury remains out on if network viewers will convert into paid sports bettors and what the lifetime value of those that do convert will be. “It is the big question mark that looms over many of the deals we’ve seen [of late within the space],” Danzig said.
The fact that Caesars and DraftKings are investing so heavily into their own brands makes it “hard to imagine [either] wanting to concede brand awareness and recognition” in a deal with ESPN, Danzig said. While it’s possible a hybrid solution that ensures both brand names are used could be negotiated (think: ESPN Sportsbook by DraftKings),“the intuition is that the stakeholder willing to pay the most on a licensing deal would be someone with much less brand awareness,” he added.
Bet365 (suggested by Danzig) and Betway (suggested by Blau) are among the operators that would seemingly find the most value in an ESPN tie-up. They have the product in place, the financial wherewithal to cover the hefty price tag and could be looking for “the most efficient path to instant relevance and long-term competitive positioning,” Danzig said. ESPN could also prove helpful in their efforts on the licensing front (think: credibility). However, he added, despite the ostensible strategic alignment, Bet365 has historically remained steadfast in their refusal to operate under any other brand name.
Rush Street Interactive (NYSE: RSI), which recently won the Connecticut Lottery’s sports betting contract, is another company to keep an eye on. Remember, ESPN is based in Bristol, Conn.
Danzig sees a licensing deal, which enables ESPN to “maximize profitability while minimizing the regulatory and operational burden,” as an attractive alternative to Disney running its own book. But Blau warns of the potential reputational risk associated with farming out the brand (particularly if it aligns with a subpar operator) and the possibility of losing its neutral voice. She added, if Disney really wants to get into sports betting, it should “spin off ESPN, raise the capital and do it themselves. And if they are going to be a marketing partner, they should do it in a way which allows them to go out and build a database rather than letting someone else pick theirs off.”