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Penn's splashy $2 billion deal with ESPN might not be a slam dunk

Penn Entertainment (PENN) believes its $2 billion dollar deal to create ESPN Bet will "redefine" the sports betting landscape. But some on Wall Street don't believe it will be so straightforward.

"It’s going to be a show-me story," Joel Simkins, a managing director in Houlihan Lokey's technology group, said via email.

Among analysts' concerns: Competitors FanDuel and DraftKings (DKNG) have already seized large portions of market share in the US and believe they are closing in on profitability. All while Wall Street remains hyper-focused on whether expansive marketing spend can lead to profits after some in the industry have floundered.

"Just because you have a lot of eyeballs watching it doesn't translate to market share automatically," Simkins said.

Penn is paying ESPN (DIS) $1.5 billion over 10 years and an additional $500 million in PENN stock warrants in exchange for exclusive rights to odds attribution, digital product integrations, and access to ESPN's talent. This means Penn's "ESPN Bet" branding and gambling odds will be plastered on the screen during game broadcasts and mentioned by on-air talent throughout shows.

For ESPN, the deal offers an opportunity to "significantly grow engagement with ESPN consumers, particularly young consumers," Disney CEO Bob Iger said on the company's earnings call Wednesday.

If successful, Penn believes the tie-up with ESPN could help bring the struggling online operator additional market share.

In June 2023, Penn's then-Barstool-tied sportsbook produced revenue of $1.2 million in Pennsylvania, the largest state where Penn operates mobile sports wagering, representing about 3.5% of the market share. Meanwhile, FanDuel and DraftKings combined have a 72% share of the state, with FanDuel alone owning 49%. Penn has included incentives for ESPN based on how much market share it gains but declined to specify those metrics on the earnings call.

"We're not doing this deal to be a 4% or 5% market share player," Snowden said on the call. "That's not going to be acceptable for us. It's not going to be acceptable for ESPN. So you should assume if those are the ranges you're in, that's not going to work out long-term."

DraftKings and FanDuel haven't relied on broadcast partnerships to gain their market share either. Instead, the two sports betting-focused apps have defined themselves in the market with top-tier technology and the widest array of options.

"Issues remain as to the magnitude of share given the later entry, as well as the competitiveness of product advancement, which has been the current success driver rather than eyeballs," Jefferies analyst David Katz wrote in a note on Tuesday night.

ESPN logo before the VRBO Fiesta Bowl college football game.
ESPN logo before the VRBO Fiesta Bowl on December 31, 2022, at State Farm Stadium in Glendale, Arizona. (Photo by Kevin Abele/Icon Sportswire via Getty Images) (Icon Sportswire via Getty Images)

A sour history of media deals

Given Penn's current place in the market, ESPN spurring increased market share would bring validity to the strategy of partnering with a broadcast network, which hasn't worked often in the past.

Sports streamers fuboTV (FUBO), Bally's (BALY), Fox (FOX), and PointsBet have all tried some version of combining exclusive sports broadcasts with their own live odds. All four of those companies have either had their sportsbooks acquired or shut down altogether since.

In 2020, PointsBet's inked a $500 million dollar deal with NBC Sports that included exclusive broadcast integrations among other similar features to ESPN and Penn's deal.

At the time, PointsBet CEO Johnny Aitken called NBC "a megaphone for sports" and noted exclusivity with NBC was "very valuable." But the partnership never translated to big market share gains. Fanatics purchased PointsBet for $225 million in June.

"They were expected to get double-digit market share gains," Macquarie gaming analyst Chad Beynon told Yahoo Finance Live. "After we saw some of these media deals not work out as expected I think there's been just more questions around if this is the right way to acquire customers, maintain customers, and are you able to hit the goals?"

For its part, Penn's deal with ESPN could be more additive than prior deals. ESPN recently added gambling celebrity Pat McAfee to its lineup of talent and owns a wider array of sports rights than any other broadcaster in the US.

"It sounds like they do have a lot of control with the personalities, with the content and there will be a board seat from ESPN on Penn's board," Beynon said. "So, it certainly looks like they're tied up as close as they could be."

Josh Schafer is a reporter for Yahoo Finance.

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