Disney Hedges Losses with Sports Betting

Penn Entertainment (NASDAQ: PENN), who recently sold back sports blog Barstool Sports to its founder, Dave Portnoy, has turned its eyes to partner with The Walt Disney Company (NYSE: DIS). The divestiture of Barstool Sports back to Portnoy was completed for only 1$ in return for “non-compete and other restrictive covenants” as well as the “right to receive 50% of the gross proceeds received by David Portnoy in any subsequent sale or other monetization event of Barstool.” This stealthy tax write-off maneuver by Penn was followed by a partnership with ‘The Happiest Place on Earth’.

Last Tuesday, Walt Disney’s ESPN and Penn Entertainment announced that they have partnered to launch a sports betting business under the brand ESPN Bet. Under the terms of the deal, Penn will pay $1.5 Bn in cash to ESPN over an initial 10-year term in exchange for brand and other rights provided by ESPN.

ESPN Bet is planned to launch this fall in the 16 states where Penn has sports betting licenses. This replaces Penn’s Barstool Sportsbook. Disney is no stranger to sports betting and sold its roughly 5 percent stake in Draftkings last quarter, taking a $90 million gain. In Nov. 2022, ESPN chairman Jimmy Pitaro had hinted that the sports network was looking to move further in sports betting and had “had conversations with all the usual suspects.” He added that ESPN did not want to set odds and take money itself, but would be more interested in a partnership.

ESPN’s last annual 10-K filing in late 2022 revealed that ESPN had lost approximately 10 million subscribers its previous two years, bringing its overall reach to 74 million cable/satellite/telco-TV households based on the filing. While Disney’s direct-to-consumer (DTC) revenue increased by 8% to $4.9 Bn, its operating losses nearly doubled from $800 Mn to $1.5 Bn. This was due to a content purge in which, as Variety reported, the media company pulled and wrote-off more than 50 titles from Disney+ and Hulu, including the series “Willow,” “The Mysterious Benedict Society” and “Dollface,” in addition to movies such as “The One and Only Ivan.” Disney noted that the loss of viewership came about at a 4 million subscriber loss at Disney+ and a 100 thousand subscriber loss at Hulu.

Last week, Disney CEO Bob Iger stated that they are actively targeting a younger demographic with this new strategic partnership. “We have been in discussions with a number of entities over a fairly long period of time. It’s something that we’ve wanted to accomplish, obviously, because we believe there’s an opportunity here to significantly grow engagement with ESPN consumers, particularly young consumers”.

ESPN starting a streaming service is the beginning of the end of cable and it looks to be the endpoint for Disney. In the interim, this $1.5 Bn partnership will hedge against previous losses incurred for any sub-par content released by Disney.