ESPN-Penn sports betting deal: Could there be potential downsides?

Penn Entertainment (PENN) stock is up on the news of the company's sports betting deal with ESPN (DIS). Yahoo Finance's Josh Schafer joins the Live show to discuss the sports betting market, whether this deal could be successful in the long term, and what it all means for Disney and Penn Entertainment.

Video Transcript

SEANA SMITH: Well, shares of Penn Entertainment moving in the opposite direction, ending the day up in a significant way. The stock getting a big bump on a $2 billion deal with Disney's ESPN. The companies are launching a branded sports book called ESPN Bet. But some Wall Street analysts don't think this bet is a guaranteed home run. Yahoo Finance's Josh Schafer here to break that down. Josh, we've been talking so much about the competition in the space. What's the downside of this deal?

JOSH SCHAFER: Yeah, Akiko, I mean, headline, right? You get really excited because you see ESPN, you see sports betting. We've sort of been waiting for this moment in the industry. But then when you step back and you think about where Penn Entertainment has been at in sports gambling and you look at their current market share, they're just really going to have a long way to go here.

So if you look at a state like Pennsylvania and you look at their revenue share there, you can see on your screen now, FanDuel owns about nearly 50% of the market in Pennsylvania. This is the biggest state, by the way, that Penn operates in. DraftKings owns about 23% of the market share. And then Penn is that Barstool Sportsbook. They just changed their branding, obviously with ESPN. But they were the Barstool Sportsbook in June. And they only had 3.5% of that revenue. So they have a long way to go if they want to build up market share.

And really, the biggest thing that stuck out to me, Akiko, as I was sort of digesting this over the last 24 hours and talking to some Wall Street analysts and seeing what their thinking is, it's at its core a deal with a broadcast company, which we've seen gambling companies try and do in the past. Remember PointsBet back in 2020 signed a $500 million deal with NBC Sports. Well, PointsBet doesn't even exist anymore. Fanatics bought them for $225 million in June.

Fox has tried to integrate broadcasting with betting. Bally Sports tried to do it as well. All of these companies struggled and now don't even have a sports book or their sports book isn't operating at all anymore. So it's a little bit more of a show me story now is what people are saying, rather than just, OK, ESPN, slam dunk, sports betting, this is totally going to work. I think we're going to have to see a lot play out here. And it's a $2 billion spend too. That's a lot of money if you're Penn Entertainment.

AKIKO FUJITA: Yet what does it mean for ESPN there because this is a bit of a turnaround, at least when you think about where Bob Iger was, how comfortable he was in getting into sports betting before. Obviously, this is the revenue side of things, the story is about Penn Entertainment. But what does this mean for ESPN?

JOSH SCHAFER: Right. I think for ESPN, what you're seeing here is-- so they're going to get $150 million from Penn annually first of all. So they're getting the money. They're getting the money themselves that's going to Disney. And then they also have vested interest in Penn doing well. So they do want to see betting do well, so they certainly will be promoting it on their broadcast.

But then I think the other thing that's interesting, Akiko, when we think about what Disney's been doing and some of the layoffs that they've had is they've signed people or talent that is sort of betting-focused, right? Pat McAfee, who was over at FanDuel for a while and is very popular in the betting space is now with ESPN. A lot of the ESPN layoffs were analysts that don't necessarily do live broadcasting and they're not betting-focused.

When you think about what ESPN kept during those layoffs, they didn't really lay off a major play-by-play announcer. They laid off some color analysts, but not actual play-by-play announcers. And they're still interested in getting into more media rights, right? So you can sort of see this playing out with ESPN's content structure moving forward. And I'm sure we're going to hear more about this on that earnings call coming up at 4:30.

But ESPN's overall content structure here being, OK, we have a lot of live sports rights, we probably have the biggest library in the country. Now let's pair with a betting network and make this something that we can broadcast live sports, have people bet on them, and really build it around live content and not necessarily just original content that we used to go to ESPN for 10 years ago and watch talk shows. I think it's going to be a lot more live entertainment-focused now.