Hitting the Mark or Missing the Goal? ESPN Bet’s Rocky Start

After losing faith in the success of Barstool Sportsbook, Penn Entertainment decided to try its luck again in the online sports betting market with a clean slate and a new brand deeply embedded in the American consciousness. This seemingly straightforward recipe for success faces complexities in the challenging U.S. market, where nothing is as simple as it appears.

Ambitious Launch and Initial Market Reaction

In August 2023, Penn Entertainment and ESPN officially announced a partnership that resulted in the launch of their joint venture, ESPN Bet. By collaborating with ESPN, Penn aimed to leverage the brand recognition and extensive user base of ESPN. This user base includes over 200 million unique monthly users and 12 million users of its fantasy sports app.

From the outset, the goals were extremely ambitious. The integration of ESPN’s media assets with Penn’s betting platform was intended to deliver a high-quality product to a broad range of potential new customers. Early estimates even suggested the potential to capture up to 20% of the U.S. online sports betting market.

The initial results for ESPN Bet were promising, garnering significant trust from the stock market. From the launch of the operator on November 14, 2023, to the end of the year on December 28, 2023, Penn Entertainment experienced a 10% increase in its stock price, rising from $24.01 to $26.60. This positive market reaction reflected investor confidence in the potential success of the new venture.

Due to substantial marketing investments, ESPN Bet quickly garnered a significant customer base. By the end of 2023, the operator boasted a 9% market share in key states such as New York, Maryland, Indiana, and Iowa. This achievement was noteworthy, considering nearly 90% of the market is dominated by the top three players: FanDuel, DraftKings, and BetMGM. This promising start indicated a positive outlook for the future.

Costly Promo Investments and January 2024 Reductions

On the other hand, scenarios involving a significant reduction in marketing expenditures and the impacts of such a move needed to be considered. This adjustment was inevitable as the company aimed to balance initial customer acquisition costs with long-term sustainability.

The marketing brake was applied in January 2024. While nationwide promotional expenditures increased by 40% year-over-year and 8% month-over-month, ESPN Bet significantly reduced its promotional spending to $3 million (-87% month-over-month). Consequently, the operator experienced a significant decline in its overall GGR share. ESPN’s market share in January 2024 was 8%, indicating a slight decrease.

The cost cuts in January at ESPN Bet were quite substantial. This is evident when comparing the promotional expenditures in January among the top five operators in the U.S.

• FanDuel: $16.6 million
• DraftKings: $10.4 million
• Bet365: $4.1 million
• BetMGM: $3.6 million
• ESPN Bet: $2.6 million

It was inevitable for ESPN Bet to make cuts in promotional spending. Therefore, the focus should be on ensuring the long-term operational sustainability of the platform, rather than being concerned with monthly fluctuations. It’s essential to consider the broader context and the strategic goals that drive these decisions.

Financial Report Impact

On Valentine’s Day, February 14, 2024, Penn Entertainment released its financial report for Q4 2023. The results significantly dampened the initial enthusiasm of investors, causing Penn’s stock to plummet. In just one day, the stock dropped nearly 14%, from $22.50 to $19.39, marking the beginning of a decline that culminated at the end of the month when Penn’s shares were valued at $16.60. This represents an over 24% decrease. What exactly was in Penn’s report that shook the stock market?

• Significant Losses: Penn Entertainment reported a net loss of $358.8 million for Q4 2023, a stark contrast to the net income of $20.8 million reported in the same quarter the previous year.
• Decline in Revenue: The company’s revenue dropped from $1.5 billion in Q4 2022 to $1.3 billion in Q4 2023. This decline was largely attributed to the launch and early operational costs of ESPN Bet.
• High Marketing Costs: Despite cutting promotional spending in January, the overall marketing costs for the quarter were still high, impacting profitability.
• Operational Challenges: The integration of ESPN Bet posed operational challenges, including the costs associated with transitioning from Barstool Sportsbook and establishing ESPN Bet’s presence in the market.

The Big North Carolina Test

The next true test for ESPN Bet was set to arrive in the first half of March. On March 11, the North Carolina sports betting market was launched, marking the first market where ESPN Bet could start on equal footing with its competitors. According to analysts, ESPN Bet’s performance in North Carolina was expected to be highly indicative of the enterprise’s future. A glimmer of hope also ignited among investors, as Penn’s shares began to rise slightly just before March 11.

The market share percentage achieved in North Carolina was expected to set the benchmark for ESPN Bet’s shares in other states. The answer came quickly, as initial estimates indicated that ESPN Bet secured a 7-8% market share in North Carolina at launch. This fell short of the original projections of 20% and the later analyst expectations of 10%.

However, Penn CEO Jay Snowden consistently emphasizes that ESPN Bet’s performance should be viewed in long-term terms. In his statements, Snowden even mentions the year 2026, suggesting that Penn’s leadership expects ESPN Bet to reach its full potential by then. For now, Penn has announced that 2024 will be a year of investment, with the first noticeable effects expected by Q3 of this year.

“Please keep in mind that Disney and ESPN did not agree to this alliance with Penn to be number four or number five in the market,” Snowden assures.

Current Market Position and Challenges

At this point, it’s hard to be particularly optimistic. According to JMP’s April estimates, ESPN Bet’s GGR market share was only 1.5%, placing the operator not only behind BetMGM but also behind Caesars, with a share similar to Rush Street Interactive. Notably, this is the exact same market share Penn had in April of the previous year, at the end of Barstool’s operations.

The first six months of ESPN Bet’s presence in the U.S. market have been quite brutal. Due to cuts in promotional spending, the operator experienced a significant decline in GGR market share. The competition in the U.S. is particularly fierce, especially with the stable dominance of FanDuel and DraftKings. Currently, ESPN Bet is positioned at the lower end of tier 2 operators aspiring to make their mark on the market. Even within this group, the competition is intense, given the rising ambitions of Fanatics and Bet365. Ultimately, ESPN Bet’s disappointing results cannot be attributed solely to market conditions.

In regular app tests conducted by Eilers & Krejcik Gaming, the ESPN Bet app performed poorly, ranking only 11th. Testers specifically highlighted the weak functionality of the software. Notably, Barstool, which used Kambi’s solutions, performed much better in EKG’s app rankings than ESPN Bet currently does. It’s evident that Penn has a substantial amount of foundational work ahead of it.

Analyst Outlook and Investor Concerns

Analysts at Bank of America recently evaluated the current situation of Penn Entertainment, and unfortunately, their outlook is not very optimistic for investors. They downgraded their recommendation for Penn’s stock to “Hold,” explaining that the significant investments required to scale ESPN Bet to profitability could prove very challenging and may take several years. The disappointing market share, app issues that Penn needs to address before the NFL season, and increasing competition make ESPN Bet’s prospects look less than encouraging. According to BofA analysts, the operator would need to double or even triple its revenue to compete with the largest players in the market.

It won’t be easy considering that ESPN Bet is grappling with a chronic issue that may be difficult to overcome due to the nature of the venture. The operator primarily attracts casual bettors who spend small amounts on sports betting. This fact undermines the foundation of ESPN Bet’s business and could make achieving profitability difficult, even by 2026, without significant changes.

Despite Penn’s continual assurances that ESPN Bet’s situation will significantly improve in the long term, current analyses suggest that this could be a very challenging task for the company. Behind the scenes, there are rather pessimistic voices indicating that Penn will manage and survive even if the ESPN Bet project turns out to be a failure. This is certainly not a good omen for the operator’s future. The key question, therefore, is how much patience Penn is willing to dedicate to this venture and how large the long-term investments it is prepared to undertake.