The current leadership of PENN Entertainment Inc. has a lot riding on the success of ESPN BET. On Tuesday, those stakes got even higher, as PENN announced it is buying its way into one of the biggest and most expensive legal sports betting markets in the United States.
In short, Wyomissing, Pa.-based PENN is paying $25 million to the interactive arm of Wynn Resorts Ltd. for an entity holding mobile sports wagering licenses in New York.
If the New York State Gaming Commission approves, ESPN BET, the product of a partnership between PENN and ESPN, could launch in the Empire State later this year.
“This is an important development that will bring ESPN BET to the largest regulated online sports wagering market in North America,” PENN Entertainment CEO Jay Snowden said in a press release. “Together with ESPN, we’re building a brand that is synonymous with sports betting, and operating in the New York market is key as we grow ESPN BET across the U.S.”
A big sports betting deal: ESPN BET (pending regulatory approvals) will launch in New York this year after its operator, PENN Entertainment, struck a $25M deal with Wynn Interactive for mobile wagering licenses.https://t.co/npJcT5gT4o pic.twitter.com/t8pkes8i2G
— Geoff Zochodne (@GeoffZochodne) February 13, 2024
Snowden is right: it’s an important development. New York is the biggest competitive market for online sports betting in the U.S. (you can argue Florida is the biggest, but, thanks to the wonders of tribal-state relations, only one sportsbook operator is allowed there) and PENN is bent on making its ESPN BET into one of the leading names in legal sports betting. Without access to New York (or Florida), it would be hard to get on the podium.
But Tuesday’s news also means PENN is forking over $25 million — the same price Wynn paid for its New York license — to access a market that will require ESPN BET to cough up 51% of the mobile sports betting revenue it generates in the state.
DraftKings and FanDuel, as they are in most states, are the top two by handle in New York, and executives from both companies have griped about the economics there. BetMGM has also complained and curtailed its spending in New York accordingly.
Oh, and that $25 million in licensing costs and the unknown amount of tax is in addition to the money PENN will spend on acquiring customers in New York, which could mean a lot of free bets.
Those New York-related costs are on top of promotional spending by ESPN BET in other states, which can affect how much business the bookmaker sees. A note from investment banking firm JMP Securities to clients on Monday said that ESPN BET's share of the market in Indiana, Maryland, and Iowa fell to 7% in January from 9% in December.
"The market share loss was on the back of its promotional intensity, in our view," JMP analyst Jordan Bender wrote.
Name your price
Not to be forgotten is what PENN is paying to use the ESPN name. The company announced last August that it obtained the exclusive right to the ESPN BET trademark for $1.5 billion in cash over 10 years, plus around $500 million in share warrants. There is the potential for ESPN to receive more share warrants if ESPN BET reaches certain market share milestones.
And, if you really want to do a full accounting, you could include what PENN spent on its previous online sports betting effort in the U.S., Barstool Sportsbook.
PENN's new sports betting relationship with ESPN meant a breakup with Barstool Sports, which PENN sold back to founder Dave Portnoy for $1. That was despite paying more than half a billion dollars to acquire the media brand in the first place.
Maybe it’s coincidental and maybe it’s not, but Barstool Sports announced a new sports betting partnership with DraftKings immediately after the Super Bowl on Sunday. PENN is announcing its New York plan shortly after that announcement. Just two former partners telling the world they are doing JUST FINE without the other.
Breaking News: I'm proud to announce that Barstool has signed a multi year monster deal with @DraftKings We're back to our roots. DK is once again the exclusive sports betting partner of Barstool Sports. The more things change the more they stay the same. #dkpartner pic.twitter.com/EvmDGK0shl
— Dave Portnoy (@stoolpresidente) February 12, 2024
A history lesson may be in order. It was a while back, but PENN was one of the original bidders for a mobile sports betting license in New York in 2021. The brick-and-mortar casino operator ultimately lost out to others, but not before Snowden weighed in on the state's potential during a November 2021 conference call for analysts and investors.
“I don't think a single operator will make money in New York,” Snowden said. “I think, objectively speaking, you'd probably rather be in than not be in, but it's one of those states where if you're not in you're not crushed by that either.”
Maybe seeing the likes of DraftKings and FanDuel grind out revenue through sports betting in New York using same-game parlays and scale changed some minds. Maybe the economics make more sense when you’ve got ESPN’s massive media empire behind you promoting your sportsbook.
Capital ideas
But, with all the money being sunk into ESPN BET, it is likely very important to PENN’s current leadership for its new online sportsbook to do well.
It's worth noting that a major investor in PENN recently asked for seats on the company's board of directors and has reportedly voiced concerns about "how management allocates capital," according to Reuters.
Diving into New York is another capital-allocation decision that will factor into how investors feel about PENN. The company's stock price is down more than 25% over the past year, with PENN shares trading at less than $23 apiece on Tuesday.
All of the above is to say that PENN had a lot riding on the success of ESPN BET — and that was before it decided to jump into a market where the trick to making money might be not entering the market at all.
