Major film and television production studios are no longer the only entities known for their lack of originality. Penn Entertainment, one of the most prominent gaming companies in the United States, has rolled out the equivalent of an eighth film in the “Transformers” franchise.
On the heels of Penn throwing even more money at its marketing strategy for improving its share of the US online gambling market, Penn seemingly can’t perceive that the size of the investment isn’t the issue. The strategy is the problem.
Penn’s failed attempt to replicate Sky Bet in the United Kingdom
There’s a gaming product in the United Kingdom that has always had gaming and media companies alike salivating. Sky Bet, a venture of Flutter Entertainment in conjunction with media company Sky Group, is a successful product in that nation.
It has built its customer base via its media products in the UK, essentially converting media consumers to players at a high rate. It’s understandable why that premise is desirable. Instead of spending billions on marketing, a gaming company could essentially let its media partner handle that with the content it is already producing anyway.
Multiple gaming companies have tried to replicate that recipe for success in the comparatively far younger US online gambling market. Penn has been among them and perhaps the one that has put more of its eggs in that basket than any other.
In 2021, Penn purchased Score Media and Gaming for $1.5 billion. Then in February, it acquired wholesale Barstool Sports, completing a total investment of $550 million into that brand. After spending more than $2 billion, Adam Candee of Legal Sports Report says its share of the national online gaming market amounted to between a percent and a percent and a half.
That included just a 5% share of June online sports betting dollars in Massachusetts, the home base of Barstool. Now, Penn has nearly doubled its investment in trying to convert content fans into gamblers by agreeing to pay ESPN as much as another $1.5 billion over the next 10 years.
While this deal differs from the Barstool/Score moves in one big way, it’s otherwise just Penn revealing that it is otherwise out of ideas when it comes to how to grow its online gambling market share.
Penn’s new approach doesn’t cancel the past
The partnership with ESPN is different from the Barstool/Score deals because it is a partnership. This time, Penn didn’t try to acquire the media company. In fairness, if you’re going to give this strategy a serious try, ESPN is probably the brand you want to attempt it with.
To Penn’s credit, it can exit the partnership after three years if it doesn’t reach its goals. Should it exercise that clause, this venture will cost $450 million.
However, the rebrand doesn’t erase the past. Penn is still the company that is so committed to this strategy that not only has it sunk at least $3 billion into it but branded its online gambling platform with a media company best known for bigotry and the irresponsible promotion of gambling.
That was evident in a comment from Penn CEO Jay Snowden in a Tuesday release about the ESPN deal.
“Barstool has been a great partner and we are thankful to Dave Portnoy, Erika Ayers, Dan Katz and their team for helping to rapidly scale our digital footprint across 16 jurisdictions in the U.S. and introducing their audience to our retail and digital products,” Snowden stated. “The divestiture allows Barstool to return to its roots of providing unique and authentic content to its loyal audience without the restrictions associated with a publicly traded, licensed gaming company.”
In a post on X, Portnoy also essentially explained that Barstool and he can’t do business in an industry in which regulators can actually hold the company and him accountable for their actions. The sequence of events is a procession of red flags for stockholders.
Penn’s leadership is out of ideas already
Not only did Penn stick its head in the sand to the reality of Barstool’s problematic nature during the acquisition but it also bailed on the premise of converting Barstool content fans to gamblers after just six months. That might not be the worst part of the past half-year, though.
Perhaps most egregiously for stockholders, Penn wasn’t tracking whether it was actually converting Barstool fans into customers according to an attorney the company hired. If that attorney’s statement is factual, then Penn made the decision to pull the plug on its last version of this plan while not allowing it any real time to develop and without sufficient data to support the decision.
To be fair, undoing a move that the company never should have made is hard to fault by itself. The divestiture from Barstool, which Portnoy framed as him buying back like a teenage boy who insists that he broke up with his significant other first when in reality he got dumped, is a good move for Penn in a vacuum.
It didn’t occur in a vacuum, though. It’s part of the story of Penn’s commitment to apparently the only idea it has to try to gain a larger share of the online gaming market. Even if the ESPN partnership proves more successful than acquiring Barstool/Score, that seemingly has its limits.
The ceiling for the ESPN deal is low
ESPN has brand power among sports fans but whether that means it can convert them into regular bettors at a high rate remains to be seen. Even if that does occur at a sustainable level, though, that still represents a low ceiling.
If ESPN Bet can get to around a 20% share of US online sports betting dollars, that’s just sports wagering. Sports wagering is a low margin business for gambling companies compared to other forms of gaming.
Even a 20% share might not represent enough actual profit to justify a $150 million per year price tag for the licensing deal. It may not come close to making Penn Interactive a division of the company that actually returns value to the whole.
ESPN likely doesn’t have the same kind of brand power for real-money online casino players. That vertical is where the real money for online gambling companies lie. While Penn might hope that ESPN will attract sports bettors and they will be able to cross-sell them on the online casino product from there, that is looking like another failed strategy.
For example, Caesars is moving away from its shared app for online casino and sports wagering. Penn is doing the same. In its release announcing the ESPN deal, Penn said “our new app will include a separate Hollywood-branded iCasino product in those states where permitted.”
That makes a $150 million per year cost to brand a sportsbook alone look even more out of place. Obviously, it was going to take a premium to license out ESPN’s brand. However, that didn’t mean Penn had to be the one to pay it.
No one is suggesting that Penn National simply roll over and give up fighting for a bigger share of the US online gambling market. The bottom line for shareholders right now is that Penn is essentially offering up its version of a 47th “Fast and Furious” film.