Why Did Disney Bet on Gambling?
Two months ago, just before Disney revealed its latest quarterly fiscal earnings report, the company quietly accepted $2 billion.
That money came from gambling, and it signified a dramatic reversal of Disney’s corporate policy.
For many years, Bob Iger, the CEO of The Walt Disney Company, resisted all offers to leverage the ESPN brand via gambling.
Seemingly overnight, Iger’s position changed. So, why did Disney change its tune on gambling?
A $2 Billion Bet
Let’s start with the shocking details of Disney’s August deal.
Virtually out of nowhere, the company accepted a $200 million annual offer from Penn Entertainment for licensing rights.
Obviously, Disney enters into agreements like this regularly, as every business would love to associate with its brands.
When you’re shopping for toasters, the one with Mickey Mouse on it is most likely to appeal to you, right?
That same thought process applies to the sports world, where gambling organizations have sought the ESPN brand for ages.
Under Iger’s previous tenure, Disney never seriously considered one of these offers.
At its core, Disney remains a family-friendly business. Any connection to gambling would appear inappropriate.
Then, Disney reversed course in dramatic fashion when Penn Entertainment announced a new deal.
Penn would pay Disney $2 billion over a decade or $200 million a year simply to utilize the name and logo of ESPN for its new sportsbook.
Gambling occurs via an app called ESPN Bet. While ESPN will acknowledge the product on-air, virtually everything else happens via Penn.
The company is merely paying Disney for the privilege of using the trusted ESPN brand.
For Disney, this transaction counts as found money. Nobody had expected this new revenue stream, as Iger had sounded so adamant against it.
During an early 2019 earnings call, the CEO had stated, “I don’t see The Walt Disney Company, certainly in the near term, getting involved in the business of gambling, in effect, by facilitating gambling in any way…”
Technically, he was right, as Disney wouldn’t introduce gambling for nearly five years.
Still, something changed here, and a recent Wall Street Journal article has explored that philosophical evolution by Iger.
Why Iger Changed His Mind
Before we discuss Iger’s position change, let’s remember that Disney already possessed a gambling connection.
When the company acquired Fox’s assets, it gained a six percent stake in DraftKings.
According to the Wall Street Journal, other Disney executives encouraged Iger to acquire a larger interest in the company.
They viewed digital sports gambling as a growing market rife with potential.
Iger consulted with some other parties, including BlackRock, a humongous investment company.
BlackRock warned Iger of perils in such a transaction, solidifying the executive’s opinion on the topic of gambling.
But a couple of things changed at Disney after Iger retired. Disney’s new CEO, Bob Chapek, cared more about money than semantics.
Chapek asked Jimmy Pitaro, the current Chairman of ESPN, to investigate potential gambling partnerships.
Neither executive felt ready to move on the subject. Their research qualified as informational more than anything else.
Once Iger returned, Pitaro updated his boss on what happened in Iger’s absence.
The gambling conversation intrigued both men due to their families.
During Iger’s downtime, he spent more time hanging out with others, and it helped him realize aspects of the changing world he’d otherwise missed.
The CEO reportedly told other executives that “His adult sons’ use of sports-betting apps opened his eyes to its popularity with a younger audience.”
For his part, Pitaro warmed to the idea of Disney gaining a foothold in an emerging industry.
By the time Iger acknowledged his interest, DraftKings had exploded in scale and claimed more than 30 percent of the industry’s market share.
For whatever reason, DraftKings chose not to bid aggressively for the ESPN licensing opportunity.
Now, Iger had renewed interest in a lucrative opportunity and a desire to prove a naysayer wrong.
Disney Makes a Move
The Wall Street Journal article describes Disney as going “all-in” on gambling. I feel that’s an overstatement.
Realistically, Disney isn’t doing much under its new terms. ESPN must honor a few modest agreements. Otherwise, Penn Entertainment does all the work.
Notably, Penn’s interest in Disney may have impacted Disney the most.
Since DraftKings was already succeeding on its own, executives at that gambling business felt no need to develop stronger ties with Disney/ESPN.
On the other hand, Penn Entertainment needed a lifeline. The company had foolishly contracted Barstool Sports for its sportsbook licensing.
Eventually, Penn purchased Barstool, which led to unpleasantness. Known for its chaotic bravado, Barstool made some gambling claims “sarcastically.”
In the process, Penn unwittingly violated gambling regulations involving people under 21.
The last thing that any gambling organization desires is intense governmental scrutiny. Do you know who wouldn’t cause that? ESPN.
Not coincidentally, Penn happily agreed to virtually all of Iger and Pitaro’s terms for an ESPN partnership.
Perhaps more than any other reason, that’s why Disney committed to gambling.
Since Penn is smaller in scale, it’s willing to do whatever it takes to earn a seat at the table.
ESPN’s credibility immediately provides that seat. However, Disney understandably wanted no part of Barstool, which Penn had acquired in full.
So, Penn sold Barstool back to its founder for a dollar, taking a $550 million bath in the process.
Penn’s ESPN licensing bid also doubled what DraftKings or anyone else had offered.
In short, Penn deftly created a deal that Iger couldn’t turn down. There’s just no downside for Disney beyond the one branding issue.
Disney has now willingly dipped its toe into the gambling pool.
The DraftKings stake counts as happenstance. This agreement with Penn is deliberate.
What Happens Next
Some outside analysts and former ESPN workers perceive this deal as more about ESPN rather than Disney, though.
John Kosner of Kosner Media previously worked for ESPN.
Now, he states, “Getting into sports betting is a perceived business necessity for ESPN.”
Kosner adds, “I think this decision has to do more with ESPN’s manifest destiny than Disney’s position on branding.”
As a reminder, many analysts feel strongly that Disney will eventually either spin off or sell ESPN.
Should that happen, Disney will once again tether its connection to gambling.
Until then, the ESPN Bet/Penn Entertainment partnership will last for ten years, although there’s a negation clause after three years.
During the lifetime of the contract, Disney gains $150 million annually.
Also, Disney now possesses warrants that allow the company to buy up to $500 million in shares of Penn Entertainment.
Those shares currently trade at roughly $20, which is actually $7 lower than during the aftermath of the Disney announcement in early August.
However, if the ESPN agreement plays out as anticipated, these shares could explode in value. Fittingly, it’s a gamble for Disney.
Feature Image: The Hollywood Reporter/ILLUSTRATION BY DREW BARDANA
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