Why Is Disney (DIS) Moving Into Sports Betting?

On the company's recent earnings call, CEO Bob Chapek of The Walt Disney Company (DIS) said that there was a "significant opportunity" for Disney in sports betting.

For long-time observers, the move might seem counter intuitive for a company that generates a bulk of its profits from fairy-tale fantasies and family-themed properties. An association with gambling might turn customers away from the brand.  

But the company has significant advantages in an industry that is poised to take off. While it is a complicated maneuver, the move into sports betting might end up enhancing Disney's bottom line.

Why Is Disney Moving Into Sports Betting?

According to statistics from the American Gaming Association, Americans wagered an estimated $3 billion in sports betting for the first time in October 2020. Revenue from the industry last year was up 53% year over year to US $237.5 million. The global sports betting industry will be worth $43 billion by 2025, according to research firm H2 Gambling Capital.

Besides, the industry is expected to benefit from a change in its regulatory status. The Supreme Court allowed states to legalize sports betting in 2018. Since then, roughly 20 states have moved to allow sports betting, and more are expected to follow suit. Major leagues like the NBA and the NFL, which had once kept sports betting at arm's length, have integrated its advertising into their games—featuring sportsbooks from leading companies in the industry such as DraftKings Inc. (DKNG), FanDuel, and Caesars Entertainment, Inc. (CZR). 

Disney owns ESPN, the most popular sports network in the country, and a relationship between leading sportsbooks and the network could mint profits for the company. Sports betting also offers the company a chance to plug into a new, upcoming demographic. "Strategically, sports betting gives us the ability to appeal to a much younger sports fan who has a very strong affinity for these sports. So it's definitely a place we want to be," CEO Chapek told analysts earlier this year.

But successive Disney CEOs refused to commit to the idea of sports betting platforms on their properties until Chapek came along. "It is all driven by the consumer ... particularly the younger consumer that will replenish the sports fans over time. They desire to have gambling a part of their sports experience," Chapek said on the company's earnings call.

A Complicated Move 

While the market for sports betting is a big one, a move into it is laden with several complications for Disney. Not least among them is the optics of entering sports betting. 

Disney has generally steered clear of "sin" industries to maintain its clean "family-friendly" image. An ESPN sportsbook that actively encourages sports betting among fans could dilute that image. For now, the House of Mouse has restricted itself to licensing tie-ups. In this respect, it lags other companies. For example, rival Fox Corporation (FOX) is part-owner of the FOX Bet, an online sports betting platform. It also has a FOX Bet Super 6 app for bettors to make small wagers on games.

The biggest move made by Disney in sports betting is a $3 billion multiyear licensing contract with DraftKings. That high figure apart, much of Disney's revenue growth in the market depends on whether DraftKings is able to increase its growth momentum in the industry. The Boston-based firm, which reportedly spends 80% of its earnings on advertising, has reported revenue increases every year since going public in 2019.

But it will need to spend less on marketing to match the hefty price tag ESPN attached to the deal. Last year, DraftKings reported a 62% increase in revenue to $644 million. Out of that figure, it spent $500 million on marketing. The company will need to boost that figure in the coming years to execute the deal profitably.

Further complicating the equation is Disney's indirect ownership stake in DraftKings through its ESPN subsidiary. Thus, a revenue hit to DraftKings affects Disney. Perhaps it is unsurprising, then, that Chris Krafcik, Eilers & Krejcik gaming analyst, said the deal would "make no money" when its news was released.

An ESPN+ Play? 

ESPN brings brand recognition and introduces a new generation of fans to sports betting. While a sportsbook may be out of bounds right now, Disney is making its moves in the storytelling space. And ESPN+, the streaming twin of ESPN network with 15 million subscribers, might benefit the most from Disney's move into sports betting. It has already begun introducing content related to sports betting on its site. 

One of those pieces recently witnessed a spike in engagement on the site during a shutdown in play. ESPNews, a news program dedicated to sports, has incorporated betting data into its mix and ESPN+ debuted Daily Wager—a program about bets on a game preshow and during halftime—in April this year.

"The content space for us, has been a really compelling one," Mike Morrison, ESPN's vice president of sports betting and fantasy, told journalists. "Betting absolutely has to be part of that storytelling and the content that we produce."