What a DraftKings-ESPN Tie-Up Will Mean for Investors

Last Friday, as the September jobs report dealt a blow to the broader stock market, shares of sports betting site DraftKings (DKNG, $13.49) jumped more than 3%. Why? Reports surfaced over a potential partnership with Walt Disney's (DIS) ESPN.

The speculation dates back to summer of 2021, when The Wall Street Journal, citing people familiar with the matter, reported that ESPN is looking to partner with a sports-betting partner. The rumors caught wind again last week, and while nothing is confirmed,  a deal between the sports gambling company and one of America's leading sports media empires would benefit both parties.

What does this mean for investors?

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Here's a look at what this partnership would do for DraftKings and, to a lesser extent, ESPN.

An ESPN Partnership Could Help DraftKings Gain Market Share

DraftKings rival FanDuel currently has an edge in certain markets, including New York, where sports gambling became legal in January 2022. The state, which has a stiff 51% tax on online sports gambling operators, tapped nine companies, including DraftKings and FanDuel, to lead its initial launch of licensed sports betting.

The competition between all nine operators has been intense., and in September, the Legal Sports Report suggested that FanDuel held a 39.7% market share of the online sports betting market in New York, 510 basis points higher than DraftKings (a basis point = 0.01%). Rounding out the top five are Caesars (13.0%), BetMGM (7.6%) and BetRivers (2.8%).

So, in New York, at least, it's a two-horse race, and FanDuel's ahead halfway through the first quarter of a four-quarter game.

From a revenue perspective, FanDuel's revenues in New York increased by 66% from June to September, from $39.6 million to $65.7 million. Over the same period, DraftKing's revenues increased 174%, from $16.4 million to $44.9 million.

In September, the nine operators made $70.2 million in total revenue after the 51% tax, while New York State brought in $73.1 million. So far, the state appears to be the big winner in online sports betting. It's projecting $615 million for the state's fiscal year, from April 1, 2022, to April 1, 2023.

It's not surprising that the nine operators have asked for a cut in the tax rate. That lobbying should intensify in 2023.

Nationally, according to Eilers & Krejcik Gaming's July 2022 report on the U.S. sports-betting market, FanDuel held 46.6% of the market with $744 million in gross gaming revenue – based on trailing three-month revenue from March to May. DraftKings was a distant second at 20.2% ($322.5 million).

FanDuel had the top spot in 14 states compared to three – New Hampshire, Oregon and Wyoming – for DraftKings.

To say that an ESPN tie-up would help DraftKings' cause is an understatement.

ESPN Brings a Mass Audience of Sports Fans

Disney CEO Bob Chapek told Bloomberg in September that ESPN's younger fans want sports betting integrated into the network's programming and content.

"Sports betting is a part of what our younger, say, under-35 sports audience is telling us they want as part of their sports lifestyle,” Chapek said. 

In the same interview, Chapek indicated the company is "working very hard" on an ESPN sports-betting app. 

So, what does ESPN bring to DKNG's table? According to The Wall Street Journal, a long-term deal could net DraftKings at least $3 billion.

That would go a long way in DKNG accelerating its sports-betting aspirations nationwide, including in California, where Proposition 27 will be on the ballot in the midterm election. Prop 27 would allow online and mobile sports wagering outside tribal lands in California.  

Most believe California voters will not approve this proposition, and Oppenheimer analyst Jed Kelly sees Prop 27's defeat as a blessing in disguise for DraftKings. It gives the company 2-3 years to scale its sports-betting business and become profitable before entering what's likely to be the biggest prize for U.S. sports gambling operators. 

More important than a big outlay of money by ESPN is the instant credibility it gives DraftKings as the official operator of ESPN sports betting. If Barstool Sports is big for PENN Entertainment (PENN), ESPN is massive for DraftKings.

"We think an agreement is likely and could include licensing of the ESPN brand and media integration that could deliver market share and player engagement boosts," says Benchmark analyst Mike Hickey.

While DKNG stock is down 51% year-to-date, it's unlikely that a failed bid to partner with ESPN would hurt its stock too badly. However, an official announcement would certainly help its share price and its fight with FanDuel to own the U.S. sport-betting audience.