Disney Takes A Risk And Gets Into Gambling - Why This Might Be A Mistake
Last week we wrote about how cable companies are finally starting to call Disney's bluff on their habit of "double dipping" by getting paid twice for the same content - once from streaming fees and once from cable fees.
If you missed it, you can read about our earlier piece here.
It is a pretty complex story and you might think that this would leave Disney's leadership with a full plate and they might just focus on trying to right the ship of Mickey rather than trying to simultaneously learn new tricks.
You would be wrong.
Competing with Netflix is no joke, it turns out. In fact it is so difficult that Disney would prefer to look elsewhere.
In reality, in its search to reinvigorate its business and stem the losses from cord cutting in cable, disappointing movie revenues as well as the hefty bills that come with building out all this online content to stream, Disney is quickly moving into whole new business sectors searching for more revenues.
More specifically, the Magic Kingdom is getting into gambling.
For those with even just a passing knowledge of Disney's brand this is an odd move. It shouldn't surprise us though.
We are bringing you this sorry tale for two reasons:
Last week we said it would be hard for Disney to make greater profits going forward.
We aren't sure this is move into gambling is a good strategic move for Disney.
It is certainly VERY different from the company's past behavior and is at odds with its core values.
We felt that we should be honest that when we said that we were not sure where the profits would come from that Disney wasn't helpless. It was at least making serious moves to address that very question.
That is hard to really hate except that we wonder whether they will be all that successful and whether the risk will be worth it considering the damage it could do to their image and also their balance sheet.
In fact Disney's move into gambling has all the hallmarks of being an expensive gamble itself.
How are they doing so?
Practically speaking, Disney did a deal where ESPN, its cable tv sports empire, will get into business with a casino and sports gambling company called Penn Entertainment.
Penn will rebrand its US sports betting sites, currently available in 16 states, as ESPN Bet. They will then expand this offering and obviously be in a great position to advertise and find synergies and greater profit combining sports broadcasting with sports gambling.
So, what is not to like then?
There are two problems as we see it.
The first is that Disney is very late to the party.
This is sort of weird to say because sports gambling has only even been legal since 2018 but it is already a VERY competitive space.
As anyone who has watched a sports match in the last few years can attest, sports gambling is everywhere. And it is already dominated by a few very large and deep pocketed companies, namely FanDuel and DraftKings.
Those two companies control over 70% of the sports gambling market share. For context, Penn's current size is around 2%. That will change in the months to come, no doubt, but that won't happen by magic (pun intended) it will also require huge investment to catch up.
That is a simply massive gulf and once that won't be easily closed even with access to Disney's customers and ability to spend vast sums.
The reason?
These companies compete viciously for customers and they do so via two tried-and-true methods:
Huge advertising and marketing spend.
Valuable promotions for customers to join and trade.
Presumably both avenues work. But both are expensive.
To give just one recent example:
The NFL season has begun which is, of course, the best source of gambling but also requires tremendous amount of promotional spending and financial inducements.
FanDuel has increased up its sign-up promotion to $200 in bonuses for a $5 bet on the NFL season. This is up from $150 last year. The gambling firm also signed a deal with YouTube to give its new and existing betting customers $100 discounts on YouTube’s NFL Sunday Ticket subscriptions for a $5 bet until September the 18th. For those not in the know, Sunday Ticket prices start at $349 and give you every single game possible.
It might be worth pointing out that both FanDuel or DraftKings struggle to turn a profit. In fact, FanDuel is the first US sports gambling company to turn a meager profit. All the rest - Caesar's, BetMGM, DraftKings - record only losses.
Big Oof.
Clearly, this is a tough game to be in if you are looking for an easy profit. Disney's leadership clearly feels like they have an edge but whether they do or not there will be one certainty:
It will certainly cost money.
The second problem is more squishy but potentially very dangerous.
Disney is known for its family values and this dramatic departure could pose a real risk to their brand.
Here is a prediction that we wish we could make money on:
Sports gambling, while fun and very lucrative for some, is going to be very quickly a huge problem for American society.
Betting on football or baseball has a ton of "negative externalities" and just like other legal vices such as drinking or smoking (or now drugs?) these will rise in direct proportion to the amount of gambling. More gambling literally means more problems.
So, as with the other activities that pray on human weakness, the cost of MORE sports gambling are going to quickly pile up.
It is true that the sports gambling companies know all this and are contributing vast sums to Gambling Anonymous-type services both out of self-preservation and as mandated by the authorities by most of the 34 states that have legalized it.
But in just a few short years American society will be fun of victims of sports gambling and its sudden ubiquitousness online and in every bar, home and phone will make it very difficult to treat properly.
Eventually, just like autumn rains follow summer sunshine, there will be a backlash about unfettered sports gambling preying on the vulnerable members of society as well as costing real money for everything from mental health services to political corruption.
Some of this backlash will be laid at Disney's door. This will be the case even if they are not very successful at sports gambling as well.
A riskier prediction:
The biggest problem with sports gambling is its intersection with the interests of young people who are not yet mature enough and possibly even capable of handling the stress and addictive properties of gambling with real money.
Regardless of whether that is true we are running a real world experiment right now with tens of millions of Americans of all ages. There is a host of evidence in other countries - especially the United Kingdom - that this does not end well.
So where does this all mean for Disney?
Put simply we think Disney is making a big mistake. They are:
Getting late into a highly competitive space.
To have a chance they will have to spend vast sums of money.
They have partnered with a tiny, tiny player in Penn.
The company is sending a mixed signal to its loyal fan base.
If this seems like the very antithesis of a recipe for success we would agree and we haven't even listed the threat to the overall Disney brand.
No doubt the company's leadership think that their huge reach, captive audience on their ESPN cable channels and the related streaming app (ESPN+) will be enough to drive a lot of customers to the ESPN Bet.
That might happen but we expect that they will find more brand risk and high expenses than easy profits. Disney has likely entered the sports gambling space just in time for the backlash when states and parents discover the havoc this is wreaking on their populations.
Once companies get in trouble they often start looking to other industries and money making opportunities because it seems easier than, say, just actually getting back to making really good movies.
It might be a tough business but it is at least a business you know and understand.....
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