Disney CEO Bob Chapek was asked about sports betting at last week's Goldman Sachs Communacopia Conference. His answer had an interesting logic to it:
putting a link out, for example, which would probably be the most likely application – a link out, not app as an app, but application, a link out to a sports betting site, ESPN-branded, would have no impact on brand equity for Disney but will have a very positive impact on the brand equity for ESPN because our younger audience is demanding that.
It seems like an obvious point: of course brand equity concerns would dictate Disney’s preference to link out to a sports betting site than own a sports betting site. But I think Chapek is implying a simpler, more nuanced point: even if sports betting is a direct-to-consumer (DTC) business, the sports betting consumer needs a linear ESPN broadcast more than they need another DTC sports betting service.
Chapek & Sports Betting
I wrote back in January that one of Disney’s biggest challenges with sports betting - beyond brand equity - is conceding to sports betting companies the transactional stages of the DTC conversion funnel closest to the consumer. That’s a suboptimal outcome for a business that is seeking to solve for how to leverage DTC to monetize the 90% of consumers around the world who “will never have a chance to experience our Disney parks”.
It means that there is valuable transactional data they likely will not see (NOTE: they likely see some of this data via their 5% ownership stake in DraftKings, but DraftKings is not obligated to share at the consumer level).
Chapek does not seem concerned about the trade-off, and I think that reveals something important about how Disney is thinking about sports betting: it’s not a great DTC business opportunity in the U.S.
BetMGM recently projected the total addressable market (TAM) for online gaming in the U.S. and Canada will reach $37 billion at maturity, and online sports betting in the U.S. is projected to represent about $17.6 billion or 47.6% of the overall North American TAM.
Disney has been hands-off on online gaming since it shut down Disney Interactive Studios in 2014. It would be a late entrant in the space in sports betting if it opted to do so. So, I think Chapek is implying that success would be expensive not only in terms of brand equity but also in terms of TAM: the upside for Disney going all-in with ESPN in sports betting would be minimal.
ESPN & Lag
Chapek also was asked about when ESPN believes it could “take the full ESPN experience a la carte” - meaning, ESPN as an opt-in choice for consumers across both linear and within the Disney+ app. Chapek demurred, “I don’t know that we would ever go that far, but who knows?”
I think it’s worth taking Chapek at his word here in light of a favorite quote of mine from NBA owner Mark Cuban from an interview he gave to SportsTechie in April 2020.
One of the problems with streaming is that you don’t know what’s going to buffer or when, and you don’t know if everybody is getting the feed at the same time. There’s a delta between a satellite feed and a cable feed and even a good stream—and that’s an issue for gambling on some level, maybe 5G changes that with low latency. But there’s a unique opportunity to juice up paid-TV subscriptions and get gamblers in particular say, ‘There’s this unique paid-TV feed that’s geared toward prop bets, gambling, so I know what’s happening.’
If you map this quote to Chapek’s quotes above, and more broadly to Disney’s recent rejection of Third Point Capital’s Dan Loeb proposal to spin off ESPN to take advantage of sports betting opportunities, I think it sums up the core elements of Disney’s ESPN strategy better than Chapek did, above.
First, cord-cutting trends will inevitably taper off and leave an audience of 44MM to 55MM total households (and 16.6MM to 18.1MM virtual MVPD households). Because sports drives the cable bundle’s economics, inevitably demand for linear sports broadcasts will be a majority of those households. Effectively, the future of ESPN may be as simple as a sales and marketing challenge for Disney - meaning, it will not need to invest any capital or shareholder value into DTC online sports betting (Caesar's has the exclusive right to provide sports betting odds to ESPN). Instead, there is better ROI in marketing ESPN via linear as the best sports signal without lag - meaning, latency in the feed resulting from the speed of light being a limit on both satellite and internet streaming - in the broadcasts.
Second, despite growing investor concerns about sports rights deals getting more and more expensive, Disney is positioned to serve multiple different sports audiences: the deal it signed last year with the National Hockey League allows it to show games on the ESPN cable network, ESPN Plus, the Hulu streaming service and ABC; and, a similar 12-year plan was signed recently for the rights to the Wimbledon tennis championships.
So, ESPN is positioned to make a variety of audiences happy. But in linear distribution (excluding satellite and vMVPDs), ESPN is positioned to make sports bettors unusually happy over the next five years.
Opportunity = cord-cutting + sports betting
The immediate question is just how big the opportunity to serve sports bettors via linear is. Nielsen estimates 46% of American adults have at least some interest in sports betting, or 106 million people. It is likely not a one-to-one relationship between Nielsen respondents and households, but let’s assume there is one household per every two adult respondents (as per Pew Research). That gets us 53MM households.
A recent Leichtman Research survey estimated that there are 60MM households with a linear-only connection (excluding satellite and virtual MVPD). So, one could argue that ESPN currently may capture 100% of all adults who at least have some interest in sports betting.
ESPN would not need to create a new service for sports bettors because it *is* that service, and it can ride out cord-cutting by raising its monthly rates for sports bettors and sports fans alike. Odds are it will lose households where adults have at least some interest in sports betting will churn out over time. But, even in one worst case scenario of 44MM linear homes in 2027, the Nielsen data point above suggests ESPN will still be in demand by 100% of them, and especially in-demand from sports bettors.
In that instance, ESPN's linear business will be serving inelastic demand for sports and sport betting content. Sports bettors will need ESPN channels for MLB, NHL, NBA, Tennis, soccer, WNBA and other sports. Therefore, they will likely be insensitive to price hikes well above the $10 per month they currently pay.
The entire business would be as it is now, monetizing audiences via affiliate fees and advertiser demand for both sports content and sports audience. This obvious takeaway seems counterintuitive given cord-cutting trends, but over the next five years linear will be a better business model for ESPN in sports betting than DTC models.
Must-Read Monday AM Articles
* Comcast’s Brian Roberts told the Communacopia conference that Comcast sees “a lot of flaws with fixed wireless,” a competitor to its broadband business
The Vibe Shift
* Peloton chair and co-founder John Foley abruptly resigned from the company and from the board ($ - paywalled)
* Universal Music Group announced its virtual metaverse band, Kingship—which features characters based on Bored Ape Yacht Club NFT artwork—has tapped a pair of music producers that have created hits for superstars like Beyoncé, Jay Z, and Bruno Mars.
The 200 vs. The 10 Million
* The Interactive Advertising Bureau’s State of Data report 2022 found that the advertising industry is largely unprepared for the signal loss that’s to come with the tightening of privacy regulations and the deprecation of third-party cookies
* Google has introduced what it is calling “publisher provided signals”, which categorize first-party data into audience or contextual segments before sharing the signals with programmatic buyers. (free - registration required)
* Podcasts are helping to drive growing interest in audio advertising as a “strong format”
Aggregator 2.0 & Bundles
* Netflix announced it is partnering with French game company Ubisoft to create three new games exclusively for the service’s subscribers
Sports & Streaming
* Amazon Prime Video's new exclusive “Thursday Night Football” series had five major initial sponsors -- Little Caesars, DraftKings, Carnival Cruise Line, Audible, and Mercedes-Benz. (free - registration required)
* Fox Corp. has sold Super Bowl commercials for more than $7 million for 30 seconds of airtime, setting a record for TV’s most popular annual event.
Creator Economy, Platforms & Transparency
* YouTube is Dead and Something New is Coming (NOTE: I disagree with this piece but it’s provocative)
* Soundcloud’s creator business lacks robust growth, competing distributors offer more artist-friendly rates, and its “product is not working super great,” among other things.
* YouTube’ Lyor Cohen announced that it has paid more than $6 billion to the music industry in the 12 months between July 2021 and June 2022
* MobileDevMemo’s Eric Seufert argues “The very fact that ByteDance was willing to invest so heavily into user acquisition should have been a signal to Snap that ByteDance was confident that it was buying, not renting, user engagement”
* The Wall Street Journal revealed Meta’s internal struggles with Instagram’s Reels, which faces formidable competition from TikTok ($ - paywalled)
Original Content & “Genre Wars”
* Warner Bros. Discovery is starting to aggressively step up a licensing strategy for IP while it struggles to find its Kevin Feige-equivalent to run DC
* Across most premium streaming video-on-demand (SVOD) services in the United States, more than half of viewers watch only one of the top programs on any given platform, according to a recent report from Samba TV.
* The parent companies of ABC, NBC and CBS now see the networks as a first stop for their content before it moves to their sister streaming services. They argue that is the role they should be judged on for now. ($ - paywalled)
AVOD & Connected TV Marketplace
* Tubi announced it will offer a FIFA World Cup FAST Channel that will offer replays of all 64 games and premium library content
* Roku’s new channel guide will gain three personalized categories: Recents, Favorites and Subscribed. It will also let viewers browse by such genres as News, Sports, Music, Crime, Music and En Espanol.
* Amazon’s and Walmart’s advertising ambitions are creating a talent war with Google and Meta
Other
* I liked The Entertainment Strategy Guy’s The American Viewer series, and especially his thoughts, recommendations and favorite pieces of feedback from the series.
* A thoughtful assessment of and counterargument to on the IAB’s new Global Privacy Platform from The Washington Post’s Aram Zucker-Scharff
* The Justice Department is suing to block Penguin Random House and Simon & Schuster’s proposed merger. The publishers’ defense hinged on their own incompetence.