Barstool-DraftKings Deal Shows Legacy Operators and DFS Companies Not Running on Same Track

Barstool-DraftKings Deal Shows Legacy Operators and DFS Companies Not Running on Same Track

Barstool Sports has reportedly agreed to a ‘wide-ranging sports betting deal’ with DraftKings (NASDAQ: DKNG). The eight-figure tie-up cannot be formally consummated until after the Super Bowl when Barstool’s lock-up period, from its breakup with PENN Entertainment (NASDAQ: PENN), expires. 

The Barstool-DraftKings deal looks to be a win-win for the participants, even if it is unlikely to have much of an impact on the overall OSB market. Sports betting is Barstool’s highest value advertising category and DraftKings is set to pump ‘eight figures’ of high margin revenue into the company annually. It should be a low-risk, and likely efficient, investment for DKNG.

“This deal [has] a very high floor,” Chris Grove (co-founding partner, Acies Investments) said. “DraftKings does not need this [partnership] to do much for it to be a neutral to positive deal.”

The delta between PENN’s experience with Barstool and the deal DraftKings will strike is emblematic of the disparate competitive experiences legacy operators and DFS companies have enjoyed in the U.S. online sports betting space. PENN spent $551 million to buy the digital pirate ship only to sell it back to founder Dave Portnoy less than one year later for $1. DraftKings is buying low, taking on minimal risk, and should be able to bolster its own market position while sticking it both optically and practically to ascending competitors.

“It’s not even laps at this point. The DFS companies and legacy operators are not running on the same track,” Grove said. “DraftKings and FanDuel are not only maximizing what they do well –products, digital media, digital acquisition, conversion funnels, retention, VIP– but the legacy casino operators are failing to maximize the structural advantages they should be enjoying. It’s a nasty combination.”

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PENN made the decision to sell Portnoy the brand back and to only limit Barstool’s participation in sports betting for a single football season under duress. It’s not clear if there were external pressures or if the company simply wanted to rid itself of the digital media entity. Presumably, it did the best deal it thought it could have at the time.

In hindsight, and without full transparency into the decision making process, it appears that PENN should have done more to keep Barstool from being able to leverage its media empire –and influence– within the sports betting sector in the years ahead. Its failure to include a long-term category exclusion enabled Barstool to sign a lucrative new agreement with a competitor. 

“There’s very little about the deal now that reads well for PENN,” Grove said.

The brick-and-mortar operator “likely had a lot more leverage in negotiations [too],” David Van Egmond (managing partner, Bettor Capital) said. “Just with a very limited time window before signing the ESPN deal.”

PENN controlled 100% of Barstool. It could have threatened to quickly unload the outlet’s most valuable assets (think: PMT) and shelve the brand had Portnoy not agreed to its conditions. 

It’s possible PENN was unconcerned with what El Pres might do once the lock-up period expired. Barstool failed to meet its sports betting goals, why would things be different with another operator?  

If that is the case, it was faulty thinking. 

“Barstool wasn’t viable as a standalone sports betting brand that could achieve the ambitions of an operator the size of PENN,” Grove said. “But that's not the same thing as concluding Barstool can't be a material contributor to the growth of a brand like DraftKings."

A nine-figure investment may sound risky given PENN’s experience with Barstool. But a low-eight figure annual payment is a relatively small expense in the context of DraftKings’ billion-dollar plus marketing budget, and smart money is on the total value of the deal including a large media buy, anwyay.  

“I suspect there is a performance-based component built into the deal, that the number can go up or down based on how much activity Barstool generates for DraftKings,” Grove said (think: new subscribers). And “it would not be surprising if there was also some kind of value trade related to the content Barstool produces.”

One could imagine Barstool-branded programming airing on the DraftKings Network (think: co-development or syndication).

DraftKings’ expectations are also very different than what PENN sought to extract from the brand.

“For PENN, Barstool was meant to carry their entire OSB operation and ambition, and some chunk of their online casino ambition,” Grove said. “The expectation here is way scaled down [and much more realistic to achieve].” 

Barstool simply needs to be a contributor within DKNG’s broader marketing strategy. 

The irreverent sports media brand has shown capable of driving fans to download and sign up for a sports betting app before.

Barstool Sportsbook “did really well when Dave and Big Cat and others lived at a PENN casino for a month and were non-stop promoting it across their socials,” Van Egmond said.

Marketing velocity faded over time and with it so did the Stoolies’ inclination to bet on the Barstool branded app. 

But DraftKings has a better product than Barstool Sportsbook had. If Barstool is successful driving traffic to the DKNG app, there is reason to believe it will be more effective influencing market share this time around.

One way to do that would be for Portnoy and Co. to adopt a pro-wrestling style ‘us versus them’ narrative (them being PENN/ESPN Bet). 

“Feuding with someone, creating drama, creating a story arc or rivalry, is a big part of the content model online,” Grove said. “Sports betting brands might want to find ways to play more in that narrative because it can spur community, affinity, and engagement.”  

It will be hard to measure the efficacy of the DraftKings-Barstool partnership. It’s not as if DKNG is going to track wallet shift and/or customer acquisition with promo codes.

But even a modest increase in market share (think: 50 basis points) should give DraftKings a positive return on its investment.

“If the sports betting market is now $10 billion of revenue, [50 basis points would equate to] $50 million of incremental revenue. [That is coming] on $10 million, $15 million, or $20 million of [annual] marketing spend. So, a reasonable return on investment if achieved,” Van Egmond said.

And if it slows any of ESPN Bet’s momentum, that would be a bonus.

Of course, it is hard to envision the hardcore Stoolie, the individual who might shift his/her allegiance from ESPN Bet to DKNG, being the high value customer that moves the needle.

Correction: A previous version of this article referred to the deal as a nine-figure tie-up.

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