The app, ESPN Bet, made early strides in the first few months, gaining ground through promotions and marketing that leveraged ESPN’s popular personalities. But it’s since lost steam as it pulled back on those early promotions and its product lagged behind competitors, lacking the range of parlay and other offerings bettors have come to expect.

Still, Penn’s goals are lofty, targeting 10% to 20% market share by 2027.

The last two quarters fell short of expectations. In the fourth quarter of 2023, revenue declined about 12% year over year to $1.395 billion. This downward trend continued into quarter one, with larger-than-expected losses and revenue from its interactive unit, which included the first full quarter with ESPN Bet, down 11% at $208 million, lower than the $237 million analysts expected.

“It’s just kind of overall a disappointing start to the launch of ESPN Bet versus what maybe the company was expecting and maybe what investors were expecting,” said Dan Wasiolek, a senior equity analyst for Morningstar.

That prompted a rebuke by Donerail Group managing partner Will Wyatt. In a May letter, he slammed Penn’s roughly $4 billion in spending in recent years on sports betting, including a nearly $1 billion loss on its ill-fated purchase and sale of Barstool Sports, a $2 billion acquisition of Canadian sports-media company theScore, and the latest partnership with ESPN (a brand Penn licenses for $150 million a year).

“Unfortunately, after less than a year into pivoting its attention to ESPN Bet, there has been no improvement in the Company’s ability to execute in Interactive,” stated the letter, which concluded that “shareholders may simply be tired of continued gambling on uncertain outcomes.”

One-third of shareholders later voted against CEO Jay Snowden’s pay package. And, Reuters reported that Boyd Gaming had approached Penn about a potential acquisition.

ESPN Bet’s struggles show how hard it is for new entrants to compete in US sports betting, even with the backing of one of the biggest names in sports. Other companies have tried to buy their way into the market, relying on marketing and brand recognition to stand out, only to bow out a year or two later, tails between their legs. Even Fanatics, the industry’s other major recent disrupter, hasn’t made much of a dent in DraftKings’ and FanDuel’s dominance.

“You’re seeing a significant strategy change moving from Barstool to ESPN, and investors are questioning whether a large capital outlay to invest in this new strategy will yield results or if, ultimately, it’s too much of a gap between drafting FanDuel and the rest of the market to compete effectively,” said Barry Jonas, an analyst at Truist Securities.

A Penn spokesperson declined to comment on this story.

Penn’s challenges with ESPN Bet

Following an unsuccessful partnership with Barstool, Penn has relied heavily on ESPN’s sports personalities like Scott Van Pelt and Stephen A. Smith and its affinity with sports fans to produce better results. But the transition hasn’t been as easy as the company may have thought.

As of March, ESPN Bet had captured about 4% of the online-sports-betting market by gross gaming revenue, per Bank of America’s analysis, though its share has been higher in states like Pennsylvania.

One challenge is that its customer base of casual bettors isn’t spending — and losing — as much as those at some of its competitors. Penn blamed its weak Q1 results on lower-than-expected hold, or the share of every dollar wagered kept by the sportsbook, and spend per user.

That’s partly because Penn doesn’t have the range of product offerings, including parlay bets, that its rivals have.

“Some of the key challenges are that they’re kind of later to the game,” Jonas said. “Their products are not as fully developed as some of the larger players on the sports betting side, specifically the parlay products.”

Penn’s app ranked 11th in Eilers & Krejcik Gaming’s latest sportsbook product testing, behind most of its major rivals, including fellow newcomer Fanatics (No. 6) and emerging sleeper hit bet365 (No. 3).

“Testers liked ESPN Bet’s UX and minty aesthetic but felt the app lacked depth (particularly more extensive features),” EKG wrote in May.

How ESPN Bet can make a comeback

Penn could still be successful if it improves its product and spends less money on acquiring new customers, the analysts said.

The company said it’s working on new features for early September to capitalize on the biggest betting season of the year — the NFL season. It’s planning to roll out an improved home screen experience and navigation, as well as more competitive parlays, same-game parlay, and player prop offerings.

Penn is also going after VIPs, who tend to be big spenders. Snowden said on the May earnings call that “we are not yet generating our fair share of wallet with experienced VIP bettors” and suggested that improving its parlay and live-betting features could help with that.

But Wasiolek also said Penn needs to target its marketing and promotions more effectively.

“Product is one thing, and I would say having expertise in how to target users effectively to lower your acquisition costs and your retention costs” is key for the ESPN Bet app to compete, Wasiolek said.

As far as the sale speculation, several analysts are skeptical a deal would happen, though Penn seems to be taking Boyd’s offer seriously, as Earnings + More reported.

For ESPN, Jonas and Wasiolek said the best-case scenario would be for Penn not to sell so that the media company doesn’t need to start over with a new betting partner (any buyer would need ESPN’s blessing, per the Reuters report). Jonas said if Boyd acquires Penn, it would be a sizable shift in strategy for their management, team, and board.

Some analysts still have hope Penn can pull it together. But it all comes down to football season — and whether the company can deliver on its planned product enhancements and gain more customer traction.

“Management believes they’ll start seeing some green shoots for the new functionality and start seeing some inflection come football season,” said Jonas.