Walt Disney Co ($DIS) owns ESPN, and ESPN bought DraftKings for $250M to capitalize on this entry into legalized gambling. If you watch sports television, you have no doubt seen the commercials that ESPN has constantly been running. But today, many media outlets are talking about insider trading – which netted an ESPN employee $350k after making bets on the rival site FanDuel.
This is horrible news for Disney stock. When news of the story was breaking on Friday, shares in DIS sold off but recovered Monday, as overall market strength took front stage for all equities. I do not think this story is anywhere near over, and I expect ESPN to cut back on advertising right away – until they get their internal controls right.
Let me explain how the fraud worked. To use an example many of us are familiar with, let’s consider the NCAA bracket we all play during March Madness, where we pick the eventual winners of the tournament as they come down to the final four. If you‘ve noticed, the odd bracket with an outlier team that made it to the final four has a higher probability of winning all the money. The same occurred when someone at ESPN/DraftKings released the information about who most people were picking. This opportunistic employee immediately went out and made a bet using this information, and netted $350k.
The Mouse House Doesn’t Always Win
In stock trading, using this sort of inside information could lead to jail time, but in the unregulated world of sports gambling that has emerged from the huge growth of fantasy sports, it was inevitable. Now, ESPN and Disney look really bad. ESPN has already been under fire for firing popular hosts, so it’s rapidly becoming the mothership for hate.
The result of all this will be fewer profits realized by Disney in the upcoming quarter. It also highlights the under-valuations for both DraftKings and FanDuel by investors. The cheap price ($250m) ESPN paid to partner with DraftKings may not be realized by Disney. The executives at ESPN touted a victory to the Disney executives way too early, and now they all look bad.
I realize that ESPN is a smaller part of Disney’s overall revenue picture, but the visibility ESPN put on fantasy gambling seems to have run amok. This also raises questions about the security and viability of a revenue stream that’s about to vault into the billions with no regulation. Internally, this will require a reboot at ESPN. The real solution is simply to legalize sports gambling on US soil. Simply let people bet on sports and take the revenue…but we are a few years away from that.
ESPN thought they had a great end run here, and Disney thought they had a winner. We’ll see how this shakes out, but right now both Disney and ESPN have put themselves in the same category as your sleazy bookie who meets you at the bar looking to collect the vig.
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