Within a short span of time, online gambling and sports betting platforms have become a multibillion dollar industry. In a nod to their rising popularity, The Walt Disney Company (DIS) is planning to license branding for its ESPN sports network to them for at least $3 billion.

According to a recent Wall Street Journal report, the entertainment behemoth has already held talks with Vegas-based Caesar’s Entertainment and sports betting giant Draftkings Inc. (DKNG). The deal may take the form of a multiyear agreement in which the platforms will be allowed to use the ESPN name for marketing and, possibly, their sportsbooks. In exchange, the sports betting platforms will have to spend money marketing their products and services on ESPN’s platforms.

Disney is already a “passive investor” in DraftKings and owns 6% of the latter’s publicly traded stock through its 2019 acquisition of 21st Century Fox.

A Rising Industry 

As recently as six years ago, operations for online gambling and sports betting platforms were restricted to states like Nevada that had laws enabling the industries to flourish. The tables turned in 2018, when the Supreme Court overturned the Professional and Amateur Sports Betting Act that prohibited states from legalizing sports betting. That decision cleared the route for sports betting platforms to consider expansion to other states.

As of this writing, around 30 states have legalized online betting or are considering it. As additional states join the club, revenues for online and mobile sports betting platforms will balloon. Already this year, analysts estimate that the industry will bring in more than $4 billion in revenues, and the level is expected to hit $59 billion by 2026, according to some estimates.

The popularity of special purpose acquisition companies (SPACs) during the pandemic helped sports betting sites to go public, swelling their marketing budgets. This enabled them to target mainstream acceptance through various advertising channels.

DraftKings, one of the biggest players in the industry, is now an official sports betting partner for Major League Baseball. It spent $157 million during the second quarter of 2021 on marketing. With an easing of pandemic shutdowns and resumption of sporting events, that figure is expected to trend higher. During DraftKings’ last earnings call, Jason Parks, chief financial officer for the company, predicted a higher marketing spend for its platform in the coming quarter, adding that DraftKings planned to invest in national advertising later this year.

What’s in it for Disney? 

Disney’s decision to court sports betting platforms is strategic. In 2012, ESPN was anointed a “crown jewel” of Disney. But that jewel has lost quite a bit of luster in the ensuing decade as streaming networks prompted an exodus from linear cable to over-the-top (OTT) platforms. While it is still the most popular in a cable bundle, ESPN’s future growth prospects may be limited because it is expensive.

Disney has released a cheaper-priced streaming app for the sports network. However, unlike Disney Plus, which has released a slate of fresh content and is going gangbusters, the ESPN app is perceived more as a “companion” to its linear cable alternative. The company reported 14.9 million subscribers, up 75% from the same time period last year, for ESPN’s streaming division during its last earnings call. Those figures compare poorly with the network’s linear cable version, which boasted 80.1 million subscribers at the end of last year.

ESPN is part of Disney’s media networks division and doesn’t report revenues separately, but it is estimated to be among the biggest contributors to Disney’s top line. According to research firm Kagan, ESPN brought in $7.34 billion in annual affiliate fees in 2020 and will generate $7.90 billion in 2021. Advertising on ESPN was worth $2.04 billion last year and will amount to an estimated $2.35 billion this year.

Disney doesn’t seem to be in a hurry to transition to a streaming model for its sports network cash cow. “We don’t believe that time is right now, but when it is time, we’ll be prepared to do that,” Disney CEO Bob Chapek told investors in June and added that “the speed of the transition (to streaming sports) will be dependent on the speed of the evolution of the consumer behavior.”

Given the streaming app’s relatively cheaper subscription costs, Disney will need additional sources of revenue to ease growth pressure on it. An advertising deal with a sports betting platform could help the company do just that.