Does Barstool Deal Show Content to Commerce Doesn’t Work?

The vision for content to commerce has always been that if you create a highly engaged audience, you can then create products down funnel to monetize them. The thinking was that a highly engaged audience would trust a publisher enough to buy directly from them versus going with a pure play ecommerce or DTC offering. 

This vision remains a viable strategy. There have been numerous companies that have accomplished this. The entire Chernin thesis has been predicated on this with numerous companies in their portfolio representing it.

But there is nuance to the discussion because not all paths are viable with content to commerce. 

The big news this week is that Penn Entertainment has officially divested Barstool Sports from its portfolio. According to an SEC filing:

In connection with PENN’s decision to rebrand our online sports betting business from Barstool Sportsbook to ESPN Bet pursuant to the Sportsbook Agreement as discussed above, PENN entered into a stock purchase agreement with David Portnoy (the “Barstool SPA”) on August 8, 2023. Pursuant to the Barstool SPA, PENN sold 100% of the outstanding shares of Barstool to David Portnoy in exchange for a nominal cash consideration ($1.00 dollar) and certain non-compete and other restrictive covenants. Pursuant to the Barstool SPA, PENN has the right to receive 50% of the gross proceeds received by David Portnoy in any subsequent sale or other monetization event of Barstool.

There are a number of ways to interpret this and a lot of the aggressive think boys on Twitter trumpeted this up as a monumental win for Dave Portnoy. So, I want to try and offer a bit more of a balanced take.

First, Penn realized that doing a deal with ESPN was far more lucrative than it would ever be with Barstool Sports. You don’t get rid of something you spent hundreds of millions of dollars on unless you realize something else is far more lucrative. I respect the Penn team for not being a case study in the sunk cost fallacy. It dumped the much weaker asset for an opportunity to work with the top sports media brand in the world.

Second, Portnoy getting his brand back for $1 with 100% shareholder control and 50% of all proceeds is unbelievably good fortune for him. I say 50% of all proceeds because the phrase “other monetization event” sounds to me like any sort of financial distribution of sorts. If Portnoy issues a dividend—a more tax advantageous way to pay oneself than a salary—does that mean half of that money has to go to Penn?

Third, the “certain non-compete and other restrictive covenants” is unbelievably vague. This would suggest that Barstool cannot get into the gambling business again or even promote another gambling-related app. However, according to some people I’ve heard from with a connection to Barstool, the non-compete only lasts for six months. And so, if that’s true, it’s a short-term restriction. 

And fourth, this is a big blow to the idea that you can “buy” someone’s audience, make it your own, and somehow convince these people to buy your product. In the case of Barstool and Penn, it was this idea that just because Barstool had readers, Penn could convince them to gamble on their app. 

The Barstool audience is thought of as gamblers, but as the brand has evolved and grown, its audience has expanded outside of that. Not to mention, the audience has also expanded with a younger cohort, which also might not be as inclined to gamble; or, if they are, they may not have the resources to do it profitably for Penn.

So, the question that stands is: does content to commerce work?

What this deal shows, at least with a case study of one, is that it entirely depends. From an M&A perspective, the Barstool Sports deal was a case study in high valuation, zero interest rate economy excitement. It was entirely purchased on this idea that Barstool could funnel its traffic to Penn products. 

I obviously wasn’t part of the diligence process, but I have to imagine that the other gambling app brands already had a head start with Barstool’s most loyal audience. FanDuel and DraftKings have the pole position in gambling with over 60% market share between the two. Every other app is left fighting for scraps. By the time Penn came along and bought Barstool, were readers even looking for a new app? It could be argued that with new state regulations legalizing it over time, there might still have been ample opportunity to grow.

Here’s what I think: product companies (the commerce side of content to commerce) cannot buy their way to success. Penn thought it was buying an audience of “66M monthly uniques with a strong affinity for sports and gaming.” It feels too much like trying to lease an audience. There are edge cases, like Hubspot buying The Hustle. But by and large, we’re not going to see a number of successful examples of commerce brands going out and buying content brands. And there’s one primary reason for this. 

The culture doesn’t fit. In the case of Barstool, the content team acted like belligerents. Buttoned up marketing professionals were not going to fit into that style of chaos at almost any product company, but especially at a regulated one like gambling. 

But even if we remove that, most companies are not built to support the constant grind of creating new content. It’s expensive. It takes time. In the case of Hubspot and The Hustle, the former had been creating content for years before it bought The Hustle, so it knew what it was getting itself into. It knew how important the long game was with The Hustle. Penn simply didn’t understand that what made Barstool great for Barstool’s audience wouldn’t be great for Penn’s business.

Think about it this way… If Le Creuset bought Food52, it’d have to be comfortable with Food52 promoting products that aren’t exclusively Le Creuset. That would be the only way readers would remain trustworthy of the brand. However, that runs counter to Le Creuset’s incentives. It wouldn’t want a reader buying cookware from someone else and there would be pressure to prevent this. 

But you’ll notice that I said that the commerce side won’t buy content brands. I see a lot of potential for content brands to buy commerce ones. 

The classic example is Food52. The food and home brand has shown itself to be quite acquisitive in the product space. In 2021, it acquired Dansk from a private equity firm. According to Architectural Digest:

Hesser recalls it being around that same time when she and executives from Lenox began talking about a potential acquisition. Food52, in contrast, was in a celebratory phase: The 11-year-old company was closing out its first-ever profitable year in 2020 and was valued at roughly $100 million. Food52 and Dansk had an existing relationship: The Danish housewares brand had been selling through Food52’s e-commerce platform for several years, and “our audience immediately connected with the brand,” says Hesser. (In fact, Food52 had become one of Lenox’s biggest vendors, a board member avowed to Hesser at an industry conference a few years back.)

And so, Food52 knew that its audience was interested in Dansk. By purchasing the company, it was able to naturally integrate the product into the Food52 experience. But while it owns Dansk, if you go to Food52, you’ll notice that it still has other cookware products for sale, including Le Creuset. It wants Dansk to sell, but it wants to give its audience the best products even more than that.

It also bought Schoolhouse in late 2021 for $48 million, which gave it a significant leg up in the home products category.

Obviously things aren’t going perfectly at Food52. Like most media companies, it had layoffs in 2022 and is figuring things out the same way we all are. But it has the DNA to create great content for its audience and then drive those people to the right products—even if the audience isn’t always buying Food52 owned products.  

The reason content companies buying commerce companies is so much harder is because of the economics behind these deals. It tends to be that these product companies are valued at a higher multiple than content companies. Therefore, the content company has to either do a major dilutive event to buy the product company—Food52 needed majority investor TCG to invest money so that it could then buy Schoolhouse—or take on a considerable amount of debt. 

And so, from a purely arbitrage perspective, it is easier for the commerce company to buy a content company. However, I firmly believe that the most successful scenarios will be when content buys the commerce. The DNA and culture makes it possible. It’s sort of like a subscription vs. advertising business. I think any subscription business can introduce an ad offering; I don’t think the opposite is true. 

The Barstool and Penn deal obviously was a failure. Investors made a killing, Portnoy’s rich as heck now, but from a value creation exercise for the acquirer, this was a bad deal. What happens with Barstool now is anyone’s guess, though if some of Portnoy’s early antics on Twitter are an indication, it’s going to be chaotic. 

As for content to commerce overall, it’s not going away. Companies will need to be smarter about their deals, though. Most product companies simply don’t have the stomach to invest in content for the long-term. It’s just easier to buy ads. And for independent media companies, that’s perfectly fine because we’ll those ad dollars. But for the more enterprising content companies, trying to pick up certain product companies might actually be a great way to grow the business.

Thanks for reading today’s piece. If you have thoughts, hit reply. Tickets are still available for the AMO Summit. It’s being held here in NYC on October 26th. If you want to come, buy your ticket today. Price increase in September.

Have a great weekend and see you all on Tuesday!