Acquired - Episode 36: The LA Clippers

Episode Date: April 24, 2017

In honor of start of NBA playoffs, Ben & David venture off the beaten path to explore one of Steve Ballmer’s most famous acquisitions, his 2014 purchase of the Los Angeles Clippers NBA franchise. Was this landmark purchase a steal or a turnover for the former Microsoft CEO? We speculate wildly! Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Topics covered include: The Clippers’ founding in 1970 as the NBA expansion team the Buffalo BravesEarly ownership changes and the move west to San Diego in 1981Acquisition in 1981 by LA lawyer and real estate developer Donald Sterling for $12.5MSterling's relocation of the Clippers to LA in 1984 against NBA rulesStruggles over the next 25 years as the "worst franchise in professional sports” according to ESPN Turnaround beginning in early 2010s led by Blake Griffin, DeAndre Jordan, and Chris PaulThe bombshell in April 2014, reported by TMZ, of a taped conversation between Sterling and his mistress where Sterling makes  hugely offensive and racist comments, directed in particular toward former Lakers point guard Magic JohnsonFallout from the comments, resulting in a lifetime ban from NBA for Sterling, and a forced sale of the team to former Microsoft CEO, Steve Ballmer for $2BImpact of the landmark sale price on NBA and other sports franchise valuations Clippers performance post-sale, and  prospects for the future The opportunity for technology and business model innovation in the NBA, and professional sports in general  Followups:  Instagram Stories passes 200 million users per day (including correction on the definition of DAU) The Last Jedi trailer!Clarifying Starbucks’ same store sales performance post-IPO   The Carve Out: Ben: Bill Gurley on This Week in StartupsDavid:  Pop, Race & the '60s podcast and Just Around Midnight by Jack Hamilton

Okay. I have this great, great carve out. I don't know what it's called, but you should go download it and pay money. I didn't write down the title. I wanted to make sure I got it right. Welcome back to episode 36 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today's episode, David and I are venturing away from technology into the world of sports. We'll be talking about Steve Ballmer's 2014 purchase of the Los Angeles Clippers. So for full disclosure here, David and I are not huge NBA fans. Well, maybe except for my unapologetic bandwagon fanhood of the Cavs and LeBron James.

And I gotta admit, the Warriors are pretty fun to watch. Yeah, well, they're changing the game. So, and Steph Curry is awesome. But we do love digging into the analysis of any acquisition, and there's no shortage of writing and opinion on this one. And, uh, we're going to be doing some episodes on the overlap of sports and tech in

the near future. So we figured we would dive in just absolutely headfirst and, uh, kind of force ourself to do all the research. And thanks to, um, many acquired listeners and, uh,

many of, of David and my friends who we, uh, we called in to get their kind of like hardcore sports opinions on all this. Yeah. Open invitation listeners to get in touch with us by email or jump in the Slack and tell us where we went wrong. But we think this will be really fun. We've done a bunch of kind of serious, more hard-hitting episodes in a row, and we wanted to do something light. And given that the NBA playoffs

start literally today, we thought this would be a fun one. Yeah. And I think, you know, this was a $2 billion purchase by Steve Ballmer. And anytime there's a $2 billion transaction going on involving Steve Ballmer, right, involving Steve Ballmer, you know, whether it's sports or airlines like we did with the Virgin Alaska acquisition or any of our standard tech wheelhouse, we can definitely apply the acquired methodology to it and get some good discussion in. So a few things before we dive in. The lifeblood of the show is iTunes reviews. So please help us grow the show. And if you're so inclined, leave an iTunes review for us.

We also have a Slack and we are close to 600 people. So if you enjoy doing analysis of any tech event, there's people in there talking about M&A events, about IPOs, about new product launches, about Star Wars trailers coming out. If you want to talk with other nerds about this sort of stuff, we are all hanging out in the Acquired Slack, which you can join at acquired.fm. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation. And they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business.

Yep. And as you know from listening to us all year, ServiceNow is pretty remarkable about embracing the latest AI developments and building them into products for their customers. AI agents are the next phase of this. So what are AI agents? AI agents can think, learn, solve problems, and make decisions autonomously. They work on behalf of your teams, elevating their productivity and potential. And while you get incredible productivity enhancements, you also get to stay in full control. Yep. With ServiceNow, AI agents proactively solve challenges from IT to HR, customer service, software development, you name it. These agents collaborate, they learn from each other,

and they continuously improve, handling the busy work across your business so that your teams can actually focus on what truly matters. Ultimately, ServiceNow and agentic AI is the way to deploy AI across every corner of your enterprise. They boost productivity for employees, enrich customer experiences, and make work better for everyone. Yep. So learn how you can put AI agents to work for your people by clicking the link in the show notes or going to servicenow.com slash AI dash agents. So now, without further ado, David, will you take us into the story? In the history and facts in the wide world of sports. So the Los Angeles Clippers were actually founded as the Buffalo Braves, Buffalo, New York in 1970. They were one of three expansion teams to join the NBA that year. And they had modest success in the first year, but in some foreshadowing of things to come for the team

and some challenging decades ahead, they were obviously in Buffalo. They found it hard to schedule home games in the first couple of years because there was another basketball team in town, the Canisus Golden Griffins, the well-known and world-famous Golden Griffins. Oh, yeah. It's just like very similar to their rivalry now with the Lakers, where they're- Yeah, Lakers, Griffins, Clippers.

Both trying to draw millions and millions of people to their their uh their as well yeah the golden griffins had pre-existing rights to uh priority on games in the arena in buffalo and they were worried about the braves kind of threatening their popularity in town. And so they would always schedule all the best dates at the arena. And as such, the Braves couldn't really develop much of a fan base. So this was a problem. And the team, after just a couple of years, gets sold to the then owner of the Kentucky Colonels, uh, which I believe is a basketball team, was a basketball team, John Brown jr. And he really wanted to move the team, uh, for obvious reasons. And so what he decided to do in further foreshadowing of things to come for the, the hapless Clippers, uh, future Clippers, he basically just decimated the team's roster, traded away all the stars, and as a result, attendance plummeted and basically nobody came.

And that was all his goal, so that they could break the lease and move out of town. So a couple more years go by, and in 1978, Brown actually, only in the 70s could something like this happen. He just trades ownership with the owner of the Celtics. So Brown takes over the Celtics. And Irv Levin, who lived in Southern California and owned the Celtics at the time, he wanted to move the Celtics to Southern California. But the NBA wasn't going to let that happen. Levin takes over.

What? I saw that they moved to become the San Diego Clippers, but it was via just an ownership swap with the Celtics? Everybody's happy. And Levin takes over the Braves, moves them to San Diego, where they change the name to the San Diego Clippers because of the impressive sailboats that would dock and sail through the bay in San Diego. So thus the Clippers because of the impressive sailboats that would dock and sail through the bay in San Diego. So thus the Clippers are born or reborn. So that was in 1978. But the team,

unfortunately, didn't get much better. And in 1981, the team still struggling and a Los Angeles lawyer and real estate developer by the name of Donald Sterling, the infamous Donald Sterling. Um, we don't really talk much about like, we don't really, we're not in the business of making judgment calls on people's character here on acquired, but this one's pretty unambiguous that Donald Sterling is, is basically a horrible human being. Yep. And, and uh it is incredible how long it took for that to come to light listeners we'll we'll get into this but despite lots of uh of rumors and allegations over the years he sort of managed to scoot by scott free after um it being quite clear

he was a huge racist yeah well we'll get into it and the crazy thing is like everybody knew but he just still owned the clippers anyway he buys the clippers in 1981 for 12 and a half million and uh he this was also i thought hilarious in the introductory news conference in san diego where where he announces he lives in la by the way uh that he's buying the clippers he vows to spend quote unlimited sums to build the clippers into a contender he later becomes famous for like spending no money on the clippers on players you know it seemed to plague their entire existence yeah and then he launches an advertising campaign in in san diego um where he puts he puts his face uh, Donald Sterling's face on billboards and on buses around town with a quote under it saying, my promise, I will make you proud of the Clippers.

Yeah. That's what every fan of every sports team wants to see a gigantic picture of the owner's face. Yeah. Nailed it. Know your audience. Well, if the owner is Steve bomber, then maybe bomber then maybe but um so that honeymoon doesn't last long and in 1984 he just up and moves the clippers to la against the nba's wishes um he basically does it illegally by the the league's bylaws and uh and

the way he gets around it is he just sues the league the league you know finds him a huge amount of money and he's like okay fine i'm gonna sue you and so he sues them for 100 million dollars uh and they stand down and they they reduce the fine to him for for basically stealing absconding with the clippers from san diego and moving them up to la boy storied franchise right like all this all these moves ownership ridiculous lawsuits. Sounds just like a tech company. Yeah, right? Boy, seeming more and more a perfect fit for Acquired than we thought. Than we thought, than we thought.

So from there, we can basically just fast forward through the next 30 some odd years because nothing happened. They didn't do very well. Yeah. So they go to the playoffs four times in the next 25 years um which is pretty bad and and actually in the whole so sterling owns the clippers from 81 until 2014 when this horrible event happens that we're about to describe um the clippers actually have the worst winning percentage of any team in any major American sport, which is, which is incredible.

Boy, that's a feat. That's like, yeah, that's, that's more like statistically difficult to achieve than mediocrity. It's, you have to work really hard to be that bad. Um, in 2009, ESPN names the Clippers, the worst franchise in professional sports um and Sterling you know continues his Sterling reputation for being a horrible human being um he actually get this you know he's the owner right he has courtside seats to every game he at some point in the 2000s late 2000s just starts heckling his own players class like Spike Lee but like for his own team you can't make this up class act i mean honestly it's it's incredible that they played on the same floor at the staples center is that uh that the lakers did a franchise like that like it's a privilege to get to play in the staples

center and that's what they did with it yeah so after the the staples center is built in the early 2000s the clippers share it with the lakers but again the lakers are the marquee team they have the lease and so just like just like back in back in buffalo uh they can't get the good dates and and they're basically just the second you know not even the second they're pretty far down the list of things to do in la um as far as sporting events go but then magically really against um despite all of Sterling's efforts to continually sabotage the team in the early 2010s, things actually start to get better. So they do a combination of some good draft picks and good trades. They get Blake Griffin, DeAndre Jordan, and Chris Paul. They actually and they actually start to build a pretty good team.

And in 2013, they win the first division title in, in team history and, uh, and are, and are off to the playoffs. Yeah. Things are, things are looking up for, uh, for the Clippers. It seems like they've got momentum on their side. Maybe the organization finally, uh, is working in lockstep on the business side um you know after all these years in the news yeah in the woods uh you know and actually this is when um what's their coach's name doc uh doc rivers comes in as uh as to coach the team right and he's also what president of basketball operations i think that's right i i'm not sure if the dates are, if it was that year that he was in it, which leads into the next season, um, after their sort of best season in perhaps ever in 2013 for the first time they win the division title at the end of the 2014, they have another good season.

They're bound for the playoffs. And then on April 25th, 2014, uh, News channel and website TMZ releases a bombshell, a taped phone conversation with Donald Sterling and between him and his mistress. He's married but estranged from his wife and his open relationship with a mistress, again, gem of a human being here. Um, and as Ben mentioned, uh, you know, it was sort of, you know, known, but swept under the rug that Sterling had been really racist, uh, for a very long time. Um, this, uh, this phone conversation TMZ releases in which he reprimands his his mistress for posting an instagram photo with her and magic johnson um and he reprimands uh his mistress for posting this photo with uh you know this is a quote here broadcasting that she is associating with

black people and that he did not want her to bring them to the team's games. This guy's off his rocker. Despicable in every sense. But he's an NBA owner and this is a photo with Magic Johnson, you know, Hall of Famer Magic Johnson. So needless to say, this is not going to end well for Sterling. No, no. You know, as you can imagine, the nba is is not too pleased about this no uh nobody is pleased about this so in fact in fact this is this is uh this is awesome the clippers players are so displeased about this that on the 27th so this comes to light on the 25th on the 27, they warmed up for their playoff game on Sunday

afternoon against the Warriors with their shooting shirts worn inside out to obscure the team logo, to not represent Donald Sterling and sort of the logo that he owns. Yeah, it's incredible. And that was, they decided to, they considered, before they decided to play the game they considered boycotting the game and and forfeiting the game which was you know a playoff game and a playoff game for the clippers is such a huge uh huge event yeah you got to imagine the team's like no we've worked worked way too hard for this to you know but that's how serious you know this was obviously uh you know sponsors most of the major sponsors with the team you know announced

they were severing ties and then really you know the nba handled this horrible situation as well as you could uh commend them for it and and adam sterling the the commissioner i think deserves um adam silver adam silver sorry yes adam silver Silver, the NBA commissioner at the time and still currently deserves huge credit for this. So less than a week later on April 29th, after an investigation that the NBA launched right away, the NBA issues a lifetime ban of Donald Sterling from the game and finds him two and a half million dollars, bars him from attending games, practices, any event involving any NBA team, bars him from being present in any Clippers office or facility, and from participating in any team business, player personnel decisions, or any league activity. And that two and a half million dollar fine is the maximum allowable fine by the NBA. You could imagine that could be much higher if there wasn't guidelines there.

Yeah, absolutely. And then in a press conference announcing this ban, Adam Silver, the commissioner, states that he is planning and he will try to force Sterling to sell the Clippers and that they are basically going to kick him out of the league, which the league can do with a three quarters vote of the other 29 team owners, which they do. Yeah, that's super interesting. And I, you know, I, I think I remember, so when this all went down, I remember reading about it briefly, but diving into all the details has been super interesting to understand how the mechanics of all this go down so when you own an nba franchise it's truly that a franchise i mean you can imagine it's like owning a mcdonald's where um yes you've poured all this money into this thing and you own this asset but there's actually a you know corporate governance structure uh above you that can force a lot of decisions with,

you know, in this case, a three quarters vote. Like, yes, you own that team. But if three quarters of the other owners don't want you to own that team, then you don't get to own that team. Yeah. I feel like if there were like a social network council that, you know, if Snapchat or Instagram did something horrible and Facebook and Google and Twitter could make them sell the company. And this is, so this is now where we sort of pick up from the acquired standpoint and where things get interesting. So obviously this is a distressed sale. You have a terrible situation going on. Well, you, you would think it'd be a, like, okay, we'll get more into this, but like it should, it should, it should be a low price, right? Cause it'd be a just like okay we'll get more into this but like it

should it should it should be a low price right because it's like a fire so fire sale team has to get sold it's the clippers right i mean they're they are literally the joke the punchline of every joke about being a bad team is like well at least you're you know not as bad as the clippers you would think that this is going to be like It's like the Cleveland Browns at basketball. Even worse. You would think this would be a fire sale, but there are quite a few people who are interested in buying the team, including reportedly Oprah Winfrey, Floyd Mayweather, Magic Johnson himself, several other bidding groups, and Steve Ballmer, our hero. He is also very interested. He has at this point left Microsoft, retired as CEO. Satya Nadella has succeeded him. That happened just a couple months earlier in February of 2014. And Ballmer has been a lifelong basketball

fan. Twice in Seattle, he tried to first save, be part of a group to save the sonics from leaving seattle a dark dark day in seattle history when the sonics left to become the oklahoma city thunder right after they drafted kevin durant too terrible and uh and then and then once more as part of another ownership group that attempted to buy the Sacramento Kings and move them to Seattle. So this is Bomber's third bite at the apple up here and build the new Sonics Arena was going to happen. But, you know, shed a tear. I think if there's any solace, it's that it does seem to be, at least according to Bill Simmons, the Oracle on all such matters. I think there's a good chance that Seattle will get an expansion team at some point in the next couple years which it absolutely deserves um yeah it's still a basketball city yeah people love the sonics you see people wearing sonics gear all over the place still um yeah so uh steve comes in

with a pretty over-the-top bid so So Forbes Magazine does an annual valuation of all, and it's just numbers they make up, but it's kind of the best source of valuation of sports franchises across all sports. And they had that year valued the Clippers at $575 million, which was 13th in the NBA, and well behind the number one valued team, the highest valued team, which was the Knicks in New York, which they had at $1.4 billion. So Bomber comes in with a bid of $2 billion. So not just... It's amazing how much the market matters, right? It's the Clippers. I mean, for sure, they've gotten some great players recently. They've started having some momentum, you know, Blake Griffin, DeAndre

Jordan, Chris Paul, but like they're still the Clippers in the Lakers market and they're, you know, in the top half of the NBA teams because LA is just a ridiculous market. Yep. And, and, but, but this kind of blows everybody out of the water. No NBA team had ever sold for anywhere near that amount of money. The Milwaukee Bucks had sold earlier that year for $550 million. So just over a quarter of that purchase price. And at the time, everybody was pretty astounded by this. Yeah, I think it's 3.5x the largest ever price tag for an NBA team before. And it's really interesting to note that this all sort of started happening recently, where when you look at

my comp for everything is the Cavs. When you look at... Note for listeners, if you aren't longtime listeners or don't know Ben, regardless, he is a proud Ohio native. That's right. That's right. Cleveland till I die. So Dan Gilbert bought the Cavs for $185 million, but that was in 2005. And so when you start to look at the escalating price tag of NBA franchises, it's all been in recent years. And it's something that I kind of want to get to later in this episode and try and dissect, you know, why is that happening? Why is, you know, any NBA team potentially a good pickup right now because of the direction and the growth

of the league? Yeah, absolutely. Well, this is, you know, again, at the time people, which was only a couple of years ago, three years ago now, people thought Bomber was crazy. And and so we'll dive into that in a minute. But but just to wrap up, the Clippers have continued their, you know, if not dominance, not being the Clippers of, you know, of old. At this point, they are in the playoffs again this year. It's their sixth straight year going to the playoffs after only doing it four times in 25 years in California. And it's their fifth straight year with over 50 wins in a season, which is pretty great. I mean, at this point, they are one of the best teams, certainly in the Western Conference, if not in the whole NBA.

Well, so I think I have a little bit more bearish take on this. And we'll end up getting to this in the way that we grade the acquisition. But I mean, they have incredible starting five. They've done a nice job, especially with Balmer ponying up to retain DeAndre Jordan. But there's no depth to that bench like there's not they don't their whole roster is not filled out with stars and what i want to get to too is you know why is that the case why why haven't they made the right uh the right player moves to throughout the league to make that the case and then on top of that like they still haven't made an appearance in a western western conference final so like it's it's definitely this story of incredible, you know, starting players.

No, that's not yet. But like, yeah, yeah, they're they're definitely not a winning team valuations came out. The clips are up to number six, but still at two billion, the same mark, the same price that Ballmer paid for them three years ago. But the rest of the list is pretty interesting. So the Knicks are still number one. And remember, in 2014, they were 1.4 billion, I believe. And yeah, in 2014, they were 1.4 billion. They are now valued at 3.3 billion. So for all the other owners in the league, this was a pretty nice mark. They're all pretty happy right now. Yep. Yep. And I want to make a a few points where we're still in acquisition history and facts the this is like a i just have to read this this clip to um to underscore what a ridiculous transaction this was when when steve bought

the team from uh the sterlings as part of the deal shelly Sterling gets the titles of Owner Emeritus and Clippers No. 1 Fan, as well as 10 tickets in Section 101 or 111 for all Clippers games, 2 courtside tickets for all games in Los Angeles, 6 parking spots in Lot C for each game, 12 VIP passes that include access to the Lexus Club, Arena Club, or Chairman's Lounge and Media Room or equivalent for each staples games three championship rings following any clippers title and will run a yet to be named charitable foundation so like what why is that part of the transaction and why does she get clippers rings like or championship rings she is donald sterling's estranged wife wife for, I don't know if we clarified that earlier.

And she kind of ran the sales process on the behalf of the team. Because Donald himself actually, you know, was super resistant, ended up suing the NBA, suing everybody involved. But fortunately has pretty much ridden off to the sunset at this point. Yeah. Yeah. And I think it's really worth like, to me, a big sticking point of this whole transaction is it should have been a fire sale. It was under intense duress. There was still incredible bidding for this thing. And they, you know, and Balmer paid almost 4x the highest transaction ever. They gave up six parking spaces in perpetuity. That's right. That's right.

And think about the diamonds on those championship rings. Yeah. But the thing that sticks with me about that is it's a limited supply thing, right? This is a team in a major market with a sport that has risen dramatically in popularity and in 2014 looked like um it was only going to continue to have uh more uh more lucrative tv deals to come and that leads itself to you know that with incredible supply constraint that there's there's more there's a lot of five plus billionaires out there that would like to own a team and there's a lot of five-plus billionaires out there that would like to own a team, and there's a very limited number of big market teams that they could own. So in considering this, in grading this acquisition later, one thing that we should keep in mind is whether or not it's actually the best place to park your money. It's a very exclusive club of people that, that, uh, own teams like this and not every billionaire can get in.

Yeah. And it actually reminds me a lot of the other non-technology, uh, well, one of the other non-technology episodes we've done on this show, which was, uh, Alaska buying Virgin America. And, uh, what we realized in, in that show is how important the quote unquote real estate of gate access and gate control at airports was. And there's just a limited number of gates at airports. And that was probably the biggest reason we concluded why Alaska bought Virgin. And it's a similar situation here. There's just limited real estate. Yep. And they don't often come up for sale. Yep. And a bunch of other themes that we'll get into later in the show. But yeah, here's another thing that I found really interesting in the Forbes list. I would not have projected this at first, and it started to make more sense when I was thinking about it. But NBA teams, on average,

I mean, this is kind of eyeballing, I should crunch the numbers, but it looked like the valuations of these teams are about 10x their revenues and about 15x their operating income. And for anybody who's building a software business, you're thinking, oh, my SaaS business is probably going to get like a 3 to 5x revenue multiple or my, I guess I just, I just wouldn't have expected that these sports teams would, uh, like have a 15 X operating income multiple. And in, in kind of talking through it with, uh, um, with other friends before this show, it kind of makes sense because you would think like, okay, what, uh, am I sure that this B2B SaaS company is going to be around in, in 15 years? No. Am I pretty sure that this NBA franchise is going to be around and generating somewhere in this neighborhood of, of operating income that

it is right now, give or take 20%. Yes. Sports franchises are such an enduring part of the fabric of a city and the fabric of American culture that we just trust that these things are going to continue to be around and continue to be popular. Yeah. Well, I think there's another really key element to analyzing this transaction, which we, well, let's get into now proxy for your expected cash flows over the future, the discounted cash flows in the future, which is the theory of how you value companies. And multiples are just sort of putting your finger in the air and guessing how much growth you're going to have in your cash flows over the next several years and how much that's going to be worth to your bottom line and in terms of the valuation of the company what's really interesting is the growth in the

mba over the last few years and how much and i wish i had harder numbers on this i don't maybe i don't know if you do ben or if our listeners do um feel free to we can uh we can pop into the slack after and chat with listeners yeah hop in the slack but um to me the most interesting part of this storyline is that the nba has emerged really since bomber acquired the clippers um i don't think this is causal but maybe he might have seen this as i think the most innovative sports league sport in the world and that has been experiencing the most growth and experiencing the most growth among young viewers, which is the future. The data I do have is that according to Nielsen, the NBA has the youngest audience of any of the major sports in America and has almost half of its viewers under 35, which is definitely not the case with baseball. It's probably the oldest, but not football, not hockey. There is a lot of

growth happening in the NBA right now, and it'd be fun for us to dig into why. Yeah, I'd caveat all this with the youngest age and the fastest growth of any physical sport. I'd say League of Legends and Counter-Strike. Yeah, I think I'd love to do a future episode on esports, but we'll scope it to traditional sports for this episode. I think, yeah, that makes a lot of sense. All right, listeners, our next sponsor is a new friend of the show, Huntress. Huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to mid-sized businesses and provides enterprise grade security with the technology, services, and expertise needed to

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who monitor, investigate, and respond to threats with unmatched precision, head on over to huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress. So, Ben, acquisition category. Yeah, this is a business line. I mean, it's kind of hard to fit our structure to it. I mean, I it's actually, you could argue his asset. Yeah. Yeah.

And actually from a, um, technical perspective, uh, the way that you see if I can find this, there's a quote from a, I think it's a Forbes article. Mr. Balmer 58 is likely to enjoy a significant personal financial benefits.

When an investor purchases a sports team, he can attribute a large part of the purchase price to the player contracts he is acquiring. As those contracts expire, their depreciation can offset income. So it kind of is interesting to think about it like you're buying something that largely consists of depreciating assets. Interesting. I'm still calling it a business line because I think all the future growth is being able to turn that flywheel of the franchise and leverage that brand to get more players, to get more fans, and turn that flywheel. And that all is part of one business line. But I think it is interesting that from a technical perspective, as players age, they are depreciating assets.

Yeah. Well, this will lead right into one of my tech themes in a minute, but, um, should we stop for a moment on what would have happened otherwise? I mean, it was clear the sale was going to happen. Um, and, uh, uh, wait, real quick. Are you saying business line also? Um, am I saying business line or asset? Um, yeah, I think I'll say, I'll say say business line because I think these are, you know, sports teams traditionally have been viewed as assets. You know, you don't buy sports teams to make money, you know, is the traditional view on the space. It's billionaires who want to

play and have fun and have a retirement gig. But I think that might be changing. You know, I mean, with the growth and the tech names we'll talk about, I think there's a bright future ahead for sports franchises as businesses and as global businesses that we'll get into in a minute. So yeah, business line. Cool. Moving into what would have happened otherwise i think we should we should focus more on the team than on what steve ballmer could have done with his money

but it is interesting that uh according to that forbes list at least um you know the the business hasn't appreciated at all and if uh he had just parked it in an um an s&p index fund from that day that he bought it until today the day that we recording, it would have been a 20.8% return. So like you're saying, at least in the short term so far, from what we can see in terms of actual appreciation of the estimated value of the asset that is the team that he bought, not the best place to park your money for an investment. Yep. All right. Should we move on into tech names? Yeah. I mean, it's probably worth what would have, uh, one thing that I also had and what would have happened otherwise is what is Steve Ballmer done for the team that another owner couldn't like, what if it did, you know, fall into the hands of another, another bidder?

Like, would we, would we see the diving save to, toign DeAndre Jordan and stop him from going to the Mavericks? I think one thing that's interesting about, potentially advantageous for the Clippers of having Steve Ballmer own the team is that, number one, he's ridiculously involved and much more so than I think most owners are and probably, and probably maybe even to a fault, but on top of that, like Microsoft, no, no, I'm not. I really think, um, this was chatting with someone that has a, uh, close friend in the, uh, in the Clippers organization. And, uh, just that it was a little like disruptive the operations of the business when he took over that he was just involved in so much of it. So for better or for worse, he's much more involved than another owner would be. But he also employed a similar strategy to the one that he employed at Microsoft for M&A in making an over-the-top bid for Skype to just end all negotiations. He did the same thing with the Clippers here and in bidding 20% over the next highest bidder.

And you know, the man has $19 billion and this is what he's going to do for maybe the rest of his life. And he has expressed over and over again that he, he has always wanted to own an NBA team, but he had, he couldn't because his day job kept him too busy before. And I think that his willingness to go above and beyond, even when it may not make obvious financial sense if you really, really dig into it, he's able and willing

to write really big checks because it could have a really big payoff. Like if he can win the Clippers a championship ring, then, you know, he's a total hero. And he may actually like all this may turn out to be a great investment for him. So I think that one thing to think about is like his liberal sort of looseness with the purse strings, especially compared to their previous ownership, is really beneficial for the team. Well, it's interesting. Let's talk about Bomber's personality here for a minute,

which we can't end the show without talking about. No. But I want to talk about Bomber's personality and compare it to Mark Zuckerberg's, who is, you know, as we've talked about on this show, probably the acquirer, the CEO of an acquiring company whose style we've analyzed most on this show. And Zuckerberg is equally very, very aggressive and willing to come in with very high prices. But he's sort of like the silent killer type. You know, he doesn't say a lot. Uh, he kind of comes down, he flies down to say he likes to buy Southern California companies or, or try to buy Southern California companies, flies down to the meeting, you know, and he says, you know, Hey, well, I'm going to

crush you or I'm gonna help you. And like, you know, here's the number. It's a lot of money. Like, let's get this done. But, uh, uh, but the thing about Zuckerberg, you know, I think with some potential missteps, thus far as we talked about on Oculus in the last episode, like he, his judgment and, and, and, uh, is generally pretty spot on. He's been right a lot more than he's been wrong with these things. Bomber is a very, uh, I wouldn't say that his judgment is, is bad, but, but he takes a very different stylistic approach to being an aggressive acquirer. He is loud. He is boisterous. Uh, he is, you know, there is, we will link to in the show notes, uh, very famous for his public persona and, um, his developers, developers, developers, developers chant his, his uh his jumping up and down on stage and and

that's just him too i mean we've we've both uh you know cross paths with him in seattle and elsewhere in our in our travels and um you know you have a conversation with him and he just oozes enthusiasm and uh and that's what he's bringing to the clippers yep and one um yeah you're absolutely right on that i mean he's uh you know he's still i think he actually jumped on a trampoline and dunked when they were announcing the new uh clippers mascot i mean he still does the the the standard bomber lean back in the middle of an arena full of people and yell and you know fling his arms around and talk about it i love the clippers i love this company i love this company so great drenched in sweat oh yes yes he is true to his style and you know he's his uh love him or hate him his his

uh passion is infectious and i think um one other point that I wanted to make before moving out of this, what would have happened otherwise, is basketball fans will note that there's a not unprecedented but uncommon thing going on within the Clippers organization where Doc Rivers is both the head coach and sort of the president GM role. And typically, the president GM role handles making the right player acquisitions, signing the right contracts, making the trades, doing a lot of the work on the draft to fill out the roster and kind of handle the sort of the business of the team and the business of making sure the team is in a place that can win. And then the coach is in charge of, you know, the actually dealing with the players and the strategy and working with the GM. and president and what that probably ends up looking like since he's so involved is balmer making a lot of the the business decisions and then also having you know doc potentially split

his time too much so you know i would say what would have happened otherwise a different owner may have actually brought in a gm and um you know and and added a little bit more depth to the uh depth to the roster and potentially just you know had a little bit more depth to the roster, and potentially just had a little bit more basketball expertise in there. Yep. But that is not Steve's style. It is not. It is not. So should we move on to themes?

Let's do it. Okay, so here's my theme for this episode. And again, listeners that are closer to the basketball world would love your input. I think this purchase, certainly as we've talked about, it reset the landscape of valuations for NBA franchises. And there is a kind of real estate component to it in that there are a limited number of NBA teams and a lot of billionaires out there with a lot of time and a lot of ego. But here's what's really interesting, I think, going on in sports and perhaps even more so, well, certainly in the game, in basketball more than any other sport right now, there is a ton of innovation happening. And I think there is business model innovation that is happening in sports right now in in american

sports for the last 50 plus years 50 60 years there's been this huge and ben thompson has written about this um this huge symbiotic relationship and flywheel between the television industry the sports industry and the advertising industry, and the advertising industry, you know, the auto industry, the beer industry, the retailer industry. And that has been a very tight coupling where you have sports being the biggest TV events, you know, literally the Super Bowl moments that bring huge scale, mass scale audiences that advertisers of mass products advertise on. And that's starting to break down today as the internet is pushing farther into entertainment. We've talked about this a lot in our various Facebook episodes and Snapchat, of course, and the opportunity to disrupt TV. But what's happening at the same time over the last few years is in one sense,

that's very threatening to the business model of sports because the vast majority of the revenue comes from TV, but they've been developing streaming and direct subscription revenue and direct customer relationships as part of the product on the side. And I think that is a huge opportunity. Um, you know, we've been, and I talked a lot about, we debated doing this episode on major league baseball advanced media, which, which changed its name to BAM tech that provides the technology for streaming behind us. And we want to do a future episode on it. But the ability for Major League Baseball charges, I believe it's $150 a year for this incredible product where you can stream any game

at any time, anywhere in the world. And they make so much money off of that from their engaged customer base and have a direct customer relationship. That's a bright future for sports. And I wonder if Bomber came in and bought this team for what seemed like a huge amount of money at the time. But if and as this transition happens, this might be the path for sports teams to become real businesses. Yeah. And I don't know exactly why there's so much more money in the TV rights for these teams than there was five years ago. I mean, one thing I could speculate is that with most shows, people cord cutting means that live doesn't matter as much and that they're down to watch almost all programming on Netflix, Amazon.

Well, to be clear, I think there are two things going on. The TV rights are staying the same and growing as sports are becoming the only thing that people keep their TV subscriptions for. Yes. But the leagues themselves on the back of BAMTEC are end-rounding, you know, disrupting themselves and that business model and offering these direct subscription

packages to customers with this big revenue stream that they still sell advertising on, but now they're basically disrupting ESPN. And ESPN makes so much money, is by far the largest and most profitable cable channel on the back of sports. And the leagues, I think, are starting to realize that they can cut ESPN right out of that and make both the advertising money, 100% of it, and the subscription money. Right. Because in that subscription money, they're commanding more power in the bundle as they are the reason that people want linear television and, you know, want that live experience. And yeah, so it's, they're winning on two fronts there. Yeah. Yeah. Because the point I'm trying to make is they're still getting the ESPN juice

and they are also like all getting a ton of money from people that are buying League Pass. And those people are also buying cable and paying money to ESPN too, right? So these sports leagues for the next couple of years are just going to be raking in the money. Yeah, I think you're right. I had the exact same tech theme as you on this one. I mean, I think I have it much more high level as just that the NBA's broadcast rights are getting more valuable, but I think you nailed exactly why that is. So the one other tech theme I want to cover quickly that I feel very unqualified to opine

on other than I see it happening and it's so fun to watch, is how the product, how the game on the court has also had so much innovation over the last couple of years. Yes. And, you know, seem driven. Well, there's the whole Moneyball aspect and what, you know, the Rockets started doing and bringing kind of statistical analysis to front office management of teams.

But then there's also literally the game on the court, which the Warriors have just completely changed. And I love watching that. And that's what's so rare in sports I feel these days. And to me, why? There are many reasons why, but I grew up loving baseball, playing baseball, and I still love baseball. But it's hard to watch because there's so little innovation in how the game is played. But basketball is so dynamic right now. Yeah. And you know, when it's funny, probably 10, 15 years ago, I was saying, I don't really love the NBA. I like watching college basketball more because it's real basketball. And watching the NBA is watching a few superstars travel all over the place, dunk, and then have, you know, like wait around at the

top of the key for the shot clock to stick down, drive, and then dunk. And it's like, okay, we know what's going to happen every time. The refs are going to be really nice to these few players. And I think that what we've seen happen is it's just a much more fast-paced, dynamic game where there's a lot more of, you know, they're passing the ball around. There's a lot more ball movement. They're optimizing for exactly the three pointers they should be taking, not taking the ones that they shouldn't be taking.

And they're really, I mean, there's a lot of data science applied to this from a technical perspective, but then from an intuition perspective, you just have, you know, your Steph Curry's that, that you know,

come together on a team like the warriors to really change how the, how the game is played. And if I have any gripes about my own team, like about the way that the Cavs it's that uh they're very very fortunate to have lebron and it's it's unclear if um i mean they're they're still kind of playing that that older style of play they are and and i think again without uh avoiding the temptation to dive too deep into analyzing these aspects of the game because because i'm not qualified. David and I are so far off of what we should be talking about right now. I really hope that other sports, and certainly I am much more qualified to talk about baseball

and football, having played both myself for close to 15 years. There's just been no innovation in either of them really in terms of how the game is played. And I hope these other sports and managers and coaches in other sports at all levels can look at the NBA and say, there is so much value and power in not feeling like we have to stick to tradition and the way it's always been done in how these games are played and that fans will react super positively and love new innovations. I mean, stuff like, you know, in baseball, like you should never bunt. It's like statistically proven that bunting is terrible. Just like in football, like you should go for it on fourth down way more often than people do. But there's such conservative environments that people don't do these things. And I hope the NBA is going to drive some more innovation in other sports as well as

people see how well audiences react to it. Yep. And I think the NFL had an amazing 20-year run-up to call it five years ago where they really turned the NFL into a family sport. It's not the thing that dad does and drinks beer on the weekend with buddies at the game. It's a thing that they've really turned it into a family product where you have people over and the whole family gets into it. The broadcast is much more tailored around entertainment than it is a gridiron sport.

The Super Bowl is the best implementation of that. But I don't think we've seen much evolution beyond that yet. Like I think the NFL is riding high now, but the basketball, but the NBA is, is more of the stock that I would buy right now. Well, and the NFL has a huge liability on their hands, um, that I don't see any way out of it with the concussion, uh, issues. Yeah. You know, I mean, I played football for over 10 years myself throughout middle school, high school, college, and loved it. But if I could go back and, you know, make those decisions again, back in at every level, I would not play. It's just not worth the risk. Yeah. And honestly, watching some of your investment decisions,

it's pretty clear to me that it wasn't worth the risk. Just imagine how good I'd be if I hadn't played football. Oh, man. Should we go into grading it? Yeah, let's go into grading it. from one listener and friend of the show that I'll just read his quote because he had a really interesting insight here that we haven't talked about yet. And that's that the most interesting phase is coming soon when JJ Reddick is likely to sign for more money elsewhere. Blake and CP3, Chris Paul, are free agents. And how will the franchise move on if one or both of those guys leave? That's the challenge for Balmer. And I think, you know, not where David

and I are not probably here to speculate about the future player moves of the team. But it is interesting to think about something that's going to knock some points off my grade is definitely the lack of a true president GM in place here to, you know, keep a good handle on a good pipeline on all these, these, uh, depth chart moves. Yeah. But I, I do think, I think this will be the true test for bomber as an owner. Right. Uh, and where, if we're going to, like we reserve the right to with tech companies, if we reserve the right to change our grades in the future, it would be his reaction to this. I think it gets back to management and lessons, you know, that are equally applicable to tech companies and startups, which is, you know, it's not always up into the right things happen, right? Like your star players become free agents

and they leave like you can't, you can't change that. That just happens. That's life in a company. The test of, of a management team and the company is how you react to that. And do you either give up and start heckling your players like Donald Sterling? That's one end of the spectrum. Or do you support your employees and your staff and your team and make the decision, sometimes hard, to continue to do your best to put the, put the team out there. That's, that's going to win and do that really thoughtfully and strategically. Like we, like we saw, you know, Facebook do throughout their IPO. And afterwards when they realized, you know, their, uh, it was like they lost their stars and free agency as, as the mobile wave was

about to wash over them and they went out and they fixed it. Yep. Agreed. Well, so I'll take a first stab at the grade. We normally on acquired grade with the lens of was this a good financial decision for the acquiring company to acquire the acquired company? And the tack that I want to take on it for this episode is to take out the word financial. So we can say, was this a good decision for Steve Ballmer to acquire the Clippers? And I think that the guy had $20 billion and the rest of his life in front of him. And I had another friend bring up this idea that it's incredibly rare that an opportunity like this comes on the market. And when you're already a billionaire, you know, buying and running a sports team is

really only like the hard, it's like the only hard thing remaining for you to do. You're instantly famous when you do this, right? Like you're, you know, Jerry Jones made all his money in oil, but then, you know, now he's famously the Dallas Cowboys owner. And you can be a billionaire, but not have your name in lights. And I think that Ballmer had a good amount of that already, but for him, what are you going to do with the rest of your life? This is a really fun thing to do. And you're in this very, very exclusive club of tier one market owners of franchises. And so there's some amount of my grade that's going to come from... It's like an A in terms of how do you want to spend the rest of your life.

And that is not necessarily a financial decision. On the financial decision, he really is bringing some innovation here. I mean, he's, he's putting a lot of effort into it. I disagree with them not having a, uh, a president. So, you know, on the execution of actually doing this thing and, and kind of furthering the turnaround of this team, I'll give it a B, but you know, if you, if you have that much money and you want to buy a, an NBA franchise and make this your, your, you know, second foray of life's work, which is certainly a fun way to do it. Yeah. I think I'm going to try and resist temptation to think about it outside of business decision

and think about it solely in terms of the price Balmer paid. He certainly probably could have gotten his team for a lot worse. I mean, that was coming in hot with that price. But he he certainly probably could have gotten this team for a lot worse i mean that was that was coming in hot with uh with that price um but he reset the market and and it's risen to that level and for all the reasons i talked about in tech themes and before um you know i think he is kind of catching this wave at the right time where the leagues and um the teams as components of these sports leagues have a big technology-enabled opportunity in front of them to change their business model, disrupt themselves into something more valuable. So given that, I'm going to go with B+, because I think he's gotten all the fundamentals right. There's execution that remains to be seen both on the product, on the team side, and quite honestly, on the business model for the league side too.

It's early days. And I think he probably could have gotten the team for a lot less. But to your point, Ben, he did not want to misfire on this one. He wasn't going to lose. And that is classic steve bomber yep all right uh follow-ups and hot takes we've got a few this week instagram stories uh was reported that instagram stories now has more than 200 million dau uh which is more than all of snapchat at least until we see snapchat's uh growth numbers for q1 which they'll be reporting their earnings soon here that'll be a big big day for snap stock and

associated with that i want to give a big shout out to listener a listener named Ross, who very kindly wrote Ben and me correcting us on our definition of DAU that we've used a few times on this show, where we implied that wrongly that DAU meant people, users using it every single day. It doesn't necessarily mean that. It's just the percentage of the user base, the total user base that a product has that uses it on any given day. So if half the half the user base uses it on one day and half the user base uses it on another day, and then they mix up and various portions of them on the third, you can still have 50% DAU to MAU ratio, but with nobody using it on every single day. So an important distinction. Thank you, Ross, for pointing that out. Yep. And one other. Yeah, I think we do have one other follow up from our early episodes. There was a little trailer that was released on the Internet this

week. Yes, I'm excited. I'm scared. I'm nervous. i don't know what to do with myself other than watch the uh the new star wars trailer over and over and over again and wonder if it is christmas yet is it christmas yet is going to take on a whole new meaning i'm so excited yeah and i've no spoilers on the trailer but like it all changes in the at the end so like it's worth watching multiple times and then reinterpreting it through that lens after seeing the end of the trailer i can't believe i'm giving spoiler alerts for a trailer but like it's so well done it's that big yeah yeah i can't wait yep another one is uh a little quick piece of follow-up from the

starbucks episode uh one reason that the the starbucks the Starbucks IPO is so successful that we didn't really touch on in grading it is because they delivered on a consistent basis financially for many quarters after the offering. And they had tens and tens and tens, or I think it was maybe even 100 months of month-over-month growth on average in same-store sales. And so, if we ever do a similar analysis in the future of an expanding chain of stores, that's an interesting mark to keep in mind. And David, one of the reasons we do this show is to try and understand what makes an acquisition successful, what makes an IPO successful. And zooming in on that metric of even though you're opening multiple stores because you have more free cash flow to keep

reinvesting, the average of your same store sales across all stores continuing to rise is a really interesting piece to zoom in on and thing to shoot for. Indeed, it is incredibly impressive. Tens and tens and even up to 100 consecutive months of same-store growth. It does help when you are literally selling drugs to your customers, as Starbucks does. Any time you can sell a legal drug, it's probably a good business. Probably a good business. As we talked about on the episode, there are so many more great lessons from Starbucks that everyone can learn.

Should we move on to Carbouts? Yeah, let's do it. Let's do it. So I'll take a stab. You guys know we love recommending podcasts. Bill Gurley was on Jason Calacanis' This Week in Startups this week. And anytime you get a chance to read some of Bill's writing on his blog or hear him speak on a podcast, it's a treat because he just has such incredible clarity of thought. And he walks through sort of the benchmark business model of really only investing in a couple companies per year and spending just an incredible amount of time embedded with those companies.

And actually, I didn't know that much about Bill's background. We had touched on when we had Tom Alberg on for the Amazon IPO episode, he had mentioned that Bill Gurley and Frank Cuatrone did the IPO. And I didn't really know that Bill was a computer science major before that. And it's just really interesting to hear about. That's right. That's right. It's super interesting to think about the decisions that guy made and the risks that he took and the way that he looks at the world and the way that he looks at investing. So if that's your cup of tea, or if any of those things are your cup of tea, I highly recommend listening to Bill because he is a sage. He is. He and all the folks at Benchmark,

they are one of the best and a joy to work with and very, very good at what they do. My carve out for the week is also a podcast, a really great one. Jenny, my wife and I were on a road trip recently

and this is a, Jenny's a member of Slate Plus. So this is a Jenny's a member of sleep plus. So this is a sleep plus podcast that you have to be a have to be a subscriber to but but it's worth subscribing. It's called pop race in the 60s. And it's by Jack Hamilton, who's a professor at UVA. And he interviews folks, it's only six episodes. It's a, it's a short series, but it's great. Each episode is about a, a white musician or musical group from the sixties and a, and a black musical musician or musical group from the sixties and comparing them against each other and how they were viewed by society at the time and their legacies and impact. And it is so great. I love 60s music, grew up listening to all of it.

And Jack actually wrote a book, his first book, which was, I believe it's dissertation, PhD dissertation called Just Around Midnight, which is basically, if you can't listen to the podcasts, this is the podcast in book form. But Janice Joplin and Aretha Franklin and Jimi Hendrix and Bob Dylan and the Beatles and the Stones and talking about the importance of race and the conversations across these groups, you know, whether it was, I didn't realize how often both the Beatles covered Motown songs and Motown artists covered the Beatles throughout their careers. Super cool. And, and also I know this is going on for a while about this carve out, but I think it's also, as I was listening to it, really applicable to the tech industry. And it made me think about,

made me think a lot about San Francisco in the sixties. And, uh, so much of that music was coming out of there and the counterculture movement and how, wow, like the tech movement and Silicon Valley really was birthed out of the counterculture movement and huge driving force of change, uh, that kind of started in San Francisco in the sixties with that counterculture movement and the legacy you see in San Francisco in the 60s with that counterculture movement and the legacy you see in that in the tech industry today. So super cool, worth listening to, or if you can't listen to it, reading the book, we'll link to both in the show notes. Very cool. We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security

reviews and compliance efforts. So frameworks like SOC 2, ISO 27001, GDPR, and HIPAA compliance and monitoring, Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple. Yep, Vanta is the perfect example of the quote that we talk about all the time here on Acquired. Jeff Bezos, his idea that a company should only focus on what actually makes your beer taste better, i.e. spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. It plays a major role in enabling revenue because customers and partners demand it, but yet it adds zero flavor to your actual product. Vanta takes care of all of it for you. No more spreadsheets, no fragmented tools, no manual reviews to cobble together your security and compliance requirements.

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Well, listeners, thanks for joining us again. If you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client. If you've been a longtime listener of the show and want to leave a review, or if you just happen to tune in this one and like the episode, either way, we'd love a lover of you on iTunes. So thanks so much for listening. Enjoy the NBA playoffs. Go Cavs.

Go Warriors. Other than that, we'll see you next time. We'll see you next time.