Acquired - Season 4, Episode 1: ESPN

Episode Date: January 21, 2019

Booyah! Acquired, the worldwide leader in acquisitions and IPOs, kicks off Season 4 with a classic: ESPN. How did a failed former TV weatherman end up building the world’s most valuable media company on top of a dump (quite literally) in Bristol, Connecticut? We follow the incredible entrepreneurial journey from Getty Oil diversification strategy to Berkshire Hathaway home run to Disney crown jewel. This Is Awesome, Baby!!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!Links:ESPN’s first moments on air: https://www.espnfrontrow.com/2018/12/espn-remembers-lee-leonard/The Outsiders Book:  https://www.amazon.com/Outsiders-Unconventional-Radically-Rational-Blueprint-ebook/dp/B009G1T74O/Carve Outs:Ben: Numbers Geek with Steve Ballmer: The Basketball Box Score Mystery  https://www.geekwire.com/2019/numbers-geek-steve-ballmer-basketball-box-score-mystery/David: Fast Company on Masa, “The most powerful person in Silicon Valley”  https://www.fastcompany.com/90285552/the-most-powerful-person-in-silicon-valley

And David, I'm kind of sick of the old theme music, and to be completely honest, I never really liked it. Welcome to Season 4, Episode 1 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today, we are covering a company that is absolutely synonymous with sports, ESPN.

The worldwide leader. Indeed. And as they say in the very first moments of their 1979 broadcast, if you're a fan, if you're a fan, what you'll see in the next minutes, hours, and days to follow may convince you you've gone to sports heaven. Indeed, Acquired has gone to sports heaven here. It was obligatory. For long-time listeners of the show, you know that we cover, you know, typically one acquisition and that we talk about it and we grade it and we have a pretty standard format. This episode covers not one acquisition, but three, each one sort of fairly monumental.

And I want to outline what that's going to be so that the story has a little bit of structure to it. As I mentioned, the first broadcast was in 79. ESPN was acquired by ABC in 1984. Just one year later, in a surprising turn of events the smaller capital city's broadcasting corporation incredibly bought abc took its name and got espn along with it and then finally in 1996 95 96 uh there was a 19 billion dollar buyout of abc by the one and only Disney. And a little teaser, the Capital Cities acquisition had a little help on the way from a certain Oracle in Omaha that we'll get into.

Excited to dive into that. So as David was pointing out to me when I was sort of teeing up, you know, how should we introduce this? The through line and the most important part of all of this, you know, these acquisitions that each sort of included espn was espn itself and so much so that by 2006 a ubs estimate was that espn alone was worth 40 percent of disney's total value yeah i love the ubs estimate man that was like that was right before i joined ubs so oh well it could it definitely wasn't accurate then. Not yet a David Rosenthal estimate. Would have been two years later. Indeed.

So this episode will largely focus on ESPN through the mid-90s. And the sort of digital and streaming eras are a whole nother story that we'll need to tell at some point. But this era of ESPN and its sort of rise to truly be the worldwide leader in sports really deserves its own episode that we're going to dive into today. Speaking of ESPN and inside baseball, yes, pun definitely intended, we did a really fun limited partner bonus show last week. We took our LPs behind the curtains of how VC firms really work from corporate structure

to incentives. If you're interested or just want to support the show, you can click the link in the show notes to become a prestigious Acquired LP or go to kimberlite.fm slash acquired. If you're new to the show, you should check out our Slack at acquired.fm. It is full of brilliant people that are providing their hot takes on the tech news of the day, often M&A and IPO related, and is also just a really great, really helpful, really friendly community. So I've really enjoyed, particularly over the last month or so, we've been on break over the holidays, just getting to chat with folks in there has been really cool. Okay, listeners, now is a great time to tell you about longtime friend of the show,

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by clicking the link in the show notes or going to servicenow.com slash AI dash agents. David, how are you feeling about the history and facts on this one? Ben, I'm cool as the other side of the pillow. I'm glad you teed me up to say that. I'm glad I didn't know how you were going to respond. That was both awesome and so awkward. All right, listeners, let's take it in. We start back in the 1970s. It's disco time. Things are crazy in America, particularly crazy in the burgeoning cable industry, which is brand new, where all the entrepreneurs in America are headed. And we start with a guy named Bill Rasmussen. Bill was a former Air Force supply officer.

He ends up getting into the television business first as a weatherman at an NBC station in Western Massachusetts. But his lifelong dream is to get into sports. And he just loves sports. He's a sports nut. So he's doing the weather in Western Massachusetts. And he starts just like reading sports scores at the end of the weather telecast. And turns out people like it.

He moves around to a few stations in New England. Ends up kind of transitioning from weather into sports because he's a natural, becomes a sports director. And then in 1974, he becomes the communications director at the Hartford Whalers hockey team. It's a real auspicious beginnings here. The Hartford Whalers at the time, their big star was Gordie Howe. And he was like larger than life he had his own business interests and bill starts working for him personally as well in his family and all's going well until memorial day weekend 1978 when bill gets a call uh from the heart for whalers

that he's being fired as communications director and he then he gets another call from Gordy's wife actually saying, yeah, and we're firing you from the family as well. Rough day, rough day. I couldn't verify this, but I believe his son, Scott Rasmussen, who had dropped out of college, was pretty young in his early 20s, was also working at the Harper Whalers, also gets fired that day. Oh my gosh. Too many eggs in one basket. A lot of eggs in one basket.

But, you know, they're pretty optimistic guys. They decide that father and son, they're going to team up, figure out what's next. So the first call they place is to a local guy. They're in, Hartford's in Connecticut, right? Yeah, they're in Connecticut. Local guy in connecticut who is an insurance agent named ed egan he's working for etna you guys this leads to espn we promise and uh and ed this went from like the most exciting episode ever to like the strangest

most boring episode but we promise there's more to come ed just like bill when he was a weatherman he really wants to get into sports and he's been trying to convince Bill to start a cable network focused on Connecticut sports. And this is when Bill was, of course, the communications director at the Whalers. And the centerpiece, he thought, would be showing the Whalers games on this new cable channel. Bill calls him up and he's like, hey, I just got fired.

I'm looking for something to do. What do you think? I like your idea. I may not be as helpful anymore as i used to be able to and uh but ed is ed is undaunted they chat and they decide like okay well we're not going to get the whalers but like they're still pretty interesting like people care about local sports we can show connecticut sports we probably just need some stuff to kind of fill in the gaps between Connecticut sports. There's not enough of that. So why don't we add some entertainment programming as well? And then they're like, Oh, this is perfect. We've got the perfect name for this. It's going to be the entertainment and sports programming company ESP. Like what good? It's perfect.

It's very descriptive. It's short. It's only three letters. Exactly. You know, it's just like ABC, NBC, ESP. ESP. ESP. So they incorporate the company, the Entertainment and Sports Programming Company, on July 14th, 1978. And it's worth taking a step back here. I mentioned earlier that cable is kind of the, it's like the internet of the time, like where all the entrepreneurs are heading at this point in the late 70s. So at this point, it's less than 20% of US households have cable.

The big over-the-air terrestrial broadcasting companies, NBC, ABC, CBS, they're still what people think of when they think of television. UHF, VHF, over the airwaves. Exactly. You've got the big rabbit ear antennas, you know, on top of TVs and on top of houses. And cable really got started as a delivery mechanism for houses in rural parts of the U.S. where the terrestrial broadcast signals didn't reach. Which is amazing in its own right to think about, gosh, we can't reach this over the airwaves,

so we will run a cable. We're literally going to run a cable there and that's more efficient like that that's kind of mind-blowing to me that like it's more efficient than i guess the capex of building big radio towers is tough and yeah i guess so well i think i could be wrong but i think this is also part of like they ran wires cables along railroad lines right and that was for telegraphs but they might also then use that for i know that was like sprints beginnings that we talked about on the sprint t-mobile episode by this time by the late 70s people had started to realize huh there's something slightly more interesting here than just

rebroadcasting the big three stations like this what's cool about cable is it's not regulated so like over the air broadcasting that is cool yeah that like is kind of like the internet you know you know you can abc mbc cbs like they're basically controlled by the government not controlled by the government but they're regulated on what they can show what they can say um but cable's the wild west and so hbo uh was the first kind of cable network got launched in 1975 a couple years earlier and then there's this crazy guy who's going to resurface down in Atlanta named Ted Turner. He owns a bunch of broadcast stations and he's experimenting. He's like, well, I'm going to take my Atlanta station and I'm just going to rebroadcast it all around the country. And everybody's going to get my Atlanta. See,

he had bought the Atlanta Braves baseball team. We're going to show Braves games to everybody. It's going to be great. So people are experimenting. It's against the backdrop of all this that the Rasmussens and Egan, they're digging in and they hear about this new kind of sustaining technology, if you will, in Clay Christensen terms, that's coming along for the cable industry called satellite transmission. And it's supposed to be this like great new thing. They don't, they have no idea what it is. They're just like, great, we're starting a new cable network. We want some of that satellite stuff. So they find out that RCA, the big electronics company, they've just launched two satellites into space for video transmission. So the Rasmussens, they call up RCA and they're like, Hey, we want some of this

satellite stuff. Will you sell it to us? RCA, they're trying, hey, we want some of this satellite stuff. Will you sell it to us? RCA, they're trying to sell satellite space. Nobody's bought it yet. So like, oh, great, we got a customer. Great. We can sell you that. What do you guys, you know, you ESP guys, what do you want to show? You must be, you know, traditional media folks like you know about this. We assume there would be this mad rush of all these media people that wanted to use them. So, take your deep media background and pitch us yeah pitch us what are you what are you what are you gonna show and they're like connecticut sports and and the rca guys are like um so you know the thing about satellite like what it does is it takes a video signal and it instantaneously transmits it all around the world. So you think Connecticut sports are going to be...

And entertainment. And entertainment are going to be what people want to see all around the world. And they're like, huh. And then RCA is like, and there's this other thing too that, you know, with satellite, like it doesn't go down, you know, it's all 24-7. So like whatever you put on this video feed is going to go out 24 7 and this is like kind of blows their minds because at this point before satellite cable and satellite the broadcast networks and even most cable networks that were using satellite they

signed off at like 11 o'clock eastern so like people used to this is crazy i mean this is before our time but like you know our parents generation you'd watch tv it get to be 11 o'clock eastern so like people used to this is crazy i mean this is before our time but like you know our parents generation you'd watch tv it get to be 11 o'clock and then you know nbc cbs they'd be like well we're signing off for the night tv was done tv was over for the day and then you just get like a test pattern on the screen so they're sitting in this meeting and they're like huh interesting so how much would it cost to get a feed on one of your satellites? And they're like $35,000 a month, actually $34,167 a month. And so they're like, done, we'll take it. They have no money at this point. Like send us the invoice. Net 30? Can we have like net 90? net 180 so they go back and they're like okay great now we got to scramble some money together we gotta uh not only pay rca uh for space on their satellite transponder but we need to set up like a whole studio to broadcast we need to buy some satellite dishes to broadcast where are

we gonna do that and how are we gonna get the money turns out there's a town nearby called bristol connecticut uh which espn aficionados know as still the the home of the worldwide leader in sports yeah worldwide headquarters the town had this big open space a bunch of acres that they were looking to lease out to a commercial business and it it's just a field, like a muddy field. But it's nearby. And so they say, great. And do you know what it was before it was a field? I didn't find that. It was a dump. ESPN's headquarters today are still built on an old dump. On an old dump. Amazing. The most valuable media business in the entire world yep and uh what's interesting about that is since there's no like trees that are growing there it's this big wide open thing it's actually perfect for broadcasting satellite because it's a complete clear shot exactly they

talk about this they'd actually first looked at another nearby town but they couldn't get enough space and it was they didn't have a clear line of sight for the satellites so obviously the dump in bristol was the perfect spot also just like rca they leased this land they have no money and they start a plan to build the studios and uh truck in some satellite dishes so they go out and they start like they hit the fundraising trail they raise their seed around a little bit of money from other members of the rasmussen family and they get a venture capitalist in in king of prussia pennsylvania of all places just like right where i grew up silicon prussia yeah silicon prussia who invests i think the exact amount of one month of of the rca uh lease so like 34 000 and so like okay34,000.

And so like, okay, great, this will get us going for like a little bit of time. Let's hit the fundraising trail for real and go get some real dollars to fund this whole thing. And interestingly, I was thinking about what their pitch must have looked like. So 20% of the US had cable at this point. So they're very much doing the same sort of philosophy and pitch that Netflix

was doing when Netflix started, you know, starting this DVD based business when no one yet had DVD players. It's like, oh, we're right on this inflection point. Everyone's about to have cable like we got that. We timed it perfectly. Yep. Yep. And indeed they did. But also just like Netflix in the beginning, all you know sources of investment dollars at this point they're looking at these guys and they're like no we're gonna need some very protective provisions in these documents yes exactly that's anyone who's even interested for a long weeks months nobody's interested they end up getting connected somehow with the getty family in los angeles so like you know listeners if you've been to la you've been to the getty museum which is an amazing art

museum uh in la uh you might know of getty images the stock image site which is one of the sons or nephews but of course the big behemoth and true uh sort of money maker and and parent of the getty empire is getty oil yeah and the family is just like nuts they're crazy stories that we won't get into here but like this is a family business in every sense of the word and one of the things that they're trying to do at the time uh this is again 1978 they're trying to as much as possible diversify out of the oil business. Uh, the family's going through generational transfer. They're looking for ways to, to get their money out of, out of oil and diversify it. And so this comes along and they're like, well, okay, why not? And, uh, there's a guy, uh, Stuart Evie who, uh, works for the family who he's really

like the champion of, of getting this done. So they start talking to the Rasmussens about funding this. And they're like pretty, pretty interested. The deal's taking a while, though. And the Getty board and the senior family members, they're like, are these guys for real? Like, who are these guys? ESP, that doesn't even have a good ring to it. Yeah.

Bill realizes he needs to prove that they have something that like is gonna once they get the money and get all this live that they have like really compelling content to put on to put on the channel so he flies to shawnee mission kansas ben do you know what is in shawnee mission kansas no the headquarters of the ncaa ah indeed and in March of 1979, they're still negotiating with Getty. And Bill emerges from Kansas with a deal in hand, signed deal with the NCAA to air all of their championships across all sports and regular season games across 18 sports everything uh including the then super prestigious men's basketball tournament the ncaa tournament i think the year before was the magic johnson and larry bird faced off in the how on earth like as i was doing research it was it became apparent that

they would have a hard time getting pro sports right so like oh we'll go with amateur but like the ncaa at the, it was no small thing. No, it was like being in college. Football was huge. Bill, great entrepreneurial fashion, manages to get this contract. So he gets rights to every game that hasn't already been given to the big three networks. But it turns out that that's a lot of games

because even in the ncaa tournament the big three networks were only showing like the final four so all the games leading up to it uh they thought nobody cared about them turns out they were wrong so bill emerges with this contract and then immediately after that gets getty across the line they invest 15 million dollars which is going to be enough to pay rca for a couple of years build out the bristol facility get the satellite uh dishes hire the first talent i think they now that what they bought was 85 percent yeah so okay this is what i was gonna get into they invest 15 million dollars for 85 percent of the company so So like listeners out there, man, you think PCs are rough today.

It's a tough series day. Yeah, that is a, now $15 million was a lot of money. So to be fair, it was kind of like doing your seed a B and C rounds all at once, but still. Yeah.

The other interesting thing is, do you know what else happened as a part of that financing? There was a commercial agreement as well but not with uh with getty uh are you referring to the beer agreement i am yes yes so i will yeah so anheuser-busch uh came to an agreement with esp this is still before his espn it's the largest advertising contract in cable television history at $1.38 million that they will be the exclusive beer advertiser on the new ESP network. And there's some quote that one of the executives there had where they say something like, because we just thought beer and sports just go together. This will come back in one second on the day it goes live later in the fall. But before they go

live, after they sign this deal, I couldn't find out who kind of initiates this. But somebody, whether it's Getty or Anheuser-Busch or somebody within ESP, they're like, you know, guys, this ESP thing, it sounds kind of corny and uh it doesn't sound super professional and it's confusing because three-letter acronyms are you know broadcast channels yeah exactly exactly so they started looking out and you know other cable networks that were getting started at the time they all called themselves networks it was was like the.ly domain name or labs or whatever. Which is fascinating

because we have all sorts of different definitions for network today. It doesn't quite make sense of why you would call your one channel that runs across a cable a network. I guess because all the endpoint homes were networked over cable to the one broadcast source maybe it

was that they they had affiliate distribution agreements with different cable operators throughout the country that could be which we'll get into in a minute here too anyway everybody loves it and they say great we're going to change the name of the company we are now the entertainment and sports programming network espn the worldwide leader worldwide leader and actually i think there was a brief period there where they they changed it to espn tv it was like espn tv and they're like oh wait we can't launch with that yeah that's that's too much that's too much let's go with the espn so they launched they end up launching with espn also before they launched though remember getty just bought way more than controlling interest in this company, 85%. Yeah, you're now an oil company subsidiary.

Yeah, exactly. And if you know anything about the history of investing in startup ventures and what investors did back then, the popular thing to do was fire the founders and bring in professional management. And Getty, in wanting to act like a true venture capitalist at the time, that is what they did. and Getty in wanting to act like a true venture capitalist at the time that is what they did now in this case it's debatable whether they did this because they felt like they should or because it was the right thing probably both the Rasmussens were amazing entrepreneurs I mean getting that

NCAA contract was like nobody else could have done that except somebody who was a true entrepreneur and at Egan too but they weren't really equipped to build out a media empire. And to illustrate that point, so they got sold by these cable guys that they should spend all this money on a satellite transponder. And the way that they sort of orchestrated getting that all connected, apparently, and this is like ESPN urban legend um the cable was connected to the satellite only five minutes prior to the first broadcast so like not exactly sort of like operational experts in this industry i believe it but you know and are extremely enterprising

entrepreneurs extremely so that summer the getty family basically forces bill and and scott and Ed to kind of step back from day-to-day involvement. They make Bill the chairman of the company, but it's kind of in-name only. He ends up leaving fully the next year in 1980. But they bring in this guy, Chet Simmons. And Chet was a legend. He had been president of NBC Sports at NBC. And they convince him to come in and take over as president of ESPN. And he brings along with him this guy named Scotty Connell, who was his kind of number two at NBC Sports and who was responsible for all talent. And the two of them, they bring into ESPN even before launch and then in the first few months after launching, like some names you might have heard of.

George Grand, who depending on your age, you may or may not have heard of. Chris Berman. Dick Vitale. Bob Lee greg gumbel amazing talent into this brand new startup cable network and almost all these guys except for dick vital are like 23 to 26 yep so like the chris you know we all sort of like know of chris berman today you know you know i think bob lee was 23 yeah i think that's right. Young, you know, super young, hot shot broadcasting crew. Yep. They were absolute pros at identifying and nurturing talent.

Yep. So September 7th, 1979, they go live. And the first show that they have, they had talked about this before launching. They thought, you know, we're going to have sports. They decided to drop the entertainment. I don't know if that was the Rasmussen's or if that was when Chet Simmons came on board and they made this really, we're going to be 24-7, the world's first 24-7 cable network and first 24-7 sports destination. It's kind of amazing. They kept the E even though they decided before launch they were never going to be anything besides sports.

Besides sports. But they thought the linchpin to all of this would be they would do a half-hour highlights show at 6.30 p.m., kind of right in the middle of primetime, every day. They were going to do this every day. And they would recap the highlights and the scores of all the sporting events in the country throughout the day. Da-da-da, da-da-da. This was super innovative because the only way to get sports scores was if your

weatherman decided to read it on your local local tv channel or to open up the paper into the next morning and even opening up the paper next morning the paper went to print in the east coast before the west coast games were done so there was no way to get scores real time they thought this would be like kind of the linchpin to all of it. And they decided, oh yeah, it's like the center of the day. It's the Sports Center. And so when they launched at 6.30 p.m. on September 7th, 1979,

the first thing that went live was Sports Center. And it was beamed via satellite to 1.4 million U.S households on day one and the network has been going ever since lee leonard and george grand on for 30 minutes on for 30 minutes followed by by an incredible uh fast-paced action of a slow pitch softball game the teams of which were the oh shoot i probably didn't write down it was two other beer companies that the teams were that was their name oh no way it was not budweiser and so they got into a huge row with anheuser-busch which is just the very first broadcast 1.4 million dollars and then on the first broadcast i think then they had wrestling they had some

college soccer like it was a it was a long night following uh following sports center it was a hodgepodge yeah shall we say we will put this link in the show notes and we just tweeted out a link before recording this episode too with with just some sort of photographs the whole thing you have to watch this like first few minutes of the first sports center broadcast to understand how different it was than the sports center you know today yeah they say like welcome to the sports center and there's like a five to ten second video clip of like zooming in on some clouds and then there's like this weird slow pan to a guy in a studio who's sitting at the desk and it's like i think it's george grand yeah you're kind of whoa, you're like in an abandoned warehouse.

This is not, this is weird. This is, and it's all terribly colored. And, you know, it was 70s television. And apparently there was no air conditioning in the studio. But of course they have to wear suits. And of course they have to wear suits. And so people are just like sweating. Not to mention 70s suits being so stuffy.

Yeah, polyester. It was great. it was great it was great so from that you know especially this beginning um again on the back of this ncaa agreement march comes around of 1980 they start showing the tournament games and they had hired this guy former coach to be the announcer for most of the tournament games dick vital and it just like takes off people can't stop watching all around the country all this you know these exciting games in this single elimination tournament this great announcer gets super excited uh calling them and people start coining i don't know who actually who if it's attributable who first coined the term people start calling this march madness it didn't exist before 1980 when espn starts showing it and this

is a theme that i want to keep sort of listening for throughout the episode is is espn in the business of market capitalization or market creation when i first started looking into it i was like wow espn was like right on the crest of all these waves. Like, this is amazing. They got March Madness right as it was happening. They got, you know. No, they created March Madness. Yeah, later on, we'll get into Sunday Night Football and Monday Night Football. And actually what ESPN did was create a platform on which live sports entertainment could become the phenomenon that it is rather than sitting there and capturing the phenomenon that it is. Yep. I think it's worth a pause here. We've talked about this a little bit, but there were two real innovations that ESPN kind of had right off the bat. One that we alluded to is this concept of 24 hours. Like they were the first 24 hour television network. Obviously, Ted Turner was rebroadcasting the atlanta superstation but cnn

hadn't launched yet um and like what's crazy is like the the media business you got to think back to then like it was headquartered in new york and all anybody thought about was the east coast prime time uh so again this you know the sign off at 11 p.m eastern that's eight o'clock on the west coast it probably really benefited i mean i know bristol connecticut is not too far from new york but it really probably benefited them to be sort of out in the middle of nowhere and not caught up in sort of the group think of how do you run a media company in the city i think most of the a huge portion of the cable penetration at that point was in the middle of the country and on the west coast again where like the whole media industry and the broadcast industry hadn't built up as much

so that was one and then two they were like there were other you know sort of niche cable stations out there were lots of crazy things happening i feel like espn was the first really huge niche community that got built like and i mean niche in terms of like a hyper focus on one thing that like lots of people are passionate about not niche in terms of small you know because like the broadcast networks they did everything like nbc sports you know that was a small portion of what nbc did right um whereas espn was like just one thing and they started creating this community, you know, around it. So it's interesting, like the notion of like the internet as infinite shelf space or as sort of infinite pages in your newspaper, like cable was the first time we always make fun of

it. It's like, oh, there's only 50 cable stations. The internet has infinite, but like going from three to 50 was kind of, you know, you could, there were still some pretty big niches available for you to own. Yeah, totally. So on the back of this and the innovation they were driving around it, like March Madness and the like, they also got the NFL draft in April and they made the NFL draft a thing. Like it was never broadcast before ESPN and they were always trying to get into the NFL. And this was the first thing that they could get was the nfl throws him a bone like yeah you can't have any of our you know games certainly not the the super bowl but uh here take the draft take the draft right and they made it into like you know an appointment viewing an event and the clock and everything yep so a couple years later they're growing like gangbusters also don't forget't forget, in 83, they did have the USFL. That's right.

That's right. There was a period in time where there were a few leagues competing with the NFL in the US around this point. Yeah, and I think the AFL may have been a separate league and then got folded into the NFL and created the AFC and the NFC. There were one or two others as well. I think the USFL was around for three years. There were one or two others as well. I think the USFL was around for three years.

The ESPN got exclusive rights to it. They were like, oh my God, this is going to be huge. We're going to blow. And then ESPN has definitely had some, for as much as they've sort of bet correctly and created waves, they definitely have also had some that just sort of fell apart. Part of what happened, I think this is right.

So Chet Simmons, who had come in to replace bill as president from nbc sports after three years he left and he became commissioner of the usfl and i think that's what kind of got that relationship going but yeah despite that growth was great and a few years later they're in like 1982 at this point they're growing they're adding more cable operators that are carrying espn uh they're adding more advertisers but all this is costing money and of course they're covering more events that cost money they're at a point where they're burning eight million dollars a month in 1982 uh and getty three years after they start three years after they start yeah and getty is financing all of these losses because they own the business you know It's not like they're out raising money because they already own the business.

They're getting pretty nervous, though. They don't like this. And as we mentioned already, the family is starting to think about, hey, we might need to exit this whole thing. We're not actually sure why we did it in the first place. Well, this whole thing. And their oil business as well, which will come up in a sec. So in 1982, the Getty family sells a 10% stake in ESPN to ABC

to help offset some of these losses. It's like they're a broadcasting company. It kind of makes sense. They could be helpful here. Yeah, exactly. Help professionalize this thing. And Chet who had come from NBC had just left. So they do that.

Now, that was a pretty bad move i couldn't i don't remember exactly how much they sold it for it wasn't that much money and it came with the right for abc to buy a majority share later on kind of like the disney bam tech deal that we talked about earlier and what's probably season one or something but yep yep um yeah that was back in season one wow because right around that time espn comes up with a third super critical innovation and that is that they change the business model for cable so up until this point when espn first started and they were going out to all these local cable operators all throughout the country they were having to pitch them to carry this channel in their lineup and and for most of them they said yeah great like i'll carry it if you pay me so espn was actually paying uh most of

their operators to carry the channel and then you get sponsors to offset the cost that you have to pay for distribution distribution right right so a couple people at this point come in so so chet simmons leaves a new president comes in from cbs bill grimes so now espn has dna from nbc abc and cbs all in the executive ranks and another guy starts like right out of college a super young guy named george bodenheimer and he starts as a driver like literally he would drive to the hartford airport pick up all the talent that's coming back from like broadcasting these games all around the country bring them into the studio and espn and he kind of gets to know everybody and he quickly moves into affiliate

relationships so now he's going out flying around the country and talking to these cable operators. And he starts to realize like, hey, ESPN is like the customers of these cable operators. They love it. They can't get enough. If they didn't have it, they would revolt. What if we flip the script on these cable operators and we say, yeah, I know we've been paying you, but now you've got to pay us. And if you don't pay us, we'll pull the signal from you. And so this happens a couple times. This has happened in a few instrumental moments

in businesses in history where they realize, wait a minute, we're actually doing them more of a favor than they're doing us. And you can actually successfully reverse the flow of money. We cannot overstate how important this was to espn and to the entire cable network industry all the cable industry this completely changes everything so much so that george bodenheimer years later in the 90s under disney after disney acquires what espn would become, he becomes the president of ESPN. Pretty good idea, I guess. Yeah, pretty good idea.

So they pull the plug on a couple stations and exactly that happens. All the subscribers of these cable distributors, they start revolting, they start picketing, they start showing up at the offices, demanding ESPN back. So basically, if we want to take this to business school, basically what happened is

the end customer developed a stronger relationship with a supplier to the cable provider than the cable provider itself. And they were provider agnostic and would go wherever that supplier was. And so if you're the cable networks, is there anything you could have done to prevent this? You mean the cable distributors? Yeah. Yeah. Is there anything you could have done to prevent this sort of disintermediation of you where you become a commodity and the real value is content? And really the question is here, there's two ways to create a ton of value. Own the linchpin of content or own the linchpin of distribution. And I suppose they needed to maintain a monopoly on distribution in order to secure that they would be the only game in town to have access

to that content. And as soon as they became commoditized and what people viewed as unique was the content they were going to get, you know. I think this was probably inevitable. I mean, the same thing played out with the internet, right? Like in the first boom of the internet, remember telecom companies were so highly valued and like ISPs and all that, and they controlled distribution and blah, blah, blah. And AOL was this integrated provider. They were an highly valued and like isps and all that and they controlled distribution and blah blah blah and aol was this integrated provider they were an isp and content company but you know fast forward to today and like netflix google you know what facebook what have you are exponentially more valuable than comcast you know whoever's providing the pipes verizon or whomever to to the home or to for wireless so yeah this is pretty big the first big deal that espn does with a very large cable

provider where the cable provider pays them was with cable vision the dolans the dolan family in long island who went on to own the cleveland indians yeah and the new york knicks and many other uh and madison square garden anyway but mostly the cleveland indians um they do a deal where cable vision is now going to pay espn 10 cents per subscriber for every cable vision subscriber and that's the dawn of the affiliate fee era. Beginning ESPN's real behemoth business model. And that becomes two-thirds of ESPN's revenue over time. Shortly after this, by 1983, ESPN has now become the biggest cable network in the US. And not just the biggest, but the only one that's making money from the cable providers in addition to advertising in january 1984 we

mentioned the getty family woes they end up selling the whole thing getty oil to texaco for 10 billion dollars and texaco of course is this huge oil conglomerate they're not a family run business and they like you guys have all that, there's all this stuff that comes with getting oil. We got to get rid of this thing. So turns out there was a guy on Texaco's board named Tom Murphy. And Tom Murphy was the president of a little company called Capital Cities. Ben, what was Capital Cities? Boy, so Capital Cities, it is worth winding back the clock to understand what Capital Cities is and just what an incredible business story this is. So Capital Cities started with Tom Murphy in 1954 when he was recruited to run a struggling TV station called WTEN in Albany, New York after graduating from Harvard Business School.

So Murphy was a lien operator, and he was able to get the station to profitability by 1957. So just a few years after taking over, it's sort of new ownership, he's new management. They lien it out and make it profitable. So he and the owner, Frank Smith, then decided to buy two more stations over the next couple of years in Raleigh, North Carolina, and Providence, Rhode Island,

and Capital Cities Broadcasting was born. So, you know. Is it capital of these states? Like, is that the? I think so. I mean, Providence, I think is. Albany definitely is. I think Raleigh is. Yeah, I don't know. Yeah. Interesting. I always wondered where like the capital came from. Yeah. So Murphy, of course, you course, he's got responsibilities across capital cities. He needs to get out of running this Albany station. So he needs to hire someone to do that. He hires Dan Burke, who's another HBS grad. Also no broadcast experience, but really clear, linear thinker.

Trusts him. I think it's an intro from one of their brothers or something like that. So hires him to run that station. So from this day forward, the DNA of Capital Cities was set. They were completely like bottom line driven, super lean, and they were very decentralized. So what was important was that if you think about sort of the Berkshire Hathaway style of management, where I can have a big, you know, central staff. We trust the managers to run their businesses. Tom and everybody, they're just like,

you guys run the stations. We're allocating capital here. Exactly. Exactly. So Murphy and Burke were a fantastic duo over the next several years with Murphy, who became CEO as kind of the master strategist and the capital allocator, and Burke, who was the COO, the lean mean operator, sort of this dream team of executives. So throughout the 70s, and through sort of the mid 80s, they operated a super calculated strategy of expanding across local TV stations, some newspapers, and in this new cable medium, buying some cable stations all across the country. Cable distributors, right? So they're starting to buy up. Yeah, that's right. Yeah, it was distributors of the they're they're they're starting to buy up yeah that's right

yeah it was distributors of the you know of the much smaller than cable vision but the types of folks that you know espn is a network is then going out and doing these affiliate agreements with exactly exactly and another sort of tenant here is they only expanded within their media and publishing vertical while others in the industry like cbs were embracing sort of an 80s era conglomerate mentality really hard they They were buying minor league baseball teams, they were taking limos around town, you know. Just wait till we get to RJR Nabisco. Capital Cities, their playbook was extremely simple. They would buy a station, they would operate it leanly and profitably, so they would get some great cash flow from it.

Then, you know, with those nice cash flows on the their ability to show those cash flows they would raise some debt capital at favorable terms then they would go buy another station then they would quickly pay down that debt that they used and then they would expand lather rinse repeat to dozens and dozens and dozens across the the u.s and you know they weren't big on pr they weren't like people still don't really know the name Capital Cities. It was kind of this like almost sleeping giant of just really well executed, disciplined business all the responsibility and authority to perform their jobs. David, is this where I can take us through, in January of 1986, they made one very unconventional acquisition. Well, before we get to that, so we just mentioned, you know, Texco had just bought Getty. And Tom Murphy, you know, the CEO of Capital Cities is on the Texco board. So Bill Grimes, you know, the new president of ESPN who'd come from CBS, he figures all this out.

And so he's like, all right, you know, he's worried about his job. He's worried about ESPN. What's going to happen to it as part of Texaco? Yep. He goes to see Tom and he says, you know, Tom's based in New England, just like him. He says, hey, you should buy ESPN. You know, you're on the board of Texco. Like, you know, like they don't want this.

They want to get rid of it. You should buy ESPN. It's a natural fit. We're the best cable network out there. You own cable distributors. You own all this stuff. Keep it decentralized. Do all this.

Tom says, you know, that's a great idea. I just can't do it right now. I'm working on something bigger. And this is a trademark Tom Murphy thing where he would know exactly what price he wanted to pay for something. He would know exactly how operationally efficient he could run it afterwards and he wouldn't pay a dollar more. So it was one of those things where he would look at it and then it was just obvious to him. Nope, sorry. It looks great, but no, not right now. So, but he has this master plan. He's working on something bigger to come in one sec,

but he's on the board of Texaco. Texaco starts a bidding process for ESPN. They're divesting the company. There are two main parties who are interested in buying it. One is Ted Turner down in Atlanta. I think CNN has launched at this point. So he's like the canonical cable entrepreneur. It turned out it wasn't Atlanta Sports

that people wanted to watch nationwide, but it was a cable news network. And so he sees ESPN. ESPN's bigger. And in fact, the 24-hour aspect of CNN was copied from ESPN. And so he's like, great, I want to own ESPN. He's putting together bids.

The other interested party is ABC. ABCc they already have this 10 stake that they owned in the espn an option for more so the first thing they do they buy five percent more from getty and texaco so they get up to a 15 stake i'm not sure why they did that or how much they pay for it but they do that bidding's going back and forth between them and turner uh again, remember, Tom Murphy's on the board of Texaco. Somehow, ABC ends up winning the deal. Now, they probably would have anyway, because they already own 15% of the company and had the inside track.

Anyway, they buy the remaining 85% that they don't own of ESPN from Texaco, Getty, and the Rasmussen still owned their original original 15 they buy it all out they now own 100 of espn which i think is the first and last time that somebody owned 100 yeah well the first time was when the rasmussen started it yeah and then this is now the only moment in history where espn is wholly owned by abc they pay 188 million dollars for the 85 that they don't own and remember it was valued at like 18 million dollars when getty sort of first bought it and of course put a ton of cash into it along the way hey 10x we'll take it it's like um the tencent episode yeah 10x i'll hit that

bid yeah again for like the reasons that are completely unknown and just terrible decision for some reason abc remember tom murphy has no control over abc at this point they turn around immediately and they resell 20 of espn to rjr nabisco i thought it was hearst no no no hearst then buys it from Nabisco. This is crazy. This is nuts. This is where... Can you elaborate on the RJR part of Nabisco?

Yeah, okay. So Nabisco, people probably, at least our US listeners probably know Nabisco. They think it's like cookies and crackers. And it's a CPG company. It's like Procter & Gamble or whatever. They had merged with RJ Reynolds. Whatnolds what's rj reynolds sounds innocuous turns out rj reynolds is a tobacco company camels winston's salems they recorded in winston salem all it's the biggest u.s cigarette company and at the time cigarettes

were you know a big thing uh and they would become embroiled in all sorts of lawsuits but because you know they had uh of course their cpg products to sell but mostly these cigarettes that they're trying to pump out to the u.s they had all of these spokespeople who were professional athletes oh my god and in particular one of their strongest channels for advertising cigarettes was NASCAR and professional racing. And ESPN had really put NASCAR on the map. So NASCAR was one of these kind of backwater sports that ESPN, as they were starting, like they needed content. They really kind of elevated. And so Nabisco, RJR Nabisco was super interested in espn had this thought they

would have this great synergistic relationship they end up buying buying this 20 percent stake from abc it was something like abc did that to like free up cash like they wanted cash for some reason yeah i'm not sure why they did it i mean it was terrible idea on so many levels so now and tom murphy meanwhile must have been just like just watching this palming watching all of this because his grand plan soon gets revealed yeah so in january of 86 this is their uh you know they made a series of very conventional small acquisitions that you know were in total something to write home about but individually nothing to write home about this is very different so with the help help of some financing from Warren Buffett, who

sort of identifies the twinkle of a soul in another in Tom Murphy. Very simpatico. Yes, yes. Invests both debt and equity. And Capital Cities executes a $3.5 billion purchase of ABC and all their related broadcast assets in New York, Chicago, and LA. The Wall Street Journal runs the headline the next morning, Minnow Swallows Whale. And this is in the beginning of 1985. So like, you know, months after all of this went down with ESPN and ABC and Nabisco. So why would they even need to raise the debt capital to do this?

Capital Cities itself was not even worth $3.5 billion at the time. So even if they sold every single share in their company to buy ABC, they would not have been able to raise enough money. And in fact, this purchase was the largest non-oil and gas transaction in business history to this point, which is like we know we're watching whatsapp get picked up for for 20 bill like this three and a half billion dollars completely unheard of outside of oil and gas completely unheard of so just to to kind of close the loop

here in capital cities murphy and burke had the track record to show that they could run this same playbook and bring in you know their the operating margins that they were used to of over 50 percent with all the capital cities properties to abc which was currently in the low 30s and so indeed they did this they generated a ton of cash and they were able to pay back all that debt in less than three years which was earlier than expected and so three years out suddenly like you know capital cities is not you know under all this debt anymore they're it's looking really good and remember abc again which had just acquired espn yep abc broadcasting they only made revenue from advertising they weren't

getting these affiliate fees from the cable operators espn, they're getting to the importance of operating margins. That's the real jewel of this acquisition. Yeah, that's the jewel. They're getting, as we said, affiliate fees become twice as big as advertising for ESPN over time. It's so much a better business. Yep. So of course, Capital Cities takes the name of ABC because they own it. It's an unbelievable brand. It was really much more of a sort of reverse acquisition for ABC. So their culture, product, headcount, balance sheet, everything looked much more like Capital Cities than it ever did ABC,

even though the company is sort of called ABC now. So crazy aside, before finishing this up, Dan Burke's son, Steve Burke, also rose to prominence through Disney and then through the media industry. He's now, in 2019, the current CEO of NBC Universal. I know. It's a total dynasty. Crazy.

It's worth noting. So a decade later, well, actually, I'll come back to this as we dip into Disney here a little bit. Well, so, okay. So that transaction gets done with Capital City's minnow swallowing the whale of ABC in March of 1985 immediately remember nevisco like they're trying to pump out these cigarettes uh they go see tom murphy and say oh hey you know you really wanted abc right you didn't want this espn thing

let us just buy it all out from you we'll pay pay you $500 million for it. And actually, that probably was really hard to turn down for Tom and Capital Cities because they just raised all this debt to buy ABC. Nabisco thinks they're going to get it. But Tom is smarter than that. And he says, thank you very much for your offer. I am going to turn it down. But that's pretty incredible. Nabisco is willing to pay 500 million dollars for ESPN I think it was valuing it at 500 million dollars and what's the time frame from when this was 1985 and it was just before in 1984 when ABC had bought it for 188 million dollars for 85 percent wow so know, people are starting to realize the value in this thing.

1986 was a huge year for ESPN on the business side. Together now with ABC, all under one house, they get ABC and ESPN together under Capital Cities, they get NFL rights for the first time. Boom. Boom. and this is ben as you were alluding to sunday night football monday night football uh it becomes huge and not only that the business innovation at espn like we can't overstate how important it was they've

already started extracting fees from cable operators they had to pay a ton of money to get the nfl rights the nfl of course knows how knew how valuable this was um but it was nowhere near sort of the crazy prices that it is that is today but still for for the time i mean it was a lot of money what does espn do they go back to their cable operators and they say hey we just acquired these rights this is gonna be you know espn was already super valuable now it's gonna be astronomically valuable but it cost us a lot of money to do this we're actually going to you know the amount that we paid for these rights we're going to push it down to you and we're going to increase your affiliate fees commensurately to

offset 100 of the cost that we're paying for these rights and there's of course nothing that those cable affiliates can do and there's a whole big showdown and again a couple of them say like we're not doing that. We walk. And within weeks, their subscribers are calling them up. They're petitioning. They're canceling. Like they have no leverage.

And to give you a sense, it's been sort of climbing. I think originally we talked about it being 10 cents. 2013, it rises to like five bucks. I think it may have risen to somewhere in sort of the $8 range. Like it's really, over time, it really grows. Yeah. And on the back of it, I mean, to give you a sense, that is, you know, by this time,

they are over five, the carriage fees, the per subscriber fees that cable operators are paying ESPN is over five times any other channel out there. CNN, what have you, you know, A A&E, all these other cable channels. ESPN just dwarfs all of them. Yeah, ESPN is the thing people watch on cable and ESPN knows it. Yeah. All right, listeners.

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If you are familiar with the Warren Buffett type of history, not Warren himself, but private equity and leveraged buyouts, you might know a little bit about the most infamous deal that the firm KKR ever did, which was in 1989. They do the largest LBO in history, leveraged buyout in history. They acquire RJR Nabisco for $24.5 billion. And this becomes the subject of the book barbarians at the gate classic classic book also got made into a movie um we should note here too a lot of the history that we're taking for espn comes from a great book those guys have all the fun um focus is really more on kind of the cultural history of espn but it's just such so great like oral histories and

interviews with everyone has a bunch of the business history too so nabisco gets acquired by kkr they take out an insane amount of debt to finance this thing like absolutely insane they start selling off assets to start paying down the debt and uh one of the things that they sell off is their 20 stake at this point in espn that they sell to the hearst corporation uh for 175 million dollars wow oh my gosh first got a deal people just like especially these these non-media businesses that owned parts of espn they just do not understand the value well it shows a lot of that timing dictates so much in the price that these things get sold for it's sort of like when you buy a house and suddenly like you must get rid of your house you can't wait around for the best offer like you're now a seller not a not a um you know it's not like you're not raising

right now yeah you are very actively raising right now that's that's not a good place to be so hearst still to this day owns 20 of ESPN and have been repaid on their investment many hundreds of times over. Can we talk about that? Like we're about to get to this Disney thing, but like in everybody's head, like Disney owns ESPN. Disney owns 80% of ESPN.

They operate ESPN, but Hearst still owns 20% of the freaking business. It's crazy. Hearst does, they don't do anything. They're a minority shareholder. So Disney operates it. The P&L flows through to Hearst, but Hearst,, they don't do anything. They're a minority shareholder. So Disney operates it. The P&L flows through to Hearst. But Hearst, of course, the William Randolph Hearst organization,

the publishing magnet, subject of the movie Citizen Kane. There's other things within the Hearst Corporation now, Condé Nast and the likes of that. But their 20% stake in ESPN is all of of it basically all the value there um it's totally crazy especially and this is the price of this deal like by the late 80s early 90s like espn is is espn at this point we're talking dan patrick and keith olbermann on sports center stuart scott like booyah you know you got rich eisen and katie main and Linda Cohn. It is a cultural icon. It's what you leave on in the living room while you're making breakfast.

Totally, or 24-7. In my house growing up, it was literally like ESPN was on all day, every day. You and 40 to 50 other million Americans. I know, it was awesome. 1994, they hire the famed ad agency wyden kennedy that of course always done uh nike to do the this is sports center commercials oh my god so good the best one ever i think is the lance armstrong cycling in the basement yes yes or lebron's uh lebron's throne yeah yeah yeah it's like i can't

it's like stewart scott or someone walks uh uh or lebron tries to walk back to his cube in uh in bristol and he sort of looks and uh his chair is not there and he looks in the cube next to him and i think it's like stewart scott is sitting in a throne at his desk and stewart turns around and he's like, oh, sorry, is this your chair? So, so good. I mean, those guys, like, go read Those Guys Have All the Fun, the book, because it really gets into all this. But, you know, just every the popular culture, like you can't you cannot understate the impact of, you know, Stuart Scott and cool is the other side of the pillow and booyah. And just like it changed everything yep uh everything um so anyway espn is crushing it through the early 90s and then in the summer of 1995 our friend mr buffett makes another reappearance he does and he uh he suggests

to tom murphy that he should get together with michael eisner who's the ceo of disney this is at the allen and company when they're when they're both in sun valley at the allen and company uh gathering yep of uh media and now technology uh 100 millionaires and billionaires this is amazing kind of how fast this deal got done so in a matter of days they had worked out the terms and Disney buys... Of course, because Berkshire Hathaway is still a large investor in capital cities at this point. Disney buys ABC, which contains capital cities or is capital cities and contains ESPN for $19 billion, which represents 13x cash flow and 28x net income. Yeah. And was at the time,

the third largest acquisition ever of course the rjr nabisco buyout had happened um a few years before that was the largest and goes oh well but third largest deal ever and of course the cable network division of uh of abc capital cities is the jewel uh at this point and of which all of that is espn yeah i i think it's something like of that 19 billion i think it was something like 4 billion alone is attributable to espn it may have been it may have even been more than that i mean hard to say exactly whatever it was by the kind of mid 2000s the, the cable network division within Disney, which does include the Disney Channel

and some other things, but ESPN is 90 plus percent of it or whatever, that is driving over half, over 50% of all the operating profit for the Walt Disney Company. Like theme parks, movies, everything, merchandise, all of it, ESPN is over half of the profit. Yeah. And if we really want to fast forward and, you know, I think the modern

era of ESPN is a very, it's a different story that we should tell in its own right, but a quick snapshot. So there was an analyst estimate from an investment bank in 2015 that ESPN alone was worth $50 billion. Yeah. Crazy. I mean, really, you know, it's funny, we did our back in season one, our Disney trilogy, which was great. And there certainly are more, more episodes we'll have to do to add on to that in the future. But this is like, this is the foundation of it all. Like, of course, Disney was a great company before the ABC Capital Cities deal. But like, if you look at just pure value creation within Disney, like, you know, Lucasfilm, Pixar, Marvel, whatever they've done, you know, in the past, like, these are peanuts

compared to ESPN. Mm hmm. So one really interesting way to reflect back on this is a phenomenal book called The Outsiders, which is about unconventional CEOs who sort of defied what other people were doing at the time in their industry and ran their business a different way. And the first chapter is about capital cities. So super instrumental to the research for this episode, had this great comment to give the rise of capital cities some context. If you had invested a dollar with Tom Murphy when he became CEO in 1966, that dollar would be worth $204 at the time he sold to Disney. That's a remarkable 19.9% IRR over the 29 years,

which significantly outpaced the S&P 500 10.1%. I mean, just continuous, maniacal, ludicrous growth. Well, you see why Warren Buffett likes him. We're going to wrap up History and Facts on this episode here. Ben, as I think you alluded to, at some point, there is another

major acquisition in the story here that happens in the 90s or 2000s we'll have to do the work um of a company called star wave actually here in seattle yeah like a mile from where we're sitting yeah which uh becomes we're doing an in-person episode today uh which is awesome that becomes the backbone of all the digital assets of vspn.com fantasy what would become the apps you know bill simmons podcast Bill Simmons, podcasting, all that. That'll be a super fun one for another day.

But we won't get into that here. Acquisition category for this. Okay, so which acquisition are we categorizing? I suppose it's a business line in basically every case. Yeah. Because there's not that much integration that really happens here in any of these things. It's not like they're integrating a product

into their sales channel. They're, of course, buying, like ESPN just had an insane amount of talent. One of their differentiators where they were an amazing sort of magnet and talent development pipeline. But like a lot of these times where we talk about plugging in a product

to improve your flywheel effects, there's that to some degree. And in fact, Disney talked about, Michael Eisner at the time of this big acquisition was doing the press circuit and talking about how espn was a brand upon which they could could apply disney's resources and really fuel that brand to be other things that was less successful i think than like they espn zone and all these different espn the magazine was fine um but like the core business is still really the carriage fees.

But ESPN didn't need Disney to do a magazine. Right. And it's not like, you know, prominent ESPN things in the theme parks are driving a material piece of it. So to me, it was an amazing business line that with sort of the right continued management and access to capital and could kind of keep growing on its own. And the business line itself just kept getting bought. Yeah. And even going back to the original Getty Oil investment, like that's what it was. It was diversifying out of oil. It was a business line. Like they weren't going to integrate that into the oil company. And for folks new to the show, we have categories for this. People, technology, product, business line, asset, consolidation,

or other. And that's sort of grown over time. The way that we differentiate between product and business line is, you know, if, if a product would be Facebook buying Instagram and then plugging it into their existing business, this, this is sort of, this is not that this is its own business. Yeah. Our next section that we do is what would have happened otherwise. I was also struggling to think about this but i actually think the to me the interesting story here is not what would have happened otherwise it's like what should have happened otherwise but didn't like you know nabisco like cigarettes like all that like there were so many things along the way like getting oil like any other business that hadn't captured such huge waves

and brought such huge innovations to the industry would have been capsized by all these machinations like getty texico rjr nevisco like abc before capital cities like the management and ownership stewardship of this company was terrible yet it survived and thrived i think just because the wave it was running was so powerful you knowved i think just because the wave it was running was so powerful you know yeah i would say often really what it was was amazing management under questionable ownership unfortunately a lot of the time that ownership was minority so they could sort of continue to run the business or at least acted like minority even when they were majority yeah yeah so i think uh it's almost like it really threaded the needle on managing to realize its true potential without anything disastrous happening.

Yeah. Yeah. You know, again, these huge innovations, you know, 24 hours, like community, like especially around SportsCenter and, you know, and the affiliate fee business model. Like these are these are huge innovations. Yep. Tech themes? Yeah. So my first one is a point that was made in The Outsiders. There are studies, and this kind of, I think, happens over and over again, that show that two-thirds of acquisitions destroy value. And of course, that's why we are doing this show, because we thought it'd be fun to cover ones that managed to not and figure out how did they manage to not destroy value. Capital Cities, over and over again, was masterful at it. So I was trying to sort of tease out what made them so good. So Murphy was able to acquire companies with confidence because the first piece is the business was already so

decentralized that whenever they would acquire a company, integration would be easier because there wasn't significant integration to do. They really sort of like installed the right managers and sort of trusted them to run it. And number two was they were so efficient at growing margins in their own business and knew that sort of their playbook could do that, that they could effectively lower the acquisition price because they knew that they could accelerate payback. And so when they could bid higher than someone else, and of course, they didn't really end up buying a lot at auctions, but when they did identify something than someone else, and of course, they didn't really end up buying a lot at auctions. But when they did identify something they wanted and they'd go after it, they knew exactly what their price could be because they knew exactly what the resulting cash flows would be five years out or at least could do pretty effective forecasting.

So they were able to get conviction in acquiring these assets. So I just thought that was worth mentioning. People often ask David and I, like, so what have you guys learned from the show? Like, what are the things that make a technology acquisition successful? And this is one where in this particular type of business model, in this media business,

running this combination of decentralized and lean really did allow them to efficiently make acquisitions that were very likely to be successful. Yeah, it's been fun learning about, uh, capital cities and learning from learning from you, Ben did most of the research on it. It's not a story that's oft told, you know, uh, Tom Murphy is, you know, nobody knows Tom Murphy, like everybody knows Warren Buffett. Um, but, uh, you can just learn so much from how these, how these people have, have allocated capital and operated. Yep. You know, my big one,

my big learning from this is uh in a lot of ways this is obvious but hadn't really quite crystallized for me until this episode that like to often to get a like huge huge generation defining company which espn absolutely is like i put it in the same category as google or facebook or ten center alibaba or whatever it just wasn't an independent entity this combination of like you have to both ride a huge you know technology wave uh in this case the technology wave was uh cable but you also if you can marry that with a business model innovation like that's how you can become just so incredibly dominant. You know, in ESPN's case, like literally 5x bigger than any other cable network.

I think you talked about this a bunch on the LP show, like really digging into what is the appropriate and sort of the highest form of perfection of business model for a given medium. And can you really exploit that new piece of technology with the appropriate business model to sort of, you know, flank an industry from the side instead of ever needing to attack anyone head on? Totally. And I think about like, Tencent did this equally as well, right? Like, you know, they ride the wave of PC usage, and then mobile, you know, usage and penetration in China. And they marry that to a huge business model innovation with the freemium business model. And no one can touch them, you know, except maybe ByteDance. That's my big one. Well, I had just to revisit one that we mentioned earlier. I think it is interesting reflecting back on what activities did ESPN perform that were sort of market capitalizing, effectively wave riding, and what ones did they do that were market creating? I think they mostly are in the

business of market creation. And I think that this even continued after, like far after where this episode ends, sort of with fantasy football being the driver of why people like the NFL. I think ESPN has actually done a lot of work in creating why the NFL is a platform for American social activity. And I think... Just like they did with March Madness and NASCAR and so many others.

Yep, yeah. You can almost think of them as a platform company in the way that sort of Microsoft created a platform on which other people could make more money than Microsoft itself made in total. I think that's probably the case with ESPN too. They were just sort of an unlock for creating a ton of value in the ecosystem. Yeah, totally.

And then lastly, it's interesting to just reflect on the media industry and sort of there's content and there's distribution. And ESPN has always been content. And reflecting back on the Kara Swisher episode, many people have tried throughout the years, including is a, again, a foreshadow, but pull off of Netflix and pull off all these streaming services and introduce Disney Plus. And I think it's, it's interesting to just look at this, but then make the money from getting other people to distribute it for them. Yeah, yeah. Talk about differentiated content. Yeah. Well, and, you know, another thing we haven't talked about here that probably wasn't as important in the time period of history where we're focusing on ESPN here,

but it's critical now is the live component especially as you know everything has transitioned over the last few years to streaming and whatnot like what is the most only really remaining defensible piece of traditional television type programming it's live and what is the most live compelling live programming it's sports yep yep you want to grade it let's do it what are we we're grading i think we should grade the disney acquisition of capital cities but it's worth talking about the others too so i think the disney acquisition of capital cities was an a or an a plus or something and we can talk about that the capital cities acquisition of abc is whatever whatever we decide for disney is

the same thing for capital cities acquiring abc because really like it's was it a good idea long term to own espn for a much more nominal price than the super high value that it's worth today was yes in both cases the abc acquisition of espn that's just like no no doubt a plus right right uh whatever enterprise value of 200 and some odd million that they paid for it yeah and then the only people that i suppose it may not be an a plus four or an a4 or whatever is uh is getty when they sort of acquired it from the rasmussens hey 10x it was a 10x they did have to pour a lot of money into it over time getty i think the yeah the it's almost like you can you can bucket out the winners and losers here or like the the winners the big winners and the not so big winners getty in the not so big winner texico for sure they were like barely even played at the table uh nabisco

loser hearst hearst might be the biggest winner of all they didn't have to do anything uh paid 175 million for 20 of the company i wonder if hearst's market cap are they publicly they're not a public company if they were a public company i wonder if their market cap would be lower than their share yeah you have like a naspers situation with tencent yeah discounted because you can't get it liquid. Yeah, yeah. I'm sure it would be. But yeah, Hearst is still a private family-owned company.

Is ESPN too expensive now with not enough perceived headroom for where it could grow for anyone to want to buy it from Hearst? Could be, yeah. Why wouldn't Disney want to buy it? But it doesn't matter, right like they've been getting cash flow distributions for decades you know yeah but that is a good question like would anybody

want to buy that from hearst right now i don't know yeah all right where are you on uh disney acquiring abc slash capital cities containing espn well i, no doubt it's an A, right? Like, even without the exact numbers at my fingertips, if half of your operating income as an entire company is coming from ESPN, you know, within a decade of the acquisition, no matter what you paid for it, and at 19 billion, I forget what Disney's market cap was at the time, whatever it was. Anyway, I would say with plenty of fudge factor based on what these numbers were that we don't have at our fingertips i'm fairly confident it was an a yeah it is worth noting the contrast to like uh our sort of two

biggest a pluses of all time or maybe three are next reverse acquiring apple yep uh facebook acquiring instagram instagram and uh booking uh price line acquiring book price line acquiring booking yep and this is different than next in that it was not company saving like disney would have been fine yeah right but nowhere near what they are right so you know if we're like reserving the pluses for company saving or something it wasn't that yeah i agree i'm not a plus i'm an a it's an a because they still paid 19 billion dollars for So if we're reserving the pluses for company saving or something, it wasn't that. Yeah, I agree. I'm not a plus. I'm an A.

That's an A. Because they still paid $19 billion for it. It's not like... Right. I mean, yeah. Yeah. It's not like they invested when... This isn't like Tencent here. Right.

And let's even say half. So in 95, they paid, call it $10 billion-ish for ESPN, just kind of as a conservative thing. And today, or in, I won't say peak. In the late 2000s, it was $50 billion. Like, it's a 5x over a decade. It's great. And it's...

But that's value. They also have been getting tons of cash flow from it over those years. So yeah, I think it's definitely an A. Owning ESPN's an A. For sure. For sure. Now, when we talk about Starwave and ESPN going forward, next time, we can't promise it will be actually next time,

but at some point in the future on Acquired. Yeah, we should do it. Carve outs. Carve outs. I have an incredibly appropriate one. So there is a very cool podcast that has been started by the folks at GeekWire in addition to their regular podcast podcast uh called numbers geek and uh todd bishop the

co-founder of geekwire uh friend of the show todd bishop indeed and and uh you know a special guest on the push pops exactly press episode boy that was early on his co-host or maybe his featured guest every time is steve balmer and steve uhmer, of course, the former CEO of Microsoft, owner of the LA Clippers, now he's used sort of his private family wealth to release USA facts. So really diving into making it easy to understand sort of the important numbers about the US, both in government spending, but across a lot of important issues. So they do this great podcast called Numbers Geek. The most recent episode was fascinating.

It was called the Basketball Box Score Mystery. Todd presented Steve with a stat sheet, very, very detailed stat sheet from a basketball game, a famous basketball game, and obfuscated the names of all the players and the names of the teams. And he said, Steve, analyze this and give me your best guess at what two teams were playing what this game was and who each of these players were on the stat lines and it's really fun because uh you know balmer's such a uh basketball geek and has been for a long time long before buying the clippers to sort of have him sort of try and analyze and understand everything from, oh, I bet this player was injured and this other player was taking some of his

minutes because he was injured. I think this might've been a playoff game. So it's a really cool. And as I was thinking about this episode, you know, just a great tie in with ESPN. My carve out, I'm going to have to listen to that that sounds awesome yeah it's cool um my carve out is uh also near and dear to the show and and our community's heart is a great great long piece that fast company just released on softbank and masa and his ambitions and where the vision fund and softbank and we work and everything goes from here by Katrina Brooker and championed by editor and huge supporter of Acquire, David Lidsky. So thank you so much for all your support.

Yeah, David is, I mentioned the Slack earlier. David is like an awesome, awesome member in the Slack. So great. And this piece is really, really good. I wish it had been out when we did our episode on the vision fund um but so the my favorite moment is this image of when soft bank uh corporate acquired arm uh which we'll have to do an episode on someday oh yeah and the deal getting done in the turkish mediterranean in an empty restaurant that Masa had bought out and then like helicoptered in all the principals from our league. Amazing. Why not? Amazing.

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