Acquired - ESPN

0:00In a 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.

0:33ESPN. 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 as gone to sports heaven. It was obligatory. For a long time, listen to the show, you know, that we cover, you know, typically one acquisition and that we talk about it and we grade it and we were pre-standard format.

1:03This 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.

1:21Just one year later, in a surprising turn of events, the smaller capital city's broadcast incorporation, incredibly bought ABC, took its name and got ESPN along with it. And then finally, in 1996, 95, 96, there was a $19 billion buyout of ABC, by the one and only Disney. And a little teaser, the capital city's acquisition hell will help on the way.

1:49from a certain oracle in Omaha. Indeed. And we'll get into. Excited to dive into that. So as David was pointing out to me when I was sort of teeing up, how should we introduce this? The through line and the most important part of all of these acquisitions that each included ESPN was ESPN itself. And so much so that by 2006, a UBS estimate was that ESPN alone was worth 40% of Disney's total value. Yeah.

2:16I love the UBS estimate, man. That was like, that was right before I joined UBS. Oh, well, it could. It definitely wasn't accurate. That's it. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. David Rosenthal. What 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 areas are a whole another story that that will need to tell at some point. But this era of ESPN and it's sort of rise to, uh, 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.

2:56We 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 kimberlight.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 it's 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 touch out with folks in there has been really cool. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, LaGora.

3:44the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus.

4:13They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love like tabular review where you...

4:26drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lugora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

4:45And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1,000,000 to 100 million in ARR in about 18 months. Truly insane numbers. And that is the real test.

5:38Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. David, how are you feeling about the history and facts on this one? Ben, I'm cool as the other side of the pillow.

6:08I'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 the 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 life-long 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.

7:20And then in 1974, he becomes the communications director at the Hartford Whalers hockey team. His real auspicious beginnings here. The Hartford Whalers at the time, their big star was Gordy 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. It also going well until Memorial Day weekend, 1978, when Bill gets a call.

7:48from the Hartford Whalers that he's being fired as communications director. And then gets another call from Gordy, from Gordy's wife actually saying, yeah, and we're firing you from the family as well. Rough day, rough day.

8:03I 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 Hartford 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 gonna team up, figure out what's next. So the first call they place is to a local guy, they're in Hartford's Inn.

8:32Connecticut, right? Yeah, they're in Connecticut. Local guy in Connecticut, who is an insurance agent named Ed Egan, he's working for Edna. This leads to ESPN, we promise. And Ed. This went from like the most exciting episode ever, to like the strangest, most more exciting episode.

8:50we promised 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. I used to be able to.

9:19And, but Ed is undaunted. They chat and they decide like, okay, well, we're not going to get the whalers, but there's still pretty interesting people care about local sports. We can show Connecticut sports. We probably just need some stuff to 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.

9:44it's going to be the entertainment and sports programming company, ESP. Like, what could it look like? 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. ESP. So they incorporate the company, the entertainment and sports programming company on July 14th, 1978. And so we're taking a step back here. I mentioned earlier that cable is kind of the...

10:11It'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 U.S. households have cable. The big over-the-air terrestrial broadcasting companies, you know, NBC, ABC, CBS, they're still what people think of when they think of television. UHF, VHF, over the other ways. Yeah, 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 in rural parts of the US where the terrestrial broadcast signals didn't reach which which is amazing in its own right to think about gosh we can't reach this over the air wave so we will run a cable we're literally going to run a cable there and so 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 what I think

11:06It 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 team mobile episode. By this time by the late 70s, people had started to realize, there's something slightly more interesting here than just rebroadcasting the big three.

11:26stations, like this, what's cool about cables, it's not regulated. So like over the air broadcasting. That is cool. Yeah, that like, it's kind of like the internet, you know, you know, you can, ABC, NBC, 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. But cables, the Wild West.

11:46And so HBO 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.

12:10the Atlanta Braves, baseball team, we're gonna show Braves games to everybody, it's gonna be great. So people are experimenting. It's against the backdrop of all this, that the Rasmussen's and Egan, they're digging in. And they hear about this new kind of sustaining technology, if you will, in Clay Christians in terms that's coming along for the cable industry, called Satellite Transmission.

12:34And it's supposed to be this like great new thing. They don't they've 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 in the space for video transmission. So they're asking me since 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 to sell satellite space nobody's bought it yet so like oh great we got a customer great we can tell you that what what do you guys you know you ESP guys what do you what do you want to show you must be you know traditional media folks like you know about this uh we assume there would be this mad rush of all these media people that wanted to use them so you know take your deep media background and pitch us yeah pitch us what are you what are you gonna show and they're like Connecticut sports and and the RCK you guys are like um

13:27So 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's sports are gonna be- And entertainment. And entertainment are gonna be what people want to see all around the world. And they're like, huh. And then RC is like, and there's this other thing too, that you know, with satellite, like, it doesn't go down, you know, it's 24-7. So like whatever you put on this video feed is gonna go out- 24, seven. 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 we're 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. And then, you know, NBC CBS, they'd be like, well, we're signing off for the night. TV was done.

14:24TV 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, interesting. So how much would it cost to get a feed on one of your...

14:35Satellites and they're like $35,000 a month, actually $34,167 a month. 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? Yeah, about net 180. So they go back and they're like, okay, great. Now we got to scramble some money together. We got to not only pay RCA for space on their satellite transponder.

15:03but we need to set up 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?

15:13Turns out there's a town nearby called Bristol, Connecticut, which ESPN-Efficient Auto's know as still 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's just a field, like a muddy field. But it's nearby.

15:39And so they say, great. And do you know what it was before it was a field? I didn't find that. What did it? It was a dump. The SVN's headquarters today are still built on an old dump. An old dump. Amazing. The most valuable media business in the entire world. Yep. And 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 satellites 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 dumping 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 truck in some satellite dishes.

16:29So they go out and they start like they hit the fundraising trail. There is their seed round, a little bit of money from other members of the Rasmussen family. And they get a venture capitalist in King of Prussia, Pennsylvania of all places, just like right where I grew up. Still a kind of Prussia. Yeah, still a kind of Prussia. Who invests, I think the exact amount of one month of the RCA, at least, so like $34,000. And so like, okay, great, this will get us going for a little bit of time. Let's hit the fundraising trail for real and go get some real dollars to fund this whole thing.

17:04And 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, all we're right on this inflection point, everyone's about to have cable. Like, we got the, we timed it perfectly. Yep, yep, and end.

17:30Indeed, they did. But also just like Netflix in the beginning, all the sources of investment dollars at this point, they're looking at these guys and they're like, no. We're going to need some very protective provisions in these documents. Yes, exactly. That's anyone who's even interested for...

17:49along 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 in LA. 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 sort of money maker and parent of the Getty Empire is Getty Oil. Yeah.

18:18And 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, this is again 1978, they're trying to as much as possible diversify out of the oil business. The families going through generational transfer, they're looking for ways to get their money out of oil and diversify. And so this comes along and they're like, well, Okay. Why not? And there's a guy, Stuart E.B., who works for the family, who he's really like the champion of getting this done. So they start talking to the Rasmussen about funding this, and they're pretty interested. The deal's taking a while, though, and the Getty Board, and the senior family members, they're like, these guys are for real. Who are these guys, then? And Bill... Yes, P. That doesn't have a good ring to it. Yeah, Bill realizes...

19:12He needs to prove that they have something that is going to, once they get the money and get all this live, that they have really compelling content to put on the channel. So he flies to Shawnee Mission, Kansas. Ben, do you know what is in Shawnee Mission, Kansas? I have no idea. The headquarters of the NCAA. Indeed. And so in March of 1979, they're still negotiating with Gettie 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, including the then super prestigious men's basketball tournament, the NCAA tournament, they think the year before was the Magic Johnson and Larry Bird faced off in the... How on earth? As I was doing research, it was...

20:09It became apparent that they would have a hard time getting pro sports, right? So they're like, oh, we'll go with amateur. But like, then CAA at the time, it was no small thing. No, it was, it was like, then college football was huge.

20:20Bill, you know, a 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 that 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, They thought nobody cared about them. Turns out, they were wrong. So Bill emerges with this contract and then immediately after that gets getting across the line, they invest $15 million, which is going to be enough to pay RCA for in a couple of years, build out the Bristol facility, get the satellite, dishes, hire the first talent. I think they know that what they bought was 85%. Yeah, so okay, this is what I'm going to get to do. They invest $15 million.

21:10for 85% of the company. 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's a commercial agreement as well, but not with Getty.

21:38Are you referring to the beer agreement? I am. Yes. I will. Yeah. So Anheuser Bush 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 because there's some quote that one of the executives there had where they they say something like, because we just thought, you know, 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 Aniser Busch or somebody within ESP, they're like, you know, guys.

22:31this ESP thing. It sounds kind of corny and it doesn't sound super professional. And it's confusing because three letter acronyms are broadcast channels. Yeah. Exactly. Exactly. So they start looking out and you know other cable networks that were getting started at the time. They all called themselves networks. It was like the, you know, .ly, you know, domain name of the, it was a labs or whatever, yeah. Which is fascinating because like what, you know, we have all sorts of different definitions for network today. It doesn't quite make sense of why you would call your one sort of channel that runs across a cable and network. I guess because all the

23:12and point homes were networked to over cable to the one broadcast source. Maybe it was that they had affiliate distribution agreements with different cable operators that could be, which we'll get into in a minute here, too. Anyway, everybody loves it. 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.

23:36And actually, I think there was a brief period there where they changed it to ESPN TV. It was like ESPN-TV and they're like, oh, we can't launch with that. Yeah, that's too much. That's too much. Let's go with ESPN. So they launched. They ended up launching with ESPN. Also before they launched, though, remember Gettie just bought...

23:51way more than controlling interest in this company, 85%. Yeah, you're now an oil company subsidiary. Yeah, exactly. And if you know anything about, you know, the history of investing in startup ventures and what investors did back then, you know, the popular thing to do was fire the founders and bring in professional management and get in wanting to act like a true venture capitalist at the time. That is what they did. Now, in this case, it's...

24:17debatable whether they did this because they felt like they should or because it was the right thing. Probably both. The Rasmussen's 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 that you can too.

24:35But 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, this is like ESPN urban legend, the cable was connected to the satellite only five minutes prior to the first broadcast. So not exactly operational experts in this industry.

25:05I believe it. But, you know, and are extremely underpricing entrepreneurs. Extremely. So, that summer, the Getty family basically forces Bill and Scott and had 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.

25:31and 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 Grant, who depending on your age, may or may not have heard of Chris Burman, Dick Vitale, Bob Lee, Greg Gumball, amazing talent into this brand new start up cable network. And almost all these guys, except for Dick Fytal, are like 23 to 26. So like the Chris, you know, we all sort of like no of Chris Berman today, you know, you know, I think Bob Lee was 23. Yeah, I think that's all right. So young, you know, super young hot shot broadcasting crew. Yep. They they were absolute pros at identifying and nurturing talent. Yep. So September 7th, 1979, they go live.

26:30And 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. You know, I don't know if that was the Rasmussen's or if that was when Chats Simmons came on board. They made this really. We're going to be 24-7.

26:45the world's first 24-7 cable network and first 24-7 sports destination. It's kind of amazing they kept it even though they decided before launch they were never going to be anything besides sports. But they thought the linchpin to all of this would be, they would do a half hour highlights show at 6.30 pm kind of right in the middle of prime time every day. They're going to do this every day and they would recap the highlights and the scores.

27:08of all the sporting events in the country throughout the day. This was like super innovative because the only way to get sports scores was if your weatherman decided to read it on your 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 like, yeah, it's like the center of of the day. It's the sports center. And so when they launched at 6.30 p.m. on September 7, 1979, the first thing that went live was sports center. And it was beamed via satellite to 1.4 million US households on day one. And the network has been going ever since. Lee Leonard and George Grant on for 30 minutes on for 30 minutes.

28:04followed by an incredible fast-paced action. of a slow-pitch softball game. The teams of which were the, oh, shoot up, I've liked them right there. It was two other beer companies that the teams were, that was their names. Oh, no way. It was not Budweiser. And so they got into a huge row with Aniser Bush, which is just paid for one point four 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 sports center. It was a Hodgepodge, shall we say.

28:41We will put this link in the show notes and we just tweeted out a link before recording this episode too 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. They say like welcome to the sports center and there's like a five to 10 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, you're kind of like, whoa, you're like in an abandoned warehouse. This is not, this is weird. And it's all terribly colored. And you know, it was 70s television.

29:23And 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 70 suits being so stuffy. Yeah, polyester. Yeah, it was great. It was great. So from that, you know, especially at the beginning. 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 Vitale. 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, calling them and people start calling, I don't know who actually.

30:12who, 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 ESPN.

30:26in 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, 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.

30:48live sports entertainment could become the phenomenon that it is rather than sitting there and capturing the phenomenon. I think it's worth a pause here. We've talked about this a little bit, but there were two real innovations that ESPN had right off the bat. One that we alluded to is this concept of 24 hours. They were the first 24-hour television network. Obviously Ted Turner was re-broadcasting.

31:15the Atlanta Super Station, but CNN hadn't launched yet. And what's crazy is the media business, you got to think back to then. It was headquartered in New York and all anybody thought about was the East Coast prime time. So again, 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.

31:39Bristol Connecticut is not too far from New York. 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 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 in the broadcast industry hadn't built up as much. So that was one. And then two, they were like, they were other sort of niche cable stations out there with lots of crazy things happening. I feel like ESPN was the first really huge niche community that got built. And I mean, niche in terms of a hyper focus on one thing that lots of people are passionate about, not niche in terms of small. Because the broadcast networks, they did everything. NBC Sports, that was a small portion of what NBC did.

32:33whereas ESPN was just one thing, and they started creating this community around it. So it's interesting, the notion of the internet as infinite shelf space, or as infinite pages in your newspaper, 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 going from three to 50, there were still some pretty big niches available for you to own.

32:58Yeah, totally. So on the back of this and the innovation, they were driving around it like March Madness and 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 it could get was the draft. The NFL throws them up. You can have any of our games, certainly not the Super Bowl, but here take the draft. Take the draft, right? And they made it into like, you know, an appointment viewing an event in the clock and everything. Yep. So a couple of years later, they're growing like gangbusters. Also, don'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

33:48The AFL may have been a separate league and then got folded into the AFL. They 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. 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 somewhere that just sort of fell apart.

34:12What happened? I think this is right. So that Chet Simmons, who had come into replace Bill as president from NBC Sports, after three years he left and he became commissioner of the USFL. I think that's what Kader 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. They're adding more advertisers, but all this is costing money. And of course, they're covering more events. That costs money.

34:42They're at a point where they're burning $8 million a month in 1982. And getty- Three years after they start, bro. 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. Right. They're getting pretty nervous, though. They don't like this. And as we mentioned already, the family is starting to think about like, hey, we might need to exit this hole.

35:07thing. We're not actually sure why we did it in the first place. Well, this whole thing and their oil business as well, uh, which will come up in sec. So in 1982, the family getting family sells a 10% stake in ESPN to ABC to help offset some of these losses. Um, I don't know. I don't have a broadcasting company. It kind of makes sense. They could be helpful here. Yeah. Exactly. You know, help professionalize this thing. Yeah. Uh, and chat to it come from from NBC. I just left. So they do that now.

35:35That was a pretty bad move. 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 at price season one or something. Yep, yep. Yeah, that was back in season one. Because right around that time, ESPN comes up with a third super critical innovation.

36:04And that is that they changed 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 for most of them, they said, yeah, great. Like, I'll carry it if you pay me. So ESPN was actually paying.

36:30most of their operators to carry the channel. And then you get sponsors to offset the costs that you have to pay for distribution distribution. Right. Right. So a couple of 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 Bowdenheimer. 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. 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.

37:23If 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 like, now you gotta pay us. And if you don't pay us, we'll pull the signal from you. And this happens a couple times. And- This has happened in a few sort of instrumental moments in businesses and history where they realize, wait a minute.

37:49We'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 Bowdenheimer years later in the 90s, under Disney, after Disney acquires, what ESPN would become, he becomes the president of ESPN. Pretty good idea, yes. Yeah, pretty good idea.

38:18So they pull the plug on a couple stations and exactly that happens all the subscribers of these cable distributors. They start revolting. They start like picketing. They start showing up at the offices like demanding ESPN back. All right. 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. Exactly.

38:43they were provider agnostic and would go wherever that supplier was. And so if you're the cable networks, like, 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 commodity and the real value is content? And really the question is here.

39:02You know, 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 is probably inevitable. I mean, the same thing played out with the internet, right?

39:28In 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 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 to Verizon or whomever to the home or to for wireless.

39:58So 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 Dolan's, the Dolan family in Long Island. Who went on to own the Cleveland Indians. Yeah. And the New York mix and many other, and Madison Square Garden. Anyway. But mostly the Cleveland Indians. They do.

40:23a 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. 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'd mentioned the Getty Family woes. They end up selling the whole thing, Getty Oil, to Texaco for $10 billion. And Texaco, of course, is this huge oil conglomerate. They're not a family run business. And you guys have all this stuff that comes with Getty Oil. We got to get rid of this thing.

41:18So 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. And what was Capital Cities? Boy, so Capital Cities 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 WTN in Albany, New York after graduating from Harvard Business School. So Murphy was a lean 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 lean it out and make it profitable.

42:08So 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 city's broadcasting was born. So capital of these states like is that the I think so I mean Providence. I think is Albany definitely is I think Raleigh is. I don't know. Yeah. Interesting. I wondered where like the capital came from. Yeah. Yeah. So Murphy of course.

42:35He'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, trust him. I think it's an intro from one of their brothers or something like that. So he 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, rockin' up a big, you know.

43:14central staff. We trust the managers. Tom and everybody, they're just like, you guys are on the stations. Yep. 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 CEO of the lean mean operator. So this dream team of executives.

43:37So 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.

43:53They're starting to buy up. Yeah, that's right. Yeah, it was distributors of the, you know, of the, is there 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. Well, others in the industry like CBS were embracing sort of an 80s era conglomerate mentality really hard. They were buying minor league baseball teams. They were taking limos around town, you know, just wait till we get to our

44:22they are Nabisco. Capital cities, their playbook was extremely simple. They would buy a station, they would operate leanly and profitably, so they would get some great cash flow from it. Then, you know, with those nice cash flows, and on 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 rents repeat to dozens and dozens and dozens across the US.

44:51you 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 discipline businessmen. They were totally obsessed with decentralization. They actually printed on their annual report every year. Decentralization is the cornerstone of our philosophy. Our job is to hire the best people we can, give them 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 unconditional acquisition? Yeah, well, before we get to that.

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47:14So we just mentioned, you know, Texco and just bought Gettie and Tom Murphy, you know, 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? 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're on the board of Texco. 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.

48:04Tom 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. 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.

48:33One is Ted Turner down in Atlanta. I think CNN has launched at this point. So he's the canonical cable entrepreneur. He's the... It turned out it wasn't Atlanta sports that people wanted to watch nationwide, but it was a cable news news. And so he sees ESPN, ESPN's bigger and is like... And in fact, the 24-hour aspect of CNN was copied from ESPN.

48:58And so he's like, great, I want to own ESPN, he's like putting together bids. The other interested party is ABC. ABC, they already have this 10% stake that they owned in the ESPN and option for more. So the first thing they do, they buy 5% more from getting in 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. And again, remember Tom Murphy's on the board of Texaco. Somehow, ABC ends up winning the deal.

49:27Now 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, Gettie, and the Rasmussen still owned, or their 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% of ESPN. Well, the first time was when the Rasmussen started it. And then this is now the only moment in history where ESPN is wholly owned.

49:58by ABC, they pay $188 million for the 85% that they don't own. And remember, it was valued at like $18 million when Getty sort of first bought it. And then, of course, put a ton of cash in to it along the way. Hey, 10x. We'll take it. It's like the 10 cent episode. Yeah, 10x. I'll get that vid. 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 Hurst. No, no, no, no. Hurst then buys it from...

50:43This 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, you know, it's like cookies and crackers. And it's a CPG company. It's like, you know, a Procter and Gamble or whatever. They had merged with RJ Reynolds. What's RJ Reynolds? Sounds innocuous. Turns out RJ Reynolds is a tobacco company. Camels.

51:11Winston's, Salem's, they're recorded in Winston's Salem. All of it's the biggest US cigarette company. And at the time, cigarettes were, you know, a big thing. And they would have become embroiled in all sorts of lawsuits. But because they had, of course, their CPG products to sell, but mostly these cigarettes that they're trying to pump out to the US, they had all of these spokespeople who were professional athletes. 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 Namisco, RDR, Namisco was super interested in ESPN had this thought they would have this great synergistic relationship. They ended up buying

52:08bang this 20% stake from ABC. There 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. Just watching this and watching all this because his grand plan soon gets revealed. Yeah. So in January of 86, this is their, you know, they made a series of very conventional small acquisitions that You know, we're in total something to write home about, but individually nothing to write home about. This is very different. So with the 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. Invest both debt and equity in capital cities executes a $3.5 billion purchase of ABC and all their related broadcast assets in New York, Chicago and LA.

53:07The 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 in Nabisco. So why would they even need to raise the debt capital to do this? Capital cities itself was not even worth three and a half billion dollars 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, you know, we're watching WhatsApp get picked up for $20 bill, like this $3.5 billion completely unheard of outside of oil and gas. Completely unheard of. So just to kind of close the loop here in capital cities.

53:56Murphy and Burke had the track record to show that they could run this same playbook and bring in, you know, they're the operating margins that they were used to of over 50% with all the capital city's 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 they're it's looking really good and remember ABC again which had just acquired ESPN yeah ABC broadcasting they only made revenue from advertising they weren't getting these affiliate fees from the cable operators ESPN now they're good to this this the importance of operating with this yeah that's the jewel like they're getting

54:47As we said, you know, affiliate fees become twice as big as advertising for ESPN over time. They're getting, like, it's so much a better business. Yep. So of course, Capital City's takes the name of the ABC because, you know, 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 City's 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.

55:19Also rose to prominence through through Disney and then through the media industry He's now in 2019 the current CEO of NBC universal total dynasty crazy is worth noting so a decade later Well actually I'll come back to this as we dip into Disney here Well, so okay, so that transaction gets done with the capital city's minnow swallowing the whale of ABC in March of 1985. Immediately, remembering Namisco, like they're trying to pump out these cigarettes. They go see Tom Murphy and say, oh, hey, you know, you really wanted ABC, right? You didn't want the CSPN thing. Let us just buy it all out from you. We'll pay you $500 million for it. And actually, that probably was really hard to turn down for

56:06Tom and capital city's because they just you know raised all this debt to buy ABC right to basically think they're gonna get it but you know Tom is smarter than that and he says thank you very much for your offer I am going to turn it down but you know that's pretty incredible Nabisco was willing to pay $500 million for ESPN. I think it was valuing it at $500 million. And what's the timeframe from when? This was 1985 and it was just before in 1984 when ABC had bought it for $188 million for 85%. Wow. So, you know, people are starting to realize the value in this thing. Yeah. 1986 was a huge year for ESPN on the business side.

56:52together now with a 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, 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.

57:18They had to pay a ton of money to get the NFL rights. The NFL of course knows how new how valuable this was. But it was nowhere near sort of the crazy prices that it is today. But still for the time when 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.

57:37This is going to be, you know, ESPN was already super valuable. Now it's going to 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.

57:53100% 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.

58:09they 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, the cable operators are paying ESPN, is over five times any other channel out there. CNN, what have you, you know, A&E, like 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. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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1:00:29So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. So, okay, quickly back to RJR Navisco, our tobacco pedaling friends. If you are familiar with the Warren Buffett type of history, not more in himself, but private equity and leverage 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 by out in history. They acquire RDR Nabisco for $24.5 billion, and this becomes the subject of the book Barbarians of the Gate.

1:01:18Classic, classic book also got made into a movie. 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. Focus is really more on kind of the cultural history of ESPN, but it's just so great. Like oral history is interviews with everyone. It has a bunch of business history too.

1:01:37So the best thing we get 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 one of the things that they sell off is their 20% stake at this point in ESPN that they sell to the Hurst Corporation for $175 million. Wow. Oh my gosh. First got a deal. People just like...

1:02:05especially these non-media businesses that own parts of ESPN. They just do not understand the value. What 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 you must get rid of your house. You can't wait around for the best offer. You're now a seller. It's not like you're not raising right now. You are very actively raising right now. That's not a good place to be. So, her still to this day owns 20% of ESPN.

1:02:38have been repaid on their investment. Which many hundreds of times over. Can we talk about that? We're about to get to this Disney thing, but in everybody's head, like Disney owns ESPN, Disney owns 80% of ESPN. They operate ESPN, but Hurst still owns 20% of the freaking business. It's crazy. Hurst does, they don't do anything. They're a minority shareholder, so Disney operates it. The PNL flows through to Hurst, but Hurst, of course, the William Randolph Hurst to organization, the publishing magnet.

1:03:06subject of the movie Citizen Kane. There's other things within the first corporation now, Kanye Nast, and that like the likes of that. But their 20% stake in ESPN is all of it, basically all the values. It's totally crazy, especially in the price of this deal.

1:03:23by the late 80s, early 90s, like ESPN is ESPN at this point. We're talking Dan Patrick and Keith Olberman on Sports Center, Stuart Scott, like Boo-yah, you know, get rich, Isaac and Kenny Main and Linda Cohn, like it is a cultural icon. It's what you leave on in the living room while you're making breakfast. Totally, or 24-7. I mean, in my house growing up, it was literally like ESPN was on.

1:03:48All day. You in every day 40 to 50 other million Americans. I know. It was awesome. Uh, 1994, they hire the famed ad agency, Wyden Kennedy, that of course, it always done, uh, Nike to do that. This is sports center commercials. Oh, my God. Oh, so good. The best one ever, I think is the Lance Armstrong cycling in the basement. Yes. Yes. Or LeBron's LeBron's throne.

1:04:16It's like Stewart Scott or someone walks or LeBron tries to walk back to his cube in Bristol. And he sort of looks and 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 in his desk. And Stewart turns around and he's like, oh, sorry, is this your chair? So good. And those guys like...

1:04:40We 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 Stortz God and Cool is the other side of the pillow and Boo yeah, and just like it changed everything. Yeah, everything 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 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 gathering yep of media now technology 100 millionaires and billionaires this is

1:05:32Amazing kind of how fast this deal got done and 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 mm-hmm Disney buys ABC which contains capital cities or is capital cities and contains ESPN for 19 billion dollars which represents 13x cash flow and 28x net income Yeah, and was at the time the third largest acquisition Ever. Of course, the Argera. Nabisco buyout had happened a few years before. That was the largest and goes well. But the third largest deal ever. And of course, the cable network division of ABC capital cities is the jewel at this point. And of which all of that is ESPN. Yeah. I think it's something like of that 19 billion. I think it was something like four billion alone is attributable to ESPN. It may have been

1:06:28It may have even been more than that. I mean, hard to say exactly whatever it was, by the mid-2000s, the cable network division within Disney, which does include the Disney channel and some other things, but ESPNX is 90% percent of it or whatever.

1:06:47That 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.

1:07:25More episodes will 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 city's deal But like if you look at just pure value creation within Disney like you know Lucasfilm picks are Marvel whatever they've done, you know in the past like these are peanuts compared to ESPN mm-hmm One really interesting way to reflect back on this was 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.

1:08:13If 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 510.1%. I mean, just continuous maniacal ludicrous growth. Well, you see why Warren Buffett like some. Yep. 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, either in the 90s or 2000s, want to do the work of a company called Star Wave.

1:09:01actually here in Seattle. Yeah, like a mile from where we're sitting. Yeah, which becomes, we're doing an in-person episode today, which is awesome. That becomes the backbone of all the digital assets. Yes, we can become fantasy, what would become the apps, you know. The Simons podcasting, all of that. Yeah. That'll be a super fun one for, for another day. So, but we won't get into that here. Acquisition category for this. Okay, so which, which acquisition are we categorizing? I suppose it's a business line in basically every case.

1:09:31Because there's not that much integration that really happens here in any of these things is like they're integrating a product into their sales channel. They're of course by like ESPN just headed in.

1:09:41insane 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 was that to some degree. And in fact, Disney talked about my glisner 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 the ESPN zone and all these different ESPN, the magazine was fine, but the core business is still really the carriage fees. But the ESPN didn't need Disney to do a magazine like, you know. Right. And it's not like prominent ESPN things in the theme parks or driving a material.

1:10:27piece 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.

1:10:40Yeah. 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 we 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 a product would be Facebook buying Instagram and then plugging it into their existing business, this is sort of the This is not that, this is its own business. Our next section that we do is what would have happened otherwise. I was also struggling to think about this, but I actually think that 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 any other business that hadn't captured such huge waves and

1:11:39brought such huge innovations to the industry would have been capsized by all these machinations, like Gettie, Texaco, RJ or Navisco, 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 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 miniaturities. Yeah. Yeah. So I think it's almost like it really threaded the needle on managing to realize this true potential without anything disastrous happening. Yeah. Yeah.

1:12:22you know, again, these huge innovations, you know, 24 hours, like community and like especially around sports center 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 it 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 manage to not and figure out how do 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

1:13:11integration would be easier because there wasn't significant integration to do they really sort of like install 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 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 of auctions but when they did identify something they wanted and they'd go after it they know 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 as as we really people often ask

1:13:57David and I, 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.

1:14:16It's been fun learning about capital cities and learning from learning from you, Ben did most of the research on it. It's not a story that's often told. Tom Murphy is, nobody knows Tom Murphy, like everybody knows Warren Buffett. But you can just learn so much from how these people have allocated capital and operated. My big one, my big learning from this is, in a lot of ways this is obvious, but it 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've put it in the same category as Google or Facebook or Tencent or Alibaba or whatever just wasn't an independent entity this combination of like you have to both ride a huge

1:15:07you know, technology wave, in this case, the technology wave was cable. But you also, if you can marry that with a business model innovation, like that's how you can become just so incredibly dummy. You know, an 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 flanking 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 usage and penetration in China.

1:15:54And they marry that to a huge business model innovation with the freemium business model, and no one can touch them, except maybe by dance. That's my big one. Well, I had just a 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 writing, 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 there, you know, 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...

1:16:46platform for American social activity. And I think just like they did with Mike Madness and NASCAR and so many others. Yeah. Yeah. There it's 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 with the SPN two. They were just sort of an unlock for creating a ton of value in the ecosystem. Yeah. Totally.

1:17:12And 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 AOL, with AOL Time Warner to achieve the dream of marrying content with distribution. And we're kind of seeing Disney do that now in a new era where they're trying to, you know, this 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 interesting to just look at this acquisition and the context of that eventual dream of marrying both together. And it's funny that it kind of incredible that ESPN was able to spend the money to produce the content, but then make the money from getting other people to distribute it for them. Yeah. Yeah. Talk about differentiated content. Yeah. Well, and another thing we,

1:18:06Haven'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 is 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 compelling live programming in sports?

1:18:36Yep, you want to grade it? Let's do it. What are we? 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 city's acquisition of ABC is whatever.

1:18:58whatever we decide for Disney is the same thing for capital city's acquiring ABC because it really like it was 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 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 a four or whatever is is Getty when they sort of acquired it from their ass me since they 10 X it was a 10 X they did have to pour a lot of money into it over time to getty I think the yeah, the it's almost like you can you can bucket out the winners and losers here or like that the winners the big winners and the not so big winners Getty in the not so big winner texico for sure they were like Bailey even it

1:19:52played at the table, Nabisco, loser. Hurst might be the biggest winner of all. They didn't have to do anything. Paid 175 million for 20% of the company. I wonder if Hurst's market cap...

1:20:07They're not a public company. If they were a public company, I wonder if their market cap would be lower than their share of the SPSP. Yeah, you have like a NASPR's situation of a tenset. Yeah, it's discounted because you can't get it liquid. Yeah, yeah, I'm sure it would be, but yeah, Horsesoli 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 Horses?

1:20:34Could be yeah, why wouldn't Disney, but it doesn't matter right like they've been getting cashflow distributions for decades, you know Yeah, but that is a good question like would anybody want to buy that from her straight now? I don't know. Yeah All right, where are you on Disney acquiring ABC slash capital cities containing ESPN? Well, I mean no doubt it's an A, right? Like, even without the exact numbers of 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 the 19 billion, I forget what Disney's market cap was at the time, whatever it was. Anyway.

1:21:17I 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 our sort of two biggest A pluses of all time or maybe three are next reverse acquiring Apple. Yup. Facebook, Instagram, Instagram and booking, price line acquiring, booking.

1:21:43This is different than next in that it was not company-saving. Like Disney would have been fine, 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. And I'm not a plus. I'm an A. That's an A. Because they still paid $19 billion for it. Like, you know, it's not like... Right, I mean, yeah. Yeah.

1:22:05It'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, I won't say peak. In the late 2000s, it was 50 billion. It's a 5X over a decade. It's great. That's value. They also been getting tons of cash flow from it over those years.

1:22:32Yeah, I think it definitely day only ESPN today 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 She did 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 called Numbers Geek and Todd Bishop, the co-founder of GeekWire. Friend of the show, Todd Bishop. Indeed, and you know, a special guest on the push-pops. Exactly. Press episode. Point that was early on.

1:23:13His co-hosts, or maybe his featured guest every time, is Steve Balmer. Steve Balmer, of course, the former CEO of Microsoft owner of the LA Clippers, now that he's used his private family wealth to release USA facts, so really diving into making it easy to understand the important numbers about the US, both in government spending, but across a lot of important issues.

1:23:39they 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 basketball game, a famous basketball game, and Office skated the names of all the players and the names of the teams. And he said, Steve.

1:23:59Analyze 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 satellites and it's really fun because you know bomber such a Basketball geek and has been for a long time longer for 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 have been a playoff game So it's a really cool and as I was thinking for this episode, you know, just a great tie in with the SPN My carve out I'm not forcing that. That sounds awesome My carve out is also near and dear to

1:24:40the show and our community's heart is a great, great, long piece that fast company just released on Softbank and Massa 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 acquired.

1:25:03David Litzky, 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.

1:25:22But so, my favorite moment is this image of Winsoft Bank corporate acquired arm, which we'll have to do an episode on someday. And the deal getting done in the Turkish Mediterranean in an empty restaurant that Masah had bought out and then helicoptered in all the principles from our amazing. That's awesome. Alright listeners, now is a great time to talk about one of our favorite companies, Statsig.

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1:26:46Well, folks, thanks as always for going on this journey with us. If you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client. If you like the show and want to dive deeper with us as a limited partner, you should join the club where you can click the link in the show notes and get access to a special, deeper episode in between every episode that we release on the main show, or you can go to Kimberlite.fm slash acquired. We'll see you next time. We will.