Acquired - The LA Clippers

0:00Okay, I have this great great curve out. I don't know what it's called, but it's you should go download it right down the title. I wanted to make sure I got it right Welcome back to episode 36 of acquired the podcast about technology acquisitions and IPOs. I'm Ben Gilbert David Rosenpal and we are your hosts today's episode David and I are venturing away from technology into the world of sports We'll be talking about Steve Balmer's 2014 purchase of the Los Angeles Clippers. So for full disclosure here, David and I are not huge NBA fans. Well, maybe except for my unapologetic bandwagon fanhood of the Cavs and LeBron James. And I got to admit, the Warriors are pretty fun to watch. Yeah. Well, they're changing the game. So it's death carries awesome.

1:01But we do love digging into the analysis of any acquisition, and there's no shortage of writing and opinion on this one. And we're going to be doing some episodes on the overlap of sports and tech in the near future. So we figured we would dive in just absolutely headfirst and kind of force ourselves to do all the research. And thanks to many acquired listeners and many of David and my friends who we called in to get their hardcore sports opinions on all this. Yeah. Open invitation listeners to get in touch with us by email or jump in the Slack and tell us where we went wrong. But we think this will be really fun. We've done a bunch of serious, more hard-hitting episodes in a row. We wanted to do something light and given that the NBA playoff start literally today, we thought this would be a fun one. Yeah. And I think, you know,

1:51This was a $2 billion purchase by Steve Balmer, and anytime there's a $2 billion transaction going on involving Steve Balmer, involving Steve Balmer, whether it's sports or airlines like we did with the Virgin Alaska acquisition or any of our standard tech wheelhouse, we can definitely apply the acquired methodology to it and get some good discussion in.

2:13So a few things before we dive in, the lifeblood of the show is iTunes reviews. So please help us grow the show and if you're so inclined, leave an iTunes review for us. We also have a Slack and we are close to 600 people. So if you enjoy doing analysis of any tech.

2:33event. There's people in there talking about M&A events, about IPOs, about new product launches, about Star Wars trailers coming out. If you want to talk with other nerds about this sort of stuff, we are all hanging out in the acquired Slack, which you can join at acquired.fm. All right, listeners. Now is a great time to talk about a new partner of ours here on acquired LaGora, the 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. They embedded inside a massive law firm

3:29for 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 drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bed 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.

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4:26speak for themselves when they have a head-to-head pilot with their top competitor they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries and crazily they went from one million to a hundred million in ARR in about 18 months. Truly insane numbers and that is the real test.

4:51Plenty 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. So now, without further ado, David will you take us into the story?

5:17in the history and facts in the wide world of sports. So the Los Angeles Clippers were actually founded as the Buffalo Braves, Buffalo, New York in 1970. They were one of three expansion teams to join the NBA that year.

5:37And they had modest success in the first year but in some foreshadowing of things to come for the team and some challenging decades ahead. They were obviously in Buffalo. They found it hard to schedule home games in the first couple of years because there was another basketball team in town. The Canisus Golden Griffins the well-known and world famous Golden Griffins. Oh, yeah. It's just like very similar to their rivalry now with the Lakers, where, you know, they're, they're, you know, Lakers, Griffins. Yeah. Both trying to draw millions and millions of people to their, they're, they're well. The Golden Griffins had pre-existing rights to priority on games in the arena in Buffalo.

6:32and they were worried about the braves kind of threatening their popularity in town and so they would always schedule all the best dates at the arena and as such the braves couldn't really develop much of a fan base so this was a problem and the team after just a couple years gets sold to the then owner of the Kentucky kernels which I believe is basketball team was a basketball team John Brown Jr.

6:59and he really wanted to move the team for obvious reasons and so we decided to do in further foreshadowing of things to come for the the hapless clippers future clippers he basically just decimated the team's roster treated away all the stars and and as a result attendance plummeted and basically nobody came and that was all his goal so that they could they could break the lease and move out of town so A couple more years go by and in 1978, Brown, actually, he did, he swore only in the 70s could something like this happen. He just trades ownership with the owner of the Celtics. So, Brown takes over the Celtics and Irv Levin who lived in Southern California and owned the Celtics at the time. He wanted to move the Celtics to Southern California, but the NBA wasn't going to let that happen.

7:5211 takes over. What? I saw that they moved to become the San Diego Clippers, but it was via just an ownership swap with the Celtics. Everybody's happy. And 11 takes over the Braille's Museum to San Diego, where they changed the name to the San Diego Clippers because of the impressive sailboats that would dock and sail through the Bay in San Diego. So thus the Clippers are born or reborn.

8:21So that was in 1978 but the team unfortunately didn't get much better and in 1981 the team still struggling and a Los Angeles lawyer and real estate developer by the name of Donald Sterling the infamous Donald Sterling. We don't really talk much about like we don't really We're not in the business of making judgment calls on people's character here on acquired. But this one's pretty in ambiguous. The Donald Sterling is is basically a horrible human being. Yep. And it is incredible how long it took for that to come to light. Listeners will get into this. But despite lots of rumors and allegations over the years, he sort of managed to scoop by Scott free after it being quite clear. He was a huge racist. Yeah. Well, we'll get into it. And

9:13The crazy thing is, like, everybody knew, but he just still owned the Clippers. Anyway, he buys the Clippers in 1981 for 12 and a half million. And this was also, I thought, hilarious. In the introductory news conference in San Diego, where he announces, he lives in LA, by the way, that he's buying the Clippers. He vows to spend, quote, unlimited sums to build the Clippers into a contender. He later becomes famous for, like, spending no money on the glippers on on players. You know, it seemed to plague their entire existence. Yeah. And then he launches an advertising campaign in in San Diego where he puts he puts his face, Donald Sterling's face on billboards and on buses around town with a quote under it saying, my promise, I will make you proud of the clippers.

10:04Yeah, that's what every fan of every sports team wants to see a gigantic picture of the owner's face nailed it. Know your audience. Well, the owner is Steve bomber than maybe, but. So that honeymoon doesn't last long. And in 1984, he just up and moves the clippers to LA against the NBA's wishes. He basically does it illegally by the the leagues bylaws. And and the way he gets around it is he just sews the league.

10:34The league finds him a huge amount of money and he's like, okay, fine, I'm gonna sue you. And so he sues them for $100 million and they stand down and they reduce the fine to him for basically stealing, absconding with the Clippers from San Diego and moving them up to LA. Boy, storied franchise, right? Like all these moves, ownership trades, ridiculous lawsuits.

10:55Sounds just like a tech company. Yeah. Right. Boy, seeming more and more a perfect fit for a choir than we thought. Then we thought then we thought. So from there, we can basically just fast forward through the next 30, some odd years because they didn't do very well. Yeah. So they go to the playoffs four times in the next 25 years, which is pretty bad. And actually in the whole so.

11:22Sterling owns the Clippers from 81 until 2014 when this horrible event happens that we're about to describe. The Clippers actually have the worst winning percentage of any team in any major American sport, which is incredible. That's a feat. That's more statistically difficult to achieve than mediocrity.

11:43It's you have to work really hard to be that bad in 2009 ESPN names the Clippers the worst franchise in professional sports and Sterling you know continues his Sterling reputation for being a horrible human being He actually get this you know, he's the owner right he has courtside seats to every game He at some point in the 2000s late 2000s just starts heckling his own players Classically but like for his own team You can't make this up class act. I mean, honestly, it's incredible that they played on the same floor at the Staples Center is that That the Lakers did franchise like that like it's a privilege to get to play in the Staples Center and that's what they did with it Yeah, so after the the Staples Center is built in the early 2000s

12:33The Clippers share it with the Lakers. But again, the Lakers are the marquee team. They have the least. And so just like just like back in back in Buffalo, they can't get the good dates. And they're basically just the second, you know, not even the second. They're pretty far down the list of things to do in LA as far as sporting events go. But then magically really against despite all of Sterling's efforts to continually sabotage the team in the early 2010s.

13:02things actually start to get better. So through a combination of some good draft picks and good trades, they get Blake Griffin, DeAndre Jordan and Chris Paul. They actually start to build a pretty good team. And in 2013, they win the first division title in team history and are off to the playoffs.

13:25Yeah, things are looking up for the Clippers. It seems like they've got momentum on their side. Maybe the organization finally is working in lockstep on the business side, you know, after all these years and the woods, you know, and actually, this is when, what's their coach's name? Doc, Doc River is in as to coach the team, right? And he's also what president of basketball operations. I think that's right. I'm not sure if the dates are, if it was that year that he was in it.

13:55which leads into the next season after their sort of best season and perhaps ever in 2013 for the first time they win the division title. At the end of the 2014, they have another good season. They're bound for the playoffs. And then on April 25th, 2014, the LA News Channel and website TMZ releases a bombshell. A taped phone conversation with Donald Sterling and between him and his mistress he's married but estranged from his wife and his open relationship with with a mistress again Gemma of a human being here and as Ben mentioned you know it was sort of you know known but swept under the rug that Sterling had been really racist for a very long time this

14:52This phone conversation, TMZ releases in which he reprimands his mistress for posting an Instagram photo with her and Magic Johnson. And he reprimands his mistress for posting this photo with, you know, good, this is a quote here broadcasting that she is associating with black people and that he did not want her to bring them to the team's games. This guy's off his rocker. Dispickable and in every sense.

15:22Not but he's an NBA owner, and this is a photo with Magic Johnson, you know, Hall of Famer, Magic Johnson. So needless to say this, this is not going to end well for Sterling. No, no, you know, as you can imagine, the NBA is not too pleased about this. No, nobody is pleased about this. So in fact, in fact, this is this is a, this is awesome. The Clippers players are so displeased about this that on the 27th, so this comes to light on the 25th, on the 27th, they warmed up for their playoff game on Sunday afternoon against the Warriors with their their shooting shirts worn inside out to obscure the team logo to not represent Donald Sterling and sort of the logo that he owns. Yeah, it's incredible. And that was they decided to do that. They considered before they

16:14decided to play the game. They considered boycutting the game. And for the game, which was, you know, a playoff game and a playoff game for the Clippers is such a huge, huge event. Yeah, you got to imagine the teams like, no, we've worked, worked way too hard for this to, you know, but that's how serious, you know, this was obviously, you know, sponsors, most of the major sponsors with the team, you know, announced they were severing ties. And then really, you know, the NBA handled this.

16:42Parable situation as well as you could commend the foreign and Adam Sterling the the commissioner I think deserves Adam Silver Adam Silver sorry, yes Adam Silver the MBA commissioner at the time and still currently deserves huge credit for this so less than a week later on April 29th after an investigation that the MBA launched right away the MBA issues a lifetime ban of Donald Sterling from the game and finds him $2.5 million. Bars him from attending games, practices, any event involving any MBA team. Bars him from being present in any Clippers office or facility from and from participating in any team business, player personnel decisions or any league activity. And that $2.5 million fine is the maximum allowable fine by the NBA. You could imagine

17:38That could be much higher if there wasn't guidelines there. Absolutely. And then in a press conference following announcing this ban, Adam Silver, the commissioner, states that he is planning and he will try to force sterling to sell the clippers and that they are basically going to kick him out of the league, which the league can do with a three-quarters vote of the other 29 team owners, which they do.

18:05Yeah, that's super interesting and I you know I I think I remember, so when this all went down, I remember reading about it briefly, but diving into all the details has been super interesting to understand how the mechanics of all this go down. So when you own an NBA franchise, it's truly that a franchise. I mean, you can imagine it's like owning a McDonald's where, yes, you've poured all this money into this thing and you own this asset, but there's actually a corporate governance structure above you that can force a lot of decisions with You know, in this case, a three-quarters vote. Like, yes, you own that team, but if three-quarters of the other owners don't want you to own that team, then you don't get to own that team. Yeah, I feel like if there were like a social network council that, you know, if Snapchat or Instagram did something horrible and Facebook and Google and Twitter could make them sell the company. And this is, so this is now where we sort of pick up from.

19:02the acquired standpoint and where things get interesting. So obviously, this is a distressed sale. You have a terrible situation going on. Well, you would think it'd be a dislike, okay, we'll get more into this. But like it should, it should be a low price, right? Because it's like a fire sale. Fire sale team has to get sold. It's the Clippers, right? I mean, they are literally the joke, the punchline of every joke about being a bad team is like, well, at least year, you know, not as bad as the Clippers.

19:32You would think that this is going to be like the Cleveland Browns at basketball. Even worse, you would think this would be a fire sale, but there are quite a few people who are interested in buying the team, including reportedly Oprah Winfrey, Floyd Mayweather, Magic Johnson himself, several other bidding groups, and Steve Bomber, our hero. He is also very interested. He has.

19:58At this point, left Microsoft, retired as CEO, Satya Nadella, has succeeded him. That happened just a couple months earlier in February of 2014. And Bomber has been a lifelong basketball fan. Twice in Seattle, he tried to first save, be part of a group to save the Sonics from.

20:20leaving Seattle a dark, dark day in Seattle history when the Sonic's left to become the Oklahoma City Thunder, right after they drafted Kevin Durant, too. Terrible. And then once more as part of another ownership group that attempted to buy the Sacramento Kings and move them to Seattle. So this is Bomber's third bite at the Apple to own an MBA franchise, and he is...

20:44not going to be denied in true Steve bomber fashion. To be a homer here, it's such a shame that he couldn't get it done in Seattle. I mean, I really thought that that ownership group to move the kings up here and build the new Sonic Serena was going to happen. But well, you know, shed it to you. I think if there's any solace, it's that it does seem to be at least according to Bill Simmons, the Oracle and all such matters.

21:09I think there's a good chance that Seattle will get an expansion team at some point in the next couple of years, which it absolutely deserves. Yeah, still a basketball city. Yeah, people love the Sonics. You see people wearing Sonics gear all over the place still. Yeah, so Steve comes in.

21:30with a pretty over the top bid so Forbes magazine does an annual valuation of all and it's just you know numbers they make up but it's kind of the best source of valuation of sports franchises across all all sports and they have that year valued the clippers at 575 million which was 13th in the NBA And well behind the number one value team, the highest value team, which was the next in New York, which they had at 1.4 billion. So bomber comes in with a bit of two billion. So not just. It's amazing how much the market matters, right? Like, it's the clippers. Now, I mean, for sure, they've gotten some great players recently. They've started having some momentum, you know, Blake Griffin, Deandre Jordan, Chris Paul, but like, they're still the clippers in the Lakers market.

22:23And they're in the top half of the NBA teams because LA is just a ridiculous market. Yep. Yep. But this kind of blows everybody out of the water. No NBA team had ever sold for anywhere near that amount of money. The Milwaukee Bucks had sold earlier that year for $550 million. So just over a quarter of that purchase price. And at the time, everybody was pretty astounded by this.

22:51Yeah, I think it's three and a half X the largest ever price tag for an NBA team before. And it's really interesting to note that this all sort of started happening recently, where when you look at my account for everything is the calves, when you look at... No, for listeners, if you aren't long-time listeners or don't know Ben, regardless, he is a proud Ohio native. That's right. That's right.

23:20Cleveland till I die. So Dan Gilbert bought the cabs for 185 million. But that was in 2005. And so when you start to look at like the escalating price tag of NBA franchises, it's all been in recent years. And it's something that I kind of want to get to later in this episode and try and dissect why is that happening? Why is you know any NBA team potentially a good pick up right now because of the direction and the growth. Absolutely well this is you know again at the time people which was only a couple years ago three years ago now people thought bomber was crazy and and so we'll dive into that in a minute but but just to wrap up the clippers have continued their you know if not dominance not being the clippers of

24:11you know, of old at this point, they are in the playoffs again this year. It's their sixth straight year going to the playoffs after only doing it four times in 25 years in California. And it's their fifth straight year with over 50 wins in a season, which is pretty great. I mean, at this point, they are, they are one of the best teams, certainly in the Western Conference, if not in the whole NBA. Well, So I think I have a little bit more bearish take on this and we'll end up getting to this in the way that we grade the acquisition. But I mean, they have incredible starting five, like they've done a nice job, especially with bomber ponying up to retain Deandre Jordan, but...

24:55there's no depth to that bench. Like, there's not, they don't, their whole roster is not filled out with stars. And what I want to get to too is, you know, why is that the case? Why, why haven't they made the right, the right player moves throughout the league to make that the case? And then on top of that, like, they still haven't made an appearance in a Western, Western conference final. So like, it's, it's definitely the story of incredible, you know, starting players. Oh, yeah, that's not, yeah, but like, Yeah, yeah, they're definitely not a winning team yet in terms of playoff appearances and, you know, finals appearances. All right, listeners. Now is a great time to tell you about a long time friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI first world, that doesn't hold up anymore.

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27:22Just recently this year, the 2017 version of the Forbes MBA franchise valuations came out. The clips are up to number six, but still let two billion. The same mark, the same price that Bomber paid for them three years ago. But the rest of the list is pretty interesting. So the next are still number one. And remember in 2014, they were 1.4 billion, I believe.

27:51Yeah, in 2014, they were 1.4 billion. They are now valued at 3.3 billion. So for all the other owners in the league, this was a pretty nice mark. They're all pretty happy right now. Yep. Yep. And I want to make a few points where we're still in acquisition history and facts. The, this is like a, I just have to read this, this clip to underscore what a ridiculous transaction this was when, when Steve bought the team from the sterlings.

28:19As part of the deal, Shelley Sterling gets the titles of owner emeritus and Clippers number one fan, as well as 10 tickets in section 101 or 111 for all Clippers games, two court side tickets for all games in Los Angeles, six parking spots and lots see for each game, 12 VIP passes that include access to the Lexus Club arena club or chairman's lounge and media room or equivalent for each staples games, three championship rings following any Clippers title and will run a yet to be named charitable foundation. So like, what, why is that part of the transaction? And why does she get clippers rings like or champions? She is, she is Donald Sterling's estranged wife for, I don't know if we clarified that earlier. And she kind of ran the sales process on the behalf of the team, because because Donald himself actually, you know,

29:14Was super resistant ended up suing the NBA suing everybody involved but fortunately has pretty much written off to the sunset at this point Yeah, yeah, and I think It's really worth like to me a big sticking point of this whole transaction is It should have been a fire sale. It was under intense duress. There was still incredible bidding for this thing and they, you know, and bomber paid almost 4x the highest transaction ever. I gave up six parking spaces in perpetuity. That's right. That's right. And think about the diamonds on those championship rings, you know.

29:52But the thing that sticks with me about that is it's a limited supply thing, right? Like this is a team in a major market with a sport that has risen dramatically in popularity. And in 2014 looked like it was only going to continue to have more lucrative TV deals to come. And that leads itself to, you know, with incredible supply constraint.

30:18there's more, there's a lot of five plus billionaires out there that would like to own a team and there's a very limited number of big market teams that they could own. So in considering this, I mean, in grading this acquisition later, like one thing that we should keep in mind is whether or not it's actually the best place to park your money, it's a very exclusive club of people that own teams like this and not every billionaire can get in.

30:48Yeah, and it actually reminds me a lot of the other non-technology what one of the other non-technology episodes we've done on this show which was Alaska buying Virgin America and What we realized in in that show is how important the the quote-unquote real estate of of gate access and gate control at airports was and there's just limited number of gates at airports, and that was probably the biggest reason we concluded why Alaska bought Virgin. And it's a similar situation here. There's just limited real estate. Yep. And they don't often come up for sale. Yep. And a bunch of other themes that we'll get into later in the show. But let's go to... Here's another thing that I found really interesting in the Forbes list.

31:36I would not have projected this at first, and it started to make more sense when I was thinking about it, but NBA teams on average, I mean this is kind of eyeballing, I should crunch the numbers, but it looked like the valuations of these teams are about 10X their revenues and about 15X their operating income.

31:55And for anybody who's building a software business, you know, you're thinking, oh, my SaaS business is probably going to get like a three to five X revenue multiple. Or my, I guess I just, I just wouldn't have expected that these sports teams would like have a 15 X operating income multiple. And in kind of talking through it with with other friends before this show, it kind of makes sense because you would think like, okay, what?

32:24Am I sure that this B2B SaaS company is going to be around in 15 years? No. Am I pretty sure that this NBA franchise is going to be around and generating somewhere in this neighborhood of operating income that it is right now, give or take 20%. Yes. This is such a sports franchise as there's such a enduring part of the fabric of a city, in the fabric of American culture that you know, we just trust that these things are going to continue to be around and continue to be popular. Yeah. When I think there's another really key element to analyzing this transaction, which we let's get into now, and we can continue to discuss throughout the show, which is growth, right? I mean, when you're talking about multiples, you know, multiples, whether it be of, you know, of, of,

33:15EBITDA are operating income or revenue. What they really are in terms of valuations is a proxy for what you're expected cash flows over the future. The discounted cash flows in the future, which is the theory of how you value companies. And multiples are just putting your finger in the air and guessing how much growth you're going to have in your cash flows over the next.

33:41Several years and how much that's gonna be worth to your bottom line in terms of the valuation of the company What's really interesting is the growth in the MBA over the last few years and How much and I wish I had harder numbers on this I don't maybe I don't know if you do better or if our listeners do Feel free to we can pop into the slack after and chat with listeners up in the slack, but to me The most interesting part of this storyline is that the NBA has emerged really since bomber acquired the Clippers I don't think this is causal but maybe he might have seen this as I think the most innovative sports league sports in the world and that has been experiencing the most growth and experiencing the most growth

34:29among young viewers, which is the future. The data I do have is that according to Nielsen, the NBA has the youngest audience of any of the major sports in America and has almost half of its viewers under 35, which is definitely not the case with baseball's probably the oldest, but not football, not hockey. There is a lot of growth happening in the NBA right now and it'd be fun for us to dig into why.

34:55Yeah, I mean, I'd caveat all this with the youngest age in the fastest growth of any physical sport. I'd say League of Legends encounter strike. Yeah, I think I'd love to do a future episode on eSports, but we'll scope it to traditional sports for this episode. Yeah, I think yeah, that makes a lot of sense. So Ben acquisition category.

35:19Yeah, um, this is a business line. I mean, it's it's like it's kind of hard to fit our our It's actually you could argue as asset Yeah, yeah and actually from a technical perspective the way that you see if I can find this The quote from, I think it's a Forbes article. Mr. Balmer 58 is likely to enjoy significant personal financial benefits. When an investor purchases a sports team, he can attribute a large part of the purchase price to the player contracts he is acquiring as those contracts expire. Their depreciation can offset income. So it kind of is interesting to think about it like you're buying something that largely consists of depreciating assets. Interesting.

36:01I'm still calling it a business line because I think all the future growth is being able to turn that flywheel of the franchise and leverage that brand to get more players, get more fans, and turn that flywheel and that all is part of one business line. But I think it is interesting that from a technical perspective, as players age, they are depreciating assets.

36:27Well, this will lead right into one of my tech themes in a minute, but so we stopped for a moment on what would have happened otherwise. I mean, it was clear the sale was gonna happen. And... Wait, real quick, are you saying business line also? Am I saying business line or asset? Yeah, I think I'll say business line because I think these are sports teams traditionally have been viewed as assets.

36:56You know, you don't buy sports teams to make money. You know, is the traditional view on the space. It's billionaires who want to play and have fun and have a retirement gig. But I think that might be changing. You know, I mean, with the growth and the tech names we'll talk about, I think there's a bright future ahead for sports franchises as businesses and as global businesses that we'll get into in a minute. So yeah, business line.

37:26Cool. Moving into what would have happened otherwise, I think we should focus more on the team than on what Steve Balmer could have done with his money. But it is interesting that according to that Forbes list at least.

37:39the business hasn't appreciated at all. And if he had just parked it in an S&P index fund from that day that he bought it until today, the day that we were recording, it would have been a 20.8% return. So like you're saying, at least in the short term so far, from what we can see in terms of actual appreciation of the estimated value of the asset that is the team that he bought, not the best place to park your money for an investment.

38:07Should we move on and detect names? Yeah, I mean, it's probably worth what would have, one thing that I also had and what would have happened otherwise is, what is Steve Balmer done for the team that another owner couldn't? Like, what if it did, you know, fall into the hands of another, another bitter? Like, would we, would we see the diving save to, to, to resign Deandre Jordan and stop him from going to the Mavericks? Like, would we see, I think one thing that's interesting about, potentially advantageous for the clippers of having Steve Balmer own the team is that number one he's ridiculously involved and much more so than I think most most owners are and probably maybe even to a fault. But I just put on top of that like the Microsoft. No, no, I'm not. I really think this was chatting with someone that has a close friend in the in the clippers organization.

39:03and just that it was a little disruptive in the operations the business when he took over that he was just involved in so much of it. So, you know, for better or for worse, he's much more involved than another owner would be. But he also, he employed a similar strategy to the one that he employed at Microsoft for M&A, you know, in making him over the top bid for Skype to just end all negotiations. Like he did the same thing with the Clippers here in bidding 20% over the next highest bidder.

39:34You know, the man has 19 billion dollars and this is what he's gonna do for maybe the rest of his life and he has expressed over and over again that he has always wanted to own an NBA team but he couldn't because his day job kept him too busy before and I think that his willingness to go above and beyond even when it may not make like obvious financial sense when you like where if you really really dig into it like he's he's able and willing to write really big checks because it could have a really big payoff like if he can win the Clippers a championship ring then you know he's a total hero and He may actually like all this may turn out to be a great investment for him So I think that one thing to think about is like he is liberal sort of

40:27the looseness with the purse strings, especially compared to their previous ownership, is really beneficial for the team. Well, it's interesting, you know, bombers, let's talk about bomber's personality here for a minute, which we can't end the show without talking about. No. But I want to talk about bomber's personality and compare it to Mark Zuckerbergs, who is, you know, as we've talked about on this show, probably the acquireer, the CEO of an acquiring company whose style we've analyzed most on this show. And Zuckerberg is equally very, very aggressive and willing to come in with very high prices, but he's sort of like the silent killer type. You know, he doesn't say a lot. He kind of comes down, he flies down to say he likes to buy Southern California companies or try to buy Southern California companies, flies down to the meeting. You know, and he says, you know, hey, well,

41:22I'm gonna crush you or I'm gonna help you and like, you know, here's the number. It's a lot of money. Like, let's get this done. But the thing about Zuckerberg, you know, I think with some potential missteps as far as we talked about on Oculus and the last episode, like he's judgment and is generally pretty spot on. He's been right a lot more than he's been wrong with these things. Bomber is a very...

41:47I wouldn't say that his judgment is bad, but he takes a very different stylistic approach to being an aggressive acquirer. He is loud. He is boisterous. He is, you know, there is, we will link to in the show notes, very famous for his public persona and his developers, developers, developers, developers chant his jumping up and down on stage. And that's just him too. I mean, we've both, you know, Cross paths with him in Seattle and elsewhere and are in our travels and you know, you have a conversation with him and he just oozes enthusiasm Yep, and and that's what he's bringing to the clippers Yep, and one Yeah, you're absolutely right on that. I mean he's uh, you know, he's still

42:34I think he actually jumped on a trampoline and dunked when they were announcing the new clippers with mascot when he still does the the the the standard bomber lean back in the middle of an arena full of people and yell and you know, fling his arms around and talk about it. I love the clippers. I love this company. I love this company. So good. It's rich and sweat. Yes. Yes.

42:58He is true to his style and you know, he's his love and her hate him his passion is infectious and I think One other point that I wanted to make before moving out of this what would have happened otherwise is Basketball fans will know that will note that There's a not unprecedented but uncommon thing going on within the Clippers organization where Doc Rivers is both the head coach and sort of the president GM role. And typically, the president GM role handles, you know, making the right player acquisitions, signing the right contracts, making the trades, doing a lot of the work on the draft to fill out the roster and kind of handle the sort of the business of the team and the business of making sure the team is in a place that can win. And then the coaches in charge of, you know, the actually dealing with the players and the strategy and working with the GM.

43:58And in this case, uh, bomber gave doc kind of all of that power as coach and president and what that probably ends up looking like since he so involved is bomber making a lot of the business decisions and then also having, you know, doc potentially split his time too much. So, you know, I would say.

44:18What would have happened otherwise? A different owner may have actually brought in a GM and added a little bit more depth to the roster and potentially just had a little bit more basketball expertise in there. But that is not Steve's style. It is not. All right, listeners.

44:39Now 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. Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like the risks are real.

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46:15So 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 actually move on to themes. Let's do it. Okay. So here's my theme for this episode. And again, listeners that are closer to the basketball world would love your input. I think this purchase, certainly as we've talked about it reset.

46:43the landscape of valuations for MBA franchises. And there is a real estate component to it and that there are limited number of MBA teams and a lot of billionaires out there with a lot of time and a lot of ego. But here's what's really interesting, I think, going on in sports and perhaps even more so, what's certainly in the game in basketball more than any other sport right now? There is a ton of innovation happening. And I think there is business model innovation that is happening in sports right now, in American sports, for the last 50 plus years, 50, 60 years, there's been this huge, and Ben Thompson has written about this, this huge symbiotic relationship and flywheel between the television industry, the sports industry,

47:38and the advertising industry, you know, the auto industry, the beer industry, the retailer industry. And that has been a very tight coupling where you have sports being the biggest TV events, you know, the literally the Super Bowl moments that bring huge scale, mass scale audiences that advertisers of mass products advertise on.

48:05And that's starting to break down today as the internet is pushing farther into entertainment. We've talked about this a lot in our various Facebook episodes and Snapchat, of course, and the opportunity to disrupt TV. But what's happening at the same time over the last few years is, in one sense, that's very threatening to the business model of sports because the vast majority of the revenue comes from TV, but they've been developing streaming and direct subscription.

48:34revenue and direct customer relationships as part of the product on the side. And I think that is a huge opportunity. You know, we've been and I talked a lot about we debated doing this episode on Major League Baseball Advanced Media which which changed its name to Bam Tech that provides the technology for streaming behind this and we want to do a future episode on it. But the ability, you know, for Major League Baseball charges, I believe it's $150 a year.

49:02for this incredible product where you can stream any game at any time, anywhere in the world. And they make so much money off of that from their engaged customer base and have a direct customer relationship. That's a bright future for sports. And I wonder if bomber came in and bought this team for what seemed like a huge amount of money at the time. But if an as this transition happens, this might be the path for sports teams to become real businesses.

49:30Yeah, and I, you know, I don't know exactly why the, there's so much more money in the TV rights for these teams than there was five years ago. I mean, one thing I could speculate is that with most shows, people core cutting means that live doesn't matter as much and that they're down to watch almost all programming on, you know, Netflix, Amazon. Well, to be clear, I think there are two things going on. The TV rights are staying the same or growing as sports are becoming the only thing that people keep their TV subscriptions for. Yes. But the leagues themselves on the back of BAMTEC are end-around disrupting themselves in that business model and offering these direct subscription packages to customers.

50:21with this big revenue stream that they still sell advertising on but now they also they're basically disrupting ESPN you know and ESPN makes so much money is by far the largest and most profitable cable channel on the back of sports and the leagues I think are starting to realize that they can they can cut ESPN right out of that and make both the advertising money 100% of it and the subscription money Right. Because in that subscription money, they're commanding more power in the bundle as they are the reason that people want linear television and want that live experience. And yeah, so they're winning on two fronts there. Yeah. Yeah, because the point I'm trying to make is they're still getting the ESPN juice. And they're also getting a ton of money from people that are buying league pass.

51:18And those people are also buying cable and paying money to ESPN too, right? So like the sports leagues for the next couple of years are just going to be raking in the money. Yeah. I think you're right. You know, I had the exact same tech theme as you on this one. I mean, I think I have a much more high level as just that the NBA's broadcast rights are getting more valuable, but I think you nailed exactly why that is. So the one other tech theme I want to cover quickly that Feel very unqualified to opine on other than I see it happening and it's so fun to watch is how the product held the game on the court is also had so much innovation over the last couple years and you know seem driven Well, there's the whole money ball aspect and what you know the rockets started doing and bringing kind of statistical analysis to

52:13front office management of teams. But then there's also literally the game on the court, which the Warriors have just completely changed. And I love watching that. And that's what's so rare in sports. I feel these days. And to me why, many reasons why, but I grew up loving baseball, playing baseball. And I still love baseball. But it's hard to watch because there's so little innovation in how the game has played. But basketball is so dynamic right now.

52:40Yeah, and you know when it's funny I played 10 15 years ago I was saying I don't really love the NBA like watching college basketball works It's real basketball and watching the NBA is watching a few superstars travel all over the place dunk and then have you know like wait around at the top of the key for the shot clock to stick down drive and then dunk and it's like okay, we know it's gonna happen every time the rest are gonna be really nice to these few players and I think that what we've seen happen is It's just a much more fast-paced dynamic game where there's a lot more of passing the ball around. There's a lot more ball movement. They're optimizing for exactly the three-pointer. They should be taking, not taking the ones that they shouldn't be taking. There's a lot of data science applied to this.

53:22From a technical perspective, but then from an intuition perspective you just have you know your Steph Curry's that that You know come together on a team like the Warriors to really change how the how the game has played and if I have any gripes about my own team like about the way that the Cavs play it's that They're very very fortunate to have LeBron and it's it's unclear if I mean that they're there's still kind of playing that that older style. Yeah, they are and I think again with a avoiding the temptation to dive too deep into analyzing these aspects of the game, because I'm not qualified. David and I are so far off of what we should be talking about right now. I really hope that other sports and certainly I am much more qualified to talk about baseball and football. I've been played both myself for close to 15 years. There's just been no innovation in either of them really in terms of how the game is played. And I hope these other sports and managers and coaches

54:19in other sports at all levels can look at the NBA and say there is so much value and power in not feeling like we have to stick to tradition in the way it's always been done in how these games are played and that fans will react super positively and love new innovations. I mean stuff like you know in baseball like you should never but it's like statistically proven that bunting is is terrible. Just like in football like you should go for it on fourth down way more often than people do but but there's such conservative environments that people don't do these things and I hope the MBA is is gonna drive some more innovation in other sports as well as people see how well audiences react to it.

55:05Yep, and I think the NFL had an amazing 20 year run up to call it you know five years ago where they really turned the NFL into a family sport It's not the thing that dad does and drinks beer on the weekend with buddies at the game like It's a thing that, like, they've really turned it into a family product where, you know, you have people over and the whole family gets into it and the broadcast is much more tailored around entertainment than it is, like, a gridiron sport. And, you know, the Super Bowl is the best implementation of that. But I don't think we've seen much evolution beyond that yet. Like, I think the NFL is right in high now, but the basketball, but the NBA is more of the stock that I would buy right now. Well, and the NFL has a...

55:48huge liability on their hands that I don't see any way out of it with the concussion issues. I played football for over 10 years myself throughout middle school, high school, college, and loved it. But if I could go back and make those decisions again back at every level, I would not play. It's just not worth the risk. Yeah. And honestly, watching some of your investment decisions, pretty clear to me, that's a. Yes. Seriously. Just imagine how good I'd be if I hadn't played football. Oh, man. Should we go into grading it? Yeah, let's go into grading it. All right. Well, one thing I want to bring up is that from one listener in front of the show that I'll just read as quote, because he had a really interesting insight here that we haven't talked about yet. And that's that.

56:40The most interesting phase is coming soon when J.J. Retic is likely to sign for more money elsewhere. Blake and CP3, Chris Paul are free agents. And how will the franchise move on if one or both of those guys leave? That's the challenge for Balmer. And I think, you know, David and I are not probably here to speculate about the future player moves of the team. But it is interesting to think about something that's going to knock some points off. Migrate is definitely Um, the, the lack of a true president GM in place here to, to, you know, keep a good handle on a good pipeline on all these, uh, depth chart moves. Yeah, but I, I do think I think this will be the true test for bomber as an owner, right? Uh, and.

57:25Where if we're going to like we reserve the right to with tech companies if we reserve the right to change our grades in the future would be his reaction to this. I think it gets back to management and lessons, you know, that are equally applicable to tech companies and startups, which is, you know, it's not always up into the right things happen, right? Like your, your star players become free agents and they leave. Like you can't, you can't change that. That just happens. That's life in a company. The Test of of a management team and the company is how you react to that and do you either you know give up and start heckling your players like Donald Starling like that's that's one end of the spectrum You know or do you do you support your employees and your your staff and your team and make the decisions sometimes hard to Continue to do your best to put the

58:18put the team out there that's going to win and do that really thoughtfully and strategically. Like we saw Facebook do throughout their IPO and afterwards when they realized it was like they lost their stars in free agency as the mobile wave was about to wash over them and they went out and they fixed it. Yep. Agreed. Well, so I'll take your first stab at the green.

58:44We normally on acquired grade with the lens of was this a good financial decision for the acquiring company to acquire the acquired company and the tech that I want to take on it for this episode is to take out the word financial so we can say was this a good decision for Steve Palmer to acquire the clippers and I think that You know the guy had 20 billion dollars and the rest of his life in front of him and I had another friend bring up this idea that It's incredibly rare that an opportunity like this comes on the market and when you're already a billionaire, you know, buying and running a sports team is really only like the hard

59:25that's like the only hard thing remaining for you to do. You're instantly famous when you do this, right? Like your, you know, Jerry Jones made all his money in oil, but then, you know, now he's, he's famously the Dallas Cowboys owner. And like, you can be a billionaire, but not have your name in lights. And I think that, you know, Balmer had a good amount of that already, but for him, you know, what are you gonna do with the rest of your life? This is a really fun thing to do. And you're in this very, very, you know, exclusive club of, of, you know, tier one market owners of franchises. And so there's like some amount of my grade that's going to come from, it's like an A in terms of how do you want to spend the rest of your life? And that is not necessarily a financial decision. On the financial decision, he really is bringing some innovation here. I mean, he's putting a lot of effort into it. I disagree with them not having a

1:00:18a president. So, you know, on the execution of actually doing this thing and kind of furthering the turnaround of this team, I'll give it a B. But, you know, if you have that much money and you want to buy an NBA franchise and make this your second foray of life's work, there's certainly a fun way to do it. Yeah. I think I'm going to try and resist temptation to think about it outside of...

1:00:46business decision, and think about it solely in terms of the price bomber paid. He certainly probably could have gotten this team for a lot worse. I mean, that was coming in hot with that price, but he reset the market. And it's risen to that level. And for all the reasons I talked about and tech themes in before, I think he is kind of catching this wave at the right time where the leagues and the teams as components of these sports leagues have a big technology enabled opportunity in front of them to, you know, change their business model, disrupt themselves into something more valuable. So given that, I'm going to go with B plus because I think he's gotten all the fundamentals right. There's execution that remains to be seen both on the product on the team side and and

1:01:41quite honestly on the business model for the league side too, it's early days. And I think he probably could have gotten the team for a lot less. But to your point, Ben, you know, he, he did not want to miss fire on this one. He wasn't going to lose. And that is, that is classic Steve bomber. Yep. All right. Follow ups and hot takes. We've got a few this week.

1:02:05Instagram Stories was reported that Instagram Stories now has more than 200 million DAU, which is more than all of Snapchat, at least until we see Snapchat's growth numbers for Q1, which they'll be reporting their earnings soon here. That'll be a big big day for Snap Stock. And associated with that, I want to give a Big shout out to listener, a listener named Ross who very kindly wrote Ben and me correcting us on our definition of DAU that we've used a few times on this show where we implied that wrongly that DAU meant people, users using it every single day, doesn't necessarily mean that. It's just the percentage of the user base, the total user base that any product has that uses it on any given day. So if half the, half the user base uses it on one day and half the user base uses it on another day, and then they mix up and various portions of them on the third, you can still have 50% DAU to MAU ratio.

1:03:15But with nobody using it on every single day. So an important distinction. Thank you, Ross, for pointing that out. Yep. And that one other. Yeah, I think we do have one other follow-up from our early episodes. There was a little trailer that was released on the internet this week. Yes. I'm excited. I'm scared. I'm nervous. I don't know what to do with myself other than watch the...

1:03:40the new Star Wars trailer over and over and over again. Wonder if it is Christmas yet. Is it Christmas yet is going to take on a whole new meeting? I'm so excited. Yeah. And I know spoilers on the trailer, but like it all changes in the at the end. So like it's worth watching multiple times and then reinterpreting it through that lens after seeing the end of the trailer. I can't believe I'm giving spoiler alerts for a trailer, but like it's so well done. It's that big. Yeah. Yeah. I can't wait. Yep.

1:04:10Another one is a little quick piece of follow up from the Starbucks episode. One reason that the Starbucks IPO is so successful that we didn't really touch on in grading and is because they delivered on a consistent basis financially for like many quarters after after the offering and they had like tens and tens and tens or I think it was maybe even a hundred months of of month-over-month growth on average in the same store sales. If we ever do a similar analysis in the future of an expanding chain of stores, that's an interesting mark to keep in mind. David, one of the reasons we do this show is to try and understand what makes an acquisition successful, what makes an IPO successful, and zooming in on that

1:04:57that metric of even though you're opening multiple stores because you have more free cash flow to keep reinvesting the average of your same store sales across all stores continuing to rise is a really interesting piece to zoom in on and thing to shoot for. It indeed is incredibly impressive. Tens and tens and even up to 100 consecutive months of of same-star growth. It does help when you are literally selling drugs to your customer, so Starbucks does, but. Any time you can sell illegal drugs, it's probably a good business. Probably a good business, but there, as we talked about on that episode, there are so many more great lessons from Starbucks that everyone can learn. Should we move on to Carbouts? Yeah, let's do it. Let's do it. So I'll take a stab. You guys know we love recommending podcasts.

1:05:47Bill Gurley was on Jason Calacanis' this week in startups this week. Any time you get a chance to read some of Bill's writing on his blog or hear him speak on a podcast, it's a treat because he just has such incredible clarity of thought. He walks through the benchmark business model of really only investing in a couple companies per year and spending just an incredible amount of time.

1:06:11embedded with those companies and and actually I didn't know that much about Bill's background we had touched on when we were When we had Tom Albergon for the Amazon IPO episode He had mentioned that Bill Gurley and Frank Quattrone did the to the IPO and I didn't really know that that you know Bill was a computer science major before that and It's really interesting back here about That's right. That's right. It's super interesting to think about the decisions that guy made and the risks that he took and the way that he looks at the world and the way that he looks at investing. So if that's your cup of tea or if any of those things are your cup of tea, I highly recommend listening to Bill because he is a sage. He is. He and all the folks at Benchmark, they are one of the best and a joy to work with and very, very good at what they do.

1:07:04My Carvout for the week is also a podcast. A really great one. Jenny and my wife and I were on a road trip recently, and this is a Jenny's a member of Sleep Plus, so this is a Sleep Plus podcast that you have to be a subscriber to, but it's worth subscribing.

1:07:25It's called Pop Race in the 60s, and it's by Jack Hamilton, who's a professor at UVA, and he interviews folks. It's only six episodes. It's a short series, but it's great. Each episode is about a white musician or musical group from the 60s and a black musical.

1:07:49musician or musical group from the 60s and comparing them against each other and their how they were viewed by society at the time and their legacies and impact and it is so great. I love 60s music grew up listening to all of it and Jack actually wrote a book, his first book, which was, I believe it's dissertation, PhD dissertation called Just Around Midnight, which is basically, if you can't listen to the podcast, this is the podcast in book form, but Janice Joplin and Aretha Franklin and Jimmy Hendrix and Bob Dylan and the Beatles and the Stones and talking about the importance of race and the conversations across these groups, you know, whether it was, I didn't realize how often both

1:08:37The Beatles covered Motown songs and Motown artists covered the Beatles. They're out there, career, super cool. And also, I know this is going on for a while about this carve out, but I think it's also, as I was listening to it, really applicable to the tech industry and it made me think about, made me think a lot about San Francisco in the 60s and so much of that music was coming out of there. And the counterculture movement and how...

1:09:03Wow, like the tech movement and Silicon Valley really was birthed out of the counter-culture movement and a huge driving force of change that kind of started in San Francisco in the 60s with that counter-culture movement and the legacy you see in that in the tech industry today. So super cool, worth listening to or if you can't listen to it reading the book we'll link to both in the show notes. Very cool. All right listeners.

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1:10:30Well listeners, thanks for joining us again. If you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client. If you've been a long time listener of the show and want to leave a review, or if you just happen to tune in this one and like the episode, either way, we'd love a lover of you on iTunes. So thanks so much for listening. Enjoy the NBA playoffs. Go Caves. Go on. Other than that, we'll see you next time. We'll see you next time.