Season 4, Episode 1: ESPN

Transcript from https://podmenti.com/t/b69925d99ed62aa2

And David, I'm kinda sick of the old theme music, and to be completely honest, I never really liked it.
Welcome to season four, episode one of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert, I'm David Rosenthal, and we are your hosts.
Today we are covering a company that is absolutely synonymous with sports.
ESPN. Indeed. And as they say in the very first moments of their nineteen seventy nine 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,
It was obligatory.
For longtime listeners to the show, you know that we cover um, you know, typically one acquisition and then we talk about it and we grade it, and we have a pretty standard format.
This episode covers not one acquisition, but three, each one sort of fairly monumental, and I wanna outline what that's gonna be so that uh the story has a little bit of structure to it.
as I mentioned, the first broadcast was in seventy nine. Uh ESPN was acquired by ABC in nineteen eight four.
Just one year later, in a surprising events, the smaller Capital Cities Broadcasting Corporation incredibly bought.
took its name and got ESPN along with it.
And then finally, in nineteen ninety six, ninety five, ninety six, ninety five, yep. There was a nineteen billion dollar buyout of
A B C by the one and only Disney.
The capital city's acquisition hell help on the way.
From a certain Oracle in Omaha.
Excited to dive into that. So as David was pointing out to me when I was sort of teeing up uh, you know, how shall we introduce this? The through line and the most important part of all of of this, you know, these acquisitions that each sort of included ESPN was ESPN itself. And so much so that by two thousand and six, a UBS estimate was that
ESPN alone was worth forty percent of Disney's total value.
Yeah.
I love the UBS estimate, man. That was like that was right before I joined UBS. So Oh. Well it could it there it definitely wasn't accurate then because it weren't uh not yet a a David Rosenthal estimate.
Would have been two years later. Indeed. Uh so this episode will largely focus on ESPN uh through the mid nineties and the sort of digital and streaming eras are a whole nother story that that we'll need to tell at some point. But this era of ESPN and its sort of
rise to uh truly be the world wide r leader in sports really deserves its own episode that we're gonna dive into today.
Speaking of ESPN and inside baseball, yes, Pun definitely intended, we did a really fun limited partner bonus show last week. We took our LPs behind the curtains of how VC firms really work, from corporate structure to incentives.
If you're interested or just want to support the show, you can click the link in the show notes to become a prestigious acquired LP or go to Kimberlight.fm slash acquired.
Um, if you're new to the show, you should check out our Slack at acquired.fm. It is full of brilliant people that are uh providing their hot takes on the tech news of the day, often MA and IPO related, and uh is also just a really great, really helpful, really friendly community. So I've really enjoyed um particularly over the last month or so, we've been
on break over the holidays, uh just getting to to chat with folks in there has been really cool.
All right listeners.
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And just tell'em 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.
I I'm glad you teed me up to to say that. I'm glad I didn't know how you were gonna respond.
Awesome and so awkward. All right, listeners.
Let's take it in.
We start.
Back in the nineteen seventies.
It's disco time.
Things are crazy.
in America.
particularly crazy in the burgeoning
Cable.
industry.
Which is brand new, where all the entrepreneurs in America are
Headed.
And we start with a guy named Bill Rasmeson.
Bill was a former Air Force supply officer. He ends up getting into the
Television business, uh, first as a weatherman at an NBC station in in Western Massachusetts. But his his lifelong dream
is to get into sports and he just loves sports. He's a sports nut. So he's doing the weather in Western Massachusetts and uh he starts just like reading sports scores at the end of the weather telecast. And uh turns out people like it. He moves around to a few stations in uh in New England ends up
kind of transitioning from weather into sports, um,'cause he's a natural, becomes a sports director.
And then in nineteen seventy four
He becomes the communications director at the Hartford Whalers hockey team. 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 and his family. And all's going well.
Until Memorial Day weekend.
Nineteen seventy eight.
When
Bill gets a call uh from the Hartford Whalers that he's being fired as communications director. And then he 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.
I I couldn't verify this, but I believe his his son, Scott Rasmussen, who uh had dropped out of college, was pretty young in his early twenties, was also working at the Hartford Wailers, also gets fired that day. Oh my gosh. Too many eggs in one basket. A lot of a lot of eggs in one basket. But you know, they're they're pretty optimistic guys. They decide
that father and son, they're gonna
Team up.
So the first call they place.
is to a local guy they're in uh
Hartford's in
Connecticut, right? Yeah. They're in Connecticut. Uh local guy in Connecticut who is an insurance agent named Ed Egan. He's working for Aetna. You can this leads to ESPN, we promise.
And uh and Ed this went from like the most exciting episode ever to like the straightest most boring episode. Yeah, the straightest most boring episode. But we promise there's more to come. Ed, just like Bill when he was a weatherman, he really wants to get into sports, and he's been trying to convince Bill to start a cable network uh 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 I like your idea. I may not be as helpful anymore as I used to be able to.
And uh but Ed is Ed is undaunted. They chat and they decide like okay, well, we're not gonna get the whalers, but like they're still pretty interesting. Like people care about
local sports we can show
Connecticut sports, we we probably just need some stuff to kind of fill in the gaps.
between Connecticut sports. There's not enough of that, so why don't we add some entertainment
programming as well. And then they're like, Oh, this is perfect. We've got the perfect name for this.
It's gonna be the Entertainment and Sports Programming Company. ESP. Like what good like it's perfect. It's very descriptive. It's short. It's only three letters. Exactly. You know, it's just like ABC, MBC, ESP. ESP. ESP. So they incorporate the company, the Entertainment and Sports Programming Company, on
July fourteenth.
Nineteen seventy eight.
It's worth taking a step back here.
I mentioned earlier that cable is kinda the um
It's like the internet of the time, like where all the entrepreneurs are heading at this point in the late seventies. So at this point, it's less than twenty percent of US 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 air waves. Exactly. You've got the big Ravityer antennas, you know, on top of uh
T Vs and on top of houses. And cable really got started as a
delivery mechanism for houses in rural
you 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 airwave, so we will run a cable.
We're literally gonna run a cable there. Uh 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 I think
Could be wrong here, but I think this is also part of like they ran wires cables along railroad lines, right?
And
That was for telegraphs, but they might also then use that for I know that was like sprints beginnings that we talked about on the sprint T Mobile episode. By this time, by the late seventies, people had started to realize huh, there's something slightly more interesting here than just rebroadcasting
The big three.
stations, like this what's cool about cable is it's not regulated. So like over the air broadcasting that is cool. Yeah, that like it's kinda like the internet, you know. You know, you can ABC, NBC, CBS, like they're basically controlled by the government by the government, but they're regulated on what they can show, what they can say. Um but cable's the Wild West.
And so HBO uh was the first kind of cable network got launched in nineteen seventy five, a couple years earlier.
And then there's this crazy guy who's gonna resurface down in Atlanta.
Named Ted Turner. He owns a bunch of broadcast stations and he's experimenting. He's like, Well, I'm gonna take my
Atlanta station, and I'm just gonna rebroadcast it all around the country. Uh, and everybody's gonna get my Atlanta CE and bought.
The Atlanta Braves baseball team. We're going to show Braves games to everybody. It's going to be great. So people are experimenting. It's against the backdrop of all this that
The Rasmus and Egan.
They're digging in.
And they hear about this new kind of uh
sustaining technology, if you will, in in Clay Christianson terms, uh that's coming along for the cable industry, called satellite transmission.
And it's supposed to be this like great new thing. They don't they have no idea what it is. They're just like, Great, we're starting a new cable network. We want some of that satellite stuff. So they find out that RCA, the big uh electronics company, they've just launched two satellites into space for video transmission.
So the Rasmussen, 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. Uh nobody's bought it yet. So like oh great, we got a customer. Great, we could we can sell you that. What what do you guys, you know, you you ESP guys, uh 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 what are you gonna show?
And they're like, Connecticut sports. And and the RCK guys are like um
So you know the thing about satellite, like what it does
is it takes a video signal and it instantaneously transmits it all around the world. Uh so you think Connecticut 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 R CA's like and there's this other thing too that you know with satellite like
It doesn't go down, you know, it's it's odd.
twenty four seven. So like whatever you put on this video feed is gonna go out.
twenty four seven. And this is like kinda blows their minds because at this point before
satellite uh cable and and satellite, the broadcast networks and even most cable networks that weren't using satellite, they signed off at
like eleven 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 eleven o'clock, and then you know NBC CBS they'd be like, Well, we're signing off for the night. T V was done. T V 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
Mm.
Interesting. So how much would it cost to get a feed on one of your satellites?
And they're like thirty five thousand dollars a month. Actually thirty-four thousand one hundred and sixty seven dollars a month. And so they're like done, we'll take it. They have no money at this point. Like send us the invoice. Net thirty? Can we have like net ninety? Yeah. How about net one eighty? So they go back and they're like
Okay, great. Now we gotta scramble some money together. We gotta uh not only pay RCA uh for space on their satellite transponder, but we need to set up like a whole studio to broadcast. We need to buy some satellite dishes to broadcast.
Where are we gonna do that and how are we gonna get the money?
Turns out there's a town nearby called Bristol, Connecticut. Uh which ESP and aficionados know as still the the home of the worldwide leader in sports. Yeah. Yeah, worldwide headquarters.
The town had this big open space and
uh bunch of acres that they were looking to lease out to
commercial business and it's just a field, like a muddy field. And um but it's nearby.
And so they say, Great. And do you know what it was before it was a field?
I didn't find out what it
It was a dump.
The SPN's headquarters today are still built on an old dump.
Amazing. The most valuable media business.
In the entire world. Yep. And uh what's interesting about that is since
There's no like trees that are growing there. It's this big wide open thing. It's actually perfect for broadcasting satellite'cause it's a complete clear shot. Exactly. They talk about this. They they'd actually first looked at a another nearby town.
But they couldn't get enough space and it was they didn't have a clear line of sight for the satellites, so
Obviously the dump in Bristol was the perfect spot.
Also, just like RCA, they lease this land. They have no money. And they start a plan to build the studios and uh trek in some satellite dishes.
So they go out and they start like they hit the fundraising trail.
There is their seed round. Uh a little bit of money from other members of the Rasmussen family.
And they get a
A venture capitalist in in King of Prussia, Pennsylvania, of all places. Just like right where I grew up. Silicon Prussia. Yeah, Silicon Prussia. Who invests I think the exact amount of one month of of the RCA uh at least. So like thirty four thousand dollars. And so like okay, great, this will get us going for like a little bit of
Yeah.
Let's hit the fundraising trail for real and go get some real dollars to fund this whole thing. And interestingly, I was thinking about what their pitch must have looked like.
So twenty percent 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 D V D based business when no one yet had D V D players. It's like, Oh, we're right on this inflection point, everyone's about to have cable. Like we we got the we timed it perfectly. Yep. Yep, and and
Indeed they did. But also just like Netflix in the beginning, the
all the you know sources of investment dollars at this point, they're looking at these guys and they're like
No. We're gonna need some very protective provisions in these documents. Yes, exactly. That's anyone who's even interested for
along weeks, months, nobody's interested. They end up getting connected somehow
with the Getty family in Los Angeles. So like, you know, listeners, if you've been to LA, you've been to the Getty Museum, which is an amazing art museum uh in LA.
Uh you might know of Getty Images, the the stock image site, which is one of the sons or nephews.
But of course the big behemoth and true uh sort of moneymaker and and parent of the Getty Empire.
is getty oil. Yeah.
And the family is just like
nuts. They're crazy stories that we won't get into here, but like this is a family business in every sense of the word. And one of the things that they're trying to do at the time, uh this is again nineteen seventy eight
They're trying to
as much as possible diversify out of the oil business. Uh the family's going through generational transfer. They're looking for ways to to get their money out of out of oil and diversify it. And so this comes along and they're like, well
Okay. Well why not? And uh there's a guy, uh Stuart Eve, who uh works for the family, who he's really like the champion of of getting this done.
So they start talking to the Rasmussen's about funning this and they're like pretty
pretty interested. The deal's taking a while, though, and the getting bored and the senior family members, they're like are these guys for real? Like who are these guys? They and um
That doesn't have a good ring to it.
He needs to prove that they have something that like is gonna
once they get the money and get all this live that they have like really compelling content to put on to put on the channel.
So he flies
To Shawnee Mission, Kansas. Ben, do you know what is in Shawnee Mission, Kansas? No.
The headquarters of the N CAA.
Ah indeed. And so
in March of nineteen seventy nine, they're still negotiating with Getty.
And Bill emerges
from Kansas with a deal in hand, sign deal.
with the N Cou A.
To air.
all of their championships across all sports and regular season games across eighteen sports
Everything uh including the then super prestigious men's basketball tournament, the NCAA tournament, I think the year before was the Magic Johnson and Larry Bird faced off in the How on earth like
As I was doing research it was
uh it became apparent that they w would have a hard time getting pro sports, right? So like, Oh, we'll go with amateur. But like the N CAA at the time, it was no small thing. No, it was it was like being college football was huge.
Bill, you know, uh great entrepreneurial fashion manages to get this contract.
Uh so he gets rights to every game that hasn't already been given to the big three networks. Um but that turns out that that's a lot of games. Cause even in the NCAA tournament, the big three networks were only showing like the final four. So all the games leading up to it.
Uh they thought nobody cared about them. Turns out they were wrong.
So Bill emerges with this contract and then immediately after that gets getty across the line, they invest fifteen million dollars.
Which is gonna be enough to
Pay R C A for a couple of years, build out the Bristol facility, get the satellite uh dishes.
Hire the first talent.
Mm-hmm.
I think they now that what they bought was eighty five percent. Well, yeah, so okay, this is what I was gonna get into. They invest fifteen million dollars.
For eighty five percent of the company. So like listeners out there, man, you think
Yeah, that is a now fifteen million dollars was a lot of money, so to be fair.
It was kinda 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 a commercial agreement as well, but not with uh with Getty.

Uh are you referring to the beer agreement? I am. Yes. Yeah, so I I I will, yeah. So Anheuser Bush uh came to an agreement with ESP. This is still before his ESPN. It's the largest advertising contract in cable television history at one point three eight million dollars.
uh that they will uh be the exclusive beer advertiser on the new ESP network because and there's some quote that one of the executives had there had where they they say something like,'Cause we just thought, you know, beer and sports just go together. This will come back in one second on the on the day it goes live later in the fall.
But uh before they go live.
After they sign this deal.
I I I couldn't find out who kinda initiates this, but
somebody, whether it's Getty or Anheuser Busch or or somebody with any ES ESP, they're like, you know guys
This ESP thing. It sounds kinda corny and uh it doesn't sound super professional. And it's confusing because three letter acronyms are you know broadcast channels. Yeah. Exactly. Exactly. So
They started looking out and you know other cable networks that were getting started at the time, they all called themselves networks. It was like the you know L Y, you know, domain name of the it was uh or labs or whatever. Yeah. Which is fascinating,'cause 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 a network. I I guess because all the
Endpoint homes were networked to over cable to the one broadcast source but maybe it was that they they had a affiliate
distribution agreements with different cable operators throughout the country, that could be, which we'll get into in a minute here, too.
Anyway.
Everybody loves it.
They say, Great, we're gonna change the name of the company. We are now the Entertainment and Sports Programming Network.
ESPN.
Worldwide leader.
And actually I think there was a brief period there where they they changed it to ESPN TV. It's like ESPN dash TV and they were like oh wait we can't launch with that. Yeah, that's that's too much. That's too much. Let's go with E SPN. So they launched they end up launching with ESPN. Also before they launch though, remember Getty just bought
w way more than controlling interest in this company, eighty-five percent. Um yeah, you're now an oil company subsidiary. Yeah, exactly. And uh 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 Getty in wanting to act like a
True venture capitalist at the time, that is what they did. Now in this case it's
debatable whether they did this because they felt like they should or because it was the right thing. Probably both. The Rasmussen were
Amazing entrepreneurs. I mean getting that N Cou A contract was like
Nobody else could have done that except somebody who was a true entrepreneur and at Egan too.
But they weren't really equipped to like
you know, build out a media empire. And to illustrate that point, uh so they got sold by these cable guys that they should spend all this money on a uh satellite transponder. And the way that they sort of orchestrated getting that all connected apparently, and this is like ESPN urban legend,
Um the cable was connected to the satellite only five minutes prior to the first broadcast. So like not exactly sort of like operational experts in this industry. I believe it. But you know, enterpr extremely enterprising entrepreneurs. Extremely. So
That summer.
the Getty family basically forces Bill and and Scott and Ed to kinda step back from day to day involvement. They make Bill the chairman of the company, but it's kinda in name only. He ends up leaving fully the next year in in nineteen eighty, but they bring in this guy Chet Simmons.
And shit.
was a legend. He had been president of NBC sports uh at NBC.
And they convince him to come in and take over as president of ESPN.
And he brings along with him this guy named Scotty Connell, who was his kind of number two
At NBC Sports and who was responsible for all talent. And the two of them they bring into ESPN even before launch and then in the first few months after launching.
Like some names you might have heard of. George Grand, uh who depending on your age, you may may or may not have heard of. Chris Berman, Dick Vital, Bob Lee, Greg Gumble, amazing talent into this brand new startup.
And almost all these guys except for Dick Vital
are like twenty three to twenty six.
Yep. So like the Chris you know, we all sort of like know of Chris Berman today, you know, y you know I think Bob Lee was twenty three. Yeah, I think that's right. Young, you know, super young hotshot broadcasting crew. Yep. They they were
absolute pros at identifying and and nurturing talent. Yep. So September seventh
Nineteen seventy nine.
They go live and
And the first show that they have, they had talked about this before launching. They they thought, you know
We're gonna have
sports. They decided to drop the entertainment. You know, uh I don't know if that was the Rasmussens or if that was when Chad Simmons came on board and they made this really we're gonna be twenty four seven, the world's first twenty four seven cable network and first twenty four seven sports.
destination. Kind of amazing they kept the E 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 uh at 630 pm kind of right in the middle of prime time. Every day they're gonna do this every day. And they would recap the highlights and the scores.
of all the sporting events in the country throughout the day. Yeah. This was like super innovative because
The only way to get sports scores was if your weatherman decided to read it on your local local TV channel or to open up the paper in the next morning. And even opening up the paper next morning, the paper went to print in the East Coast before the West Coast games were done. So there was no way to get scores real time. They thought this would be like kind of the linchpin to all of it.
And they decided oh yeah, it's like the center of
of you know the day. It's the sports center. And so when they launched at six thirty PM
On September seventh, nineteen seventy nine.
The first thing that went live was Sports Center. Yeah. And it was beamed
Uh via satellite.
to one point four million US
Households.
On day one and the network has been going
Ever since.
Lee Leonard and and George Grant on for thirty minutes. On for thirty minutes. Followed
By an incredible uh fast paced action.
of a slow pitch softball game. The teams of which were the Oh shoot, I probably didn't write down it was two other beer companies.
the the teams where that was their names. Oh no way. It was not Budweiser. And so they got into a huge row with Anizer Bush, which is just broadcast. And then on the first broadcast. I think they and they had wrestling, they had some college soccer, like it was a it was a long night following uh following sports center. It was a hodgepodge.
Yeah, shall we say. We will put this link in the show notes, and I we we just tweeted out a link before recording this episode too, with with just some sort of uh photographs of 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 ten second video clip of like zooming in on some clouds and then there's like this weird slow pan to a guy in a studio who's sitting at at the desk and it's like
Yeah, you're kinda like Whoa you're like in an abandoned warehouse. Like this is not this is weird. This is and it's all terribly colored and you know, it was it was seventies television.
And apparently there was no uh air conditioning in the studio. But of course they have to wear it. And of course they have to wear suits. And so people are just like sweating and not to mention seventies suits being so stuffy. Yeah, polyester. Oh it was great. It was great. So from that
You know, especially as beginning. Um
Again on the back of this N C double A agreement.
March comes around of nineteen eighty, they start showing the tournament games and
And they had hired this guy, a former coach
To be
The announcer for most of the tournament games.
Dick Vital.
And
It just like
takes off. People can't stop watching all around the country all this, you know, these exciting games and the single elimination tournament, this great announcer gets super excited, uh calling them and people start coining. I don't know who actually who if it's attributable who first coined the term.
People start calling this March Madness. It didn't exist before nineteen eighty when ESPN starts showing it. And this is a theme that I wanna keep sort of listening for throughout the episode is
Is ESPN
in the business of market capitalization or market creation. When I first started looking into it, I was like wow, ESPN was like right on the crest of all these waves. Like this is amazing. They got March Madness right as it was happening. They got, you know, they created March Madness. Yeah, later on we'll get into Sunday football and Monday night football. And actually what ESPN did was create

live sports entertainment could become the phenomenon that it is rather than sitting there and capturing the the phenomenon that it is. Yep. I think it's worth a pause here. We've talked about this a little bit, but
There were two real innovations that ESPN kind of had right off the bat. One that we alluded to
is this concept of twenty four hours. Like they were the first twenty four hour
television network. Obviously Ted Turner was was rebroadcasting
the Atlanta super station, but CNN hadn't launched yet. Um
And like what's crazy is like the the media business, you gotta think back to then, like
It was headquartered in New York.
And
All anybody thought about was the East Coast prime time. Uh so again, this you know, the sign off at
Eleven PM Eastern. That's eight o'clock on the West Coast. It probably really benefited. I mean I know
Bristol, Connecticut, is not too far from New York, but it really probably benefited them to be sort of out in the middle of nowhere and not caught up in sort of the group think of how do you run a media company in the city. I think most of the
A huge portion of the cable
penetration at that point was in the middle of the country and on the West Coast. Uh again, where like the whole media industry and the broadcast industry hadn't built up as much. So that was one.
And then two, they were like there were other, you know, sort of niche cable stations out there with lots of crazy things happening. I feel like ESPN was the first really huge niche community that got built. Like
And I mean niche in terms of like
a s hyper focus on one thing that like lots of people are passionate about, not niche in terms of small. Yeah. You know, because like the broadcast networks, they did everything. Like NBC sports, you know, that was a small portion of what NBC did. Right. Um whereas ESPN was like just one thing and they started creating this
community, you know, around it. So it's interesting, like the notion of like the internet as infinite shelf space or as sort of infinite pages in your newspaper. Yeah like cable was the first time we always make fun of cable. It's like oh there's only fifty cable stations. The internet has infinite. But like going from three to fifty was kind of you know you could
There were still some pretty big niches available for you to to own. Yeah, totally. So on the back of this and the innovation they were driving around it, like March Madness and the like
They also got the NFL draft in April and they made the NFL draft a thing. Like it was never broadcast before ESPN. And they were always trying to get into the NFL and this was the first thing that they could get was the NFL throws them a boom. Yeah, you can't have any of our uh you know games. Cer certainly not the the Super Bowl, but uh
Here, take the draft. Take the draft, right? And they made it into like, you know, an appointment viewing an event and the clock and everything. So a couple of years later, they're growing like gangbusters. Also, don't forget, in eighty three they did have the US FL.
That's right. That's right. There were there was a period in time where
There were a few
uh leagues competing with the NFL in the US around this point. Yeah. And I I think the AFL
May have been a separate league and then got folded into the NFL and created AFC in the NFL. I think the USFL was around for three years. The ESP ESPN got exclusive rights to it. They were like, Oh my God, this is gonna be huge. We're gonna blow it and then you know ESPN has definitely had some uh uh for as much as they've sort of bet correctly and created waves
They definitely have also had some where that just sort fell apart. I I think this is right. So the Chet Simmons, who had come in to replace Bill as president from NBC Sports, after three years he left and he became commissioner of the USFL. And I think that's what kinda got that relationship going. But yeah, uh despite that.
Growth was great. And a few years later.
there in like nineteen eighty two at this point.
They're growing, they're adding more cable operators that are carrying ESPN, uh, they're adding more advertisers, but all this is costing money. And of course they're covering more events, that costs money. They're at a point where they're burning eight million dollars a month.
in nineteen eighty two. Uh and get it. Three years after they start brought it up. And
Getty is financing all of these losses. Um because they own the business. You know, it's not like they're outraising money because they already own the business. Right. They're getting pretty nervous, though. They 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.
thing. We're not actually sure why we did it in the first place. Well they this whole thing and their oil business as well, uh which will come up in a sec. So in nineteen eighty two
the family Getty family sells a ten percent stake in ESPN.

to help offset some of these losses. Um I don't know. I don't think it's like they're a broadcasting company, it kinda makes sense. They could be helpful here. Yeah, exactly. You know, help professionalize this thing. Yeah. Uh and Chadwick come from from NBC had just left. So they do that.
Now
That was a pretty bad move. I couldn't I don't remember exactly how much they sold it for. It wasn't that much money. And it came with the right for ABC to buy a majority share later on. Kinda like the the Disney Bam Tech deal that we talked about earlier and what's that probably season one or something, but Yep, yep. Um yeah, that was back in season one.
Wow. Because right around that time
ESPN comes up with a third
super critical innovation.
And that is
That they change the business model.
For
Cable.
So up until this point when ESPN first started, and they were going out to all these local cable operators all throughout the country.
They were
having to pitch them to carry this channel in their lineup.
And and for most of them
They said, Yeah, great, like I'll carry it if you pay me. So ESPN uh was actually paying uh
Most of their operators to carry the channel. And then you get sponsors to offset the costs that you have to pay for distribution.
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 Bodenheimer. And he starts as a driver. Like literally, he would drive to the Hartford Airport, pick up all the talent that's coming back from like broadcasting these games all around the country, bring them into the studio and ESPN. 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.
E S P N is
Like the customers of these cable operators
They love it. They can't get enough. If they didn't pay it, if they didn't have it, they would revolt. What if we
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
So this happens a couple times.
And this has happened in a uh a few sort of instrumental moments in businesses in history where they realize, Wait a minute.
We're actually doing them more of a favor than than than they're doing us. And you you can actually successfully reverse the flow of money.
We we cannot overstate how important this was to ESPN.
And to the entire cable network industry, all the cable industry.
This completely changes everything. So much so that George Bodenheimer, years later in the nineties under Disney, after Disney acquires w what ESPN would become, uh, he becomes the president of EV ESPN. Pretty good idea. Pretty good idea. Um
So they pull the plug on a couple stations, and exactly that happens, all the subscribers of these cable distributors, they start revolting, they start like picketing, they start showing up at the offices, like d demanding ESPN back.
take this to business school. Basically what happened is the end customer developed a stronger relationship with a supplier to the cable provider than the cable provider itself. And would sort of
they were provider agnostic and would go wherever that supplier was. And so if you're the cable network's like
W 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 and really the question is here.
you know, there's two ways to create a a ton of value. Own the linchpin of of content or own the linchpin of distribution. And I suppose they needed to maintain a monopoly on distribution in order to uh
secure that they would be the only game in town to have access to that content. And as soon as they
became commoditized the and and what people viewed as unique was the content they were gonna get
You know.
I think this is probably inevitable. I mean the same thing played out with the internet, right? Like
In the first boom of the internet.
Remember telecom companies were so highly valued and like ISPs and all that, and they controlled distribution and blah blah blah, and AOL was this integrated provider, they were an ISP and
content company.
But
You know, fast forward to today and like Netflix
Google, you know, what Facebook, what have you.
All right.
exponentially more valuable than
Comcast, uh, you know, w whoever's providing the pipes to Verizon or whomever to
To the home. Or to for wireless.
So yeah, this is pretty big. The first big deal that ESPN does with a very large cable provider where the cable provider pays them was with cable vision, the Dolans, uh Dolan family in Long Island. Who went on to own the Cleveland Indians. Yeah.
And the New York Knicks and
Many other uh and Madison Square Garden.
Anyway.
But mostly the Cleveland Indians. Um they do a deal where CableVision is now gonna pay ESPN ten cents per subscriber.
For every
Cable Vision subscriber.
And that's the dawn of the affiliate fee era.
Uh beginning ESPN's real behemoth business. And that becomes two thirds of ESPN's revenue over time.
Shortly after this, by nineteen eighty three, ESPN has now become the biggest cable network in
The US and not just the biggest, but
You know, the only one that's like making money from the cable providers in addition to advertising.
In January nineteen eighty four
We'd mention the Getty family was.
They end up selling the whole thing, getty oil.
To Texac for$10 billion. And Texico, of course, is this huge oil conglomerate. They're not a family run business.
And they like, you guys have all the like there's all this stuff that comes with gay oil. We gotta get rid of this thing.
So turns out there was a guy
on Texaco's board uh named Tom Murphy. And uh Tom Murphy was the president of a little company called Capital Cities. And what was Capital Cities?
Boy, so Capital Cities, it is worth winding back the cock to understand what Capital Cities is and just what an incredible business story this is.
So Capital Cities started with Tom Murphy in nineteen fifty four when he was recruited to run a struggling TV station called WTEN in Albany, New York after graduating from
Harvard Business School.
So Murphy was a 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 he's new management.
they they lean it out and and make it profitable.
So he and the owner, Frank Smith, then decided to buy two more stations over the next couple of years in Raleigh, North Carolina and Providence, Rhode Island, and
Capital City's broadcasting was born.
Mm.
So, yeah.
Of the estates. Like is that the Uh I think so. I mean Providence I think is Albany definitely is. I think Raleigh is.
Yeah, I don't know.
Yeah. I always wondered where like the capital came from. Yeah. Yeah. So Murphy, of course
And he's got responsibilities across capital cities. He needs to get out of running this Albany station. So he needs to hire someone to do that. He he hires uh Dan Burke, who's another HBS grad, also no broadcast experience, but uh you know, really clear linear thinker, trusts him. I think it's an intro from one of their brothers or something like that. So hires him to to run that station.
So from this day forward, the DNA of capital cities was set. Uh they were
Completely
like bottom line driven, super lean, um, and they were very decentralized. So what was important was that uh if you you think about sort of the um
Berkshire Hathaway style of management. We're not gonna have a big, you know, central staff. We trust the managers to run the market. They're just like you guys are on the stations, we're allocating capital here. Exactly.
Exactly. So so Murphy and Burke um were a fantastic duo over the next several years with Murphy who became CEO as kind of the master strategist and the capital allocat, and Burke, who was the COO, the lean mean operator. So this this dream team of uh of executives.
So throughout the seventies and through sort of the mid eighties, they operated a super calculated strategy of expanding across local T V stations, some newspapers, and in this new cable medium buying some cable stations all across the country. Cable distributors, right? So they're they're
They're starting to buy up.
Yeah, that's right. Yeah, it's it was distributors of the, you know, of the much smaller than cable vision, but the types of folks that, you know, ESPN as a network is then going out and doing these affiliate agreements with. Exactly. Exactly. And
another sort of tenant here is they only expanded within their media and publishing vertical while others in the industry like CBS were embracing sort of an eighties 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 R J R Novisco.
Yeah.
Capital Cities, their their playbook was extremely simple. They would buy a station, they would operate it leanly and profitably, so they would get some great cash flow from it. Then, you know, with those nice cash flows and on the their ability to show those cash flows, they would raise some debt capital at favorable terms.
Then they would go buy another station, then they would quickly pay down that debt that they used, and then they would expand. Lather, rinse, repeat to dozens and dozens and dozens uh across the the US. And
You know, they weren't big on PR. They weren't like people still don't really know the name capital cities. It was kind of this like
almost sleeping giant of just really well executed, disciplined businessmen. They were totally obsessed with decentralization. They actually printed on their um
uh 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 where I I can take us through uh in January of nineteen eighty six they made one very unconventional acquisition. Well before we get to that
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So we just mentioned, you know, Texco had just bought Getty and Tom Murphy, the CEO of Capital Cities, is on the Texco board.
So Bill Grimes, you know, the new president of ESPN who'd come from CBS, he figures all this out. And so he's like
All right. You know, he's worried about his job. He's worried about ESPN, what's gonna happen to it as part of Texaco. Yep um
He goes
To see Tom.
And he says, You know Tom's based in the New England, just like him. He says, Hey
You should buy ESPN. You know, you're on the board of Texco, like you know, like they don't want this, they want to get rid of it. You should buy ESPN. It's a natural fit. We're the best cable network out there. You own cable distributors, you own all this stuff, keep it decentralized, do all this.
Tom says.
You know that's a great idea.
I just can't do it right now. I'm working on something.
Bigger. And this is a trademark Tom Murphy thing where he would know exactly what price he wanted to pay for something. He would know exactly how operationally efficient he could run it afterwards and he wouldn't pay a dollar more. Yeah. And 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.
Yeah, right now. So but he has this master plan. He's working on something bigger.
To come in one sec, but he's on the board of Texas. Texico starts a bidding process for ESPN. They're they're divesting the company.
There are two main parties who are interested in buying it.
One.
Is
Ted Turner.
Down in Atlanta.
Uh you know, he's I think I think CNN has I think has launched at this point. So he's like
you know, the canonical cable entrepreneur. He's the It turned out it wasn't Atlanta sports that people wanted to watch nationwide, but it was uh cable news. News and so he sees you know, he sees ESPN, ESPN's bigger and and is like and in fact the twenty four hour
Aspect of CNN was copied from the
Um
And so he's like, Great, I wanna own ESPN. He's like putting together bids.
The other interested party is ABC. A B C
they already have this 10% stake that they owned in ESPN and option for more. So the first thing they do, they buy five percent more from
Getty and Texas. They get up to a fifteen percent 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 and Turner.
Uh and again remember Tom Murphy's on the board of Texas.
Somehow ABC ends up winning the deal.
Uh now they probably would have anyway, because they already owned fifteen percent of the company and had the inside track. Anyway, they buy
The remaining
eighty five percent that they don't own a V SPN from Texaco Getty and the Rasmussen still owned or their original fifteen percent. They buy it all out. They now own a hundred percent of ESPN. Which I think is the first and last time that somebody owned one hundred percent of V ESPN. Well the first time was when the Rasmussen started it. Yeah.
And then this is now the only moment in history where ESPN is wholly owned.
By ABC. They pay a hundred and eighty eight million dollars for
The eighty five percent that they don't own. And remember it was valued at like
eighteen million dollars when Getty sort of first bought it and of course put a ton of cash into it along the way. Hey, ten X. We'll take it. It's like um
the Tencent episode. Yeah, 10X? I'll hit that bid. 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 twenty percent of ESPN.
To R J R Nabisco. I thought it was Hurst. No no no. Hurst then buys it from Nabisco. This is this is crazy. This is this is nuts. This is where Can you elaborate on the R J R part of Nobisco? Yeah. Okay. So so Nobisco, people probably at least our our US listeners probably know Nabisco. They think, you know, it's like a
Cookers and crackers and it's a it's a C P G company. It's like you know, Practor and Gamble or whatever.
They had merged with RJ Reynolds.
What's R J Reynolds sounds innocuous.
Turns out.
R J Reynolds is a tobacco company.
Camels.
Winston's Salem's, they're headquartered in Winston, Salem. All of it's the biggest US cigarette company.
And at the time.
That's where
You know?
A big thing. Uh and they would em become embroiled in all sorts of lawsuits. But because uh they had uh, 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. Oh my gosh. And in particular, one of their
strongest channels for advertising cigarettes.
was NASCAR and uh 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 and they really kinda elevated.
And so Novisco, R JR Novisco was super interested in ESPN, had this thought they would have this great synergistic relationship. They end up buying
Buying this twenty percent.
stake from A B C It was something like A B C 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 baseballing watching all of this because his grand plan soon gets revealed. Yeah, so in January of eighty six, this is their uh you know, they made a series of very conventional small acquisitions that, you know, were
In total something to write home about, but individually nothing to write home about. This is very different.
So with the help of uh some financing from from Warren Buffett, who r who uh sort of identifies the twinkle of a soul in another in in Tom Murphy. Very sympathetic. Yes, yes. Invests uh both debt and equity.
And Capital Cities executes a three point five billion dollar purchase of ABC and all their related broadcast assets in New York, Chicago, and LA.
The Wall Street Journal runs the headline the next morning, Minnow swallows whale. And this is in the beginning of nineteen eighty five. So like eighty five months after all of this went down with ESPN and ABC and Novisco.
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 A B C, they would not have been able to raise enough money. Um 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 for twenty bill. Like this three and a half billion dollars completely unheard of outside of oil and gas. Completely unheard of. So
Just to to kinda close the loop here in capital cities.
Murphy and Burke had the track record to show that they could run this same playbook and bring in you know their the operators that they were used to of over fifty percent with all the capital city's properties.
to ABC, which was currently in the low thirties. 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, un under all this debt anymore. They they're it's looking really good. And remember ABC, again, which had just acquired
E S P N
A B C
Broadcasting, they only made revenue from advertising.
They weren't getting these affiliate fees from the cable operators.
ESPN now.
They're getting to to this this the importance of the real duel of this action. Yeah, that's the jewel. Like they're getting
As as 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 Cities takes the name of E A B C'cause, 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 their culture, product, headcount, balance sheet, everything looked much more like capital cities than it ever did ABC, even though the company is is sort of called ABC now.
So crazy aside, before finishing this up, Dan Burke's son, Steve Burke
also rose to prominence through through Disney and then through the media industry. He's now in twenty nineteen the current CEO of NBC Universal. Total dynasty. Crazy. It's worth noting so a a decade later
Well, actually I'll come back to this as we dip into Disney here a little bit. Well
So okay, so that transaction gets done of the capital city's minnow swallowing the whale of ABC uh in March of nineteen eighty five. Immediately remember Novisco, like they're trying to pump out these cigarettes. Uh they
Go see Tom Murphy.
And say
Oh, hey, you know, you really wanted ABC, right? You didn't want the C SPN thing. Let us just buy it all out from you. We'll pay you five hundred million dollars for it. And and actually that w that probably was really hard to turn down for
uh Tom in capital cities because they just, you know, raised all this debt to buy ABC. Right. Navisco thinks they're gonna get it. But
Yeah.
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.
Navisco is willing to pay five hundred million dollars for ESPN. I think it was valuing it at five hundred million dollars. And what's the time frame from when This was nineteen eighty five and it was just before in
nineteen eighty four, when ABC had bought it for one hundred and eighty eight million dollars for eighty five percent. Wow. So
You know.
People are starting to realize the value in this thing. Yeah.
Nineteen eighty six.
was a huge
Year for ESPN.
On
Yeah.
Together now with A A B C All Under One House.
They get ABC and ESPN together under under Capital Cities, they get NFL rates for the first time. Boom. Boom.
And this is, Ben, as you were alluding to, Sunday night football, Monday night football. Uh, it becomes huge. And not only that, the business innovation at ESPN, like we can't overstate how important it was.
They've already started extracting fees from cable operators.
They had to pay a ton of money to get the NFL rates. The NFL, of course, knows how knew how valuable this was.
Um but it was nowhere near sort of the crazy prices that it is today. That it is today. But still for for the time I mean it was a lot of money. What does ESPN do? They go back to their cable operators and they say, Hey, we just acquired these rights.
This is gonna be, you know, ESPN was already super valuable. Now it's gonna be astronomically valuable, but it cost us a lot of money to do this. We're actually gonna, you know, the the amount that we paid for these rights, we're gonna push it down to you and we're gonna increase your
affiliate fees commensurately to offset
a hundred percent of the cost that we're paying for these rights. And there's of course nothing that those cable affiliates can do. They can't do and and there's a whole big showdown and again a couple of them say, like we're not doing that, we walk and within weeks their subscribers are calling them up, they're petitioning, they're canceling, like they're
They really they have no leverage. Um to give you a sense, it's it's been sort of climbing. I think originally we talked about it being ten cents. Twenty thirteen it rises to like five bucks. I think it m may have risen to somewhere in sort of the eight dollar range. Like the it's really
Over time it really grows. Yeah. And on the and the back of that, I mean
To give you a sense.
That is, you know, by this time, they are over five the the carriage fees, the per subscriber fees that cable operators are paying ESPN is over five times
any other channel out there. CNN.
What have you, you know, A and D, 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.
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So okay.
Quickly back to RJR Novisko, our tobacco peddling friends. If you are familiar with uh the Warren Buffett uh type of history, not Warren himself, but um
You know, uh private equity and leverage buyouts.
uh you might know a little bit about
the most infamous deal that the firm KKR ever did.
which was in nineteen eighty nine, they do the largest LBO in history, leverage buyout in history. They acquire R JR Nebisco for twenty four and a half billion dollars. And this becomes the subject of the book Barbarians at the Gate. Classic, classic book also got made into a movie
Um we should note here too, a lot of the history that we're taking for ESPN comes from a great book, Those Guys Have All the Fun. Um focuses really more on kind of the cultural history of ESPN, but it's it's just such so great, like oral history is uh interviews with everyone.
has a bunch of the business history too.
So
And Nebisco gets acquired by KKR, they take out an insane amount of debt to finance this thing, like absolutely insane.
they start selling off assets to start paying down the debt.
And uh one of the things that they sell off is their twenty percent stake at this point in ESPN that they sell to the Hearst corporation, uh for
A hundred and seventy five million dollars.
Wow. Oh my gosh.
Especially these these non media businesses that owned parts of ESPN, they just do not
understand the value. Well, it shows a lot of that timing dictates so much in the price that these things get sold for. It's sort of like when you buy a house and suddenly like you must get rid of your house. You can't wait around for the best offer like you're now a seller, not a not a um you're
It's not like you're not raising right now. You are very actively raising right now. That's that's not a good place to be. So Hurst still to this day owns twenty percent of ESPN and
have been repaid on their investment many hundreds of times over. Can we talk about that? Like we're about to get to this Disney thing, but like in in everybody's head, like Disney owns ESPN. Disney owns eighty percent of ESPN. They operate ESPN, but Hurst still owns twenty percent of the freaking business. It's crazy. Hearst does they they don't do anything. They're a minority shareholder.
So Disney uh operates it. The P L flows through to Hurst, but um Hurst, of course
the William Randolph Hurst organization, you know uh the publishing magnet. Um
subject of the movie Citizen Cain. There's other things within the Hearst Corporation now, Condemnast and and that like uh the likes of that.
But
Their twenty percent stake in ESPN is all of it, basically all the value there. Um
It's totally crazy.
Especially in this the price of this deal, like
By the late eighties, early nineties, like
Yes, PN is
Is ESPN at this point. We're talking Dan Patrick and Keith Alberman on SportsCenter, Stuart Scott, like Booya, you know? Got Rich Eisen and Katie 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 or twenty four seven. Yeah. I mean
In my house growing up, it was literally like
ESPN was on all day. You and like forty to fifty other million Americans. I know. It was awesome. Uh
Ninete four, they hire the famed at agency Wyden Kennedy, that of course has always done uh Nike.
So my so good.
The best one ever, I think, is the uh Lance Armstrong cycling in the basement.
Yes. Yes. Or Lebron's uh Lebron's throne.
Years and then it's like I can't it's like Stuart Scott or someone walks uh
Uh or LeBron w tries to walk back to his cube in uh in Bristol and he sort of looks and uh his chair is not there and he looks in the cube next to him and I think it's like Stuart Scott is sitting in a throne at his desk and Stuart Scott turns around and he's like
Oh uh sorry, is this your chair?
So so good.
We uh go read Those Guys Have All the Fun, uh the the book,'cause 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, Stort Scott and
cool as the other side of the pillow and booya and just like
It changed everything. Yeah.
Uh everything. Um
So anyway.
E SPN is
Crushing it.
Through the early nineties.
And then
In the summer of nineteen ninety five, our friends.
Mr. Buffett makes another reappearance. He does, and he uh
He suggests to Tom Murphy that uh he should get together with Michael Eisner, who's the CEO of Disney. This is at the Allen and Company. Yep of uh media and now technology uh hundred millionaires and billionaires. This is
Amazing kind of how fast this deal got done. And so in a matter of days they had worked out the terms and Disney buy of course because Berkshire Hathaway is still a large investor in capital cities at this point.
Disney buys ABC, which contains capital cities or is capital cities and contains ESPN for nineteen

Which represents thirteen X cash flow and twenty eight X net income. Yeah, and was at the time the third largest acquisition.
Ever. Of course the R Jar Nabisco buyout had happened. Um
A few years before that was the largest go so well. But third largest deal ever, and of course
The cable network.
division of uh of ABC capital cities
is the jewel uh at this point, and of which all of that is ESPN. Yeah, I th I think it's something like of that nineteen billion
I think it was something like four billion alone is attributable to ESPN.
It may have been a
It may have even been more than that.
Hard to say exactly. Whatever it was.
By
The
kind of mid two thousands.
the cable network division within Disney
Which does include uh, you know, the Disney Channel and s some other things, but ESPN exists is you know ninety plus percent of it or whatever. Um
That is driving over half, over fifty percent of all the operating profit for the Walt Disney company.
Like
Theme parks, movies, you know, everything, you know, merchandise, all of it.
ESPN is over half of the profit. Yeah. And if we really want to fast forward, and 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 uh there was a analyst estimate from an investment bank in twenty fifteen that ESPN alone was worth fifty billion dollars. Yeah.
Crazy.
I mean really, you know, it's funny, we did our
Back in season one, our Disney trilogy, which was great in their
certainly are more um
more episodes we'll have to do to add on to that in the future. But this is like this is the foundation of it all. Like of course Disney was a great company before the ABC Capital Cities deal, but like if you look at just pure value creation within Disney, like, you know
Lucasfilm, Pixar, Marvel, whatever they've done, you know, in the past, like
Those are peanuts compared to ESPN. Mm-hmm.
One really interesting way to reflect back on this is a phenomenal book called The Outsiders, which is about unconventional CEOs who sort of uh
defied what other people were doing at the time in their industry and ran ran their business a different way and and the first chapter is about capital cities. So super instrumental to the research for for this uh episode had this great comment to give the rise of capital citi some context.
If you had invested a dollar with Tom Murphy when he became CEO in nineteen sixty six,
That dollar would be worth two hundred and four dollars at the time he sold to Disney.
That's a remarkable nineteen point nine percent IRR.
over the twenty nine years.
Which
significantly outpaced the S P five hundred ten point one percent.
Mm.
I mean
Just
Well you see why uh Warren Buffett uh
Likes him. Yep.
We're gonna wrap up.
History and facts on this episode here.
Uh, Ben, as I think you alluded to
At some point there there is another major acquisition in the story here that happens uh in the
I think in the nineties or two thousands wanted to do the work um of a company called Star Wave.
Actually here in Seattle. Yeah, like a mile from where we're sitting. Yeah, which uh
becomes we're doing an in person episode today, uh, which is awesome. That becomes the backbone of all the digital assets of the P dot com fantasy, what would become the apps, you know.
Simmons podcasting, all 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.
Yeah.'Cause there's not that much integration that really happens here in any of these things. It's not like they're integrating a product into their sales channel. They're of course buy like ESPN just had an insane amount of talent, one of their differentiators where they were an amazing sort of magnet and talent development pipeline.
But like a lot of these times where we talk about plugging in a product to improve your flywheel, there's that to some degree. And in fact, Disney talked about Michael Eisner at the time of this big acquisition was doing the press circuit and talking about how ESPN was a brand upon which they could could apply Disney's resources and really
fuel that brand to be other things. That was less successful, I think, than like they w ESPN zone and all these different ESP ESPN the magazine was fine. Um, but like the core business is still really the the carriage fees. So E SPN didn't need Disney to do a magazine. Like you know. And it's not like, you know, prominent
d ESPN things in the theme parks are driving a material piece of it. So to me, it it was a amazing business line that uh with sort of the right continued management and access to capital and could kind of keep growing on its own and the business line itself just kept getting bought. Yeah. And
Even going back to the original Getty Oil investment, like that's what it was. It was diversifying out of oil. It was a business line, like they weren't gonna integrate that into the oil company. Um and for folks new to the show, uh, we have categories for this people, technology, product, business line, asset, consolidation, or other. And that's sort of grown over time. Um the way that we differentiate
Between product and business line is you know, if if a product would be Facebook buying Instagram and then plugging it into their existing business, this this is sort of this is not that. This is its own business.
Our next.
section that we do is what would have happened otherwise. I was also struggling to think about this, but I actually think the
To me the interesting story here is not
what would have happened otherwise. It's like
What should have happened otherwise, but didn't. Like, you know, N Nibisco, like cigarettes, like all the like there were so many things along the way, like getting all like
Any other business that hadn't captured such huge waves and
brought such huge innovations to the industry would have been capsized by all these machinations like Getty Texaco, R Jair Nabisco, 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. Yeah. Yeah. So I think uh
It's almost like it it really threaded the needle on managing to realize his true potential without anything disastrous happening. Yeah. Yeah.
You know, again, m these huge innovations, you know, twenty four hours, like community, uh like especially around sports center and
You know, um 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 this kinda I think happens over and over again that show that uh
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 what made them so good.
So Murphy was able to acquire companies with confidence because
The first piece is the business was already so decentralized that whenever they would acquire a company
integration would be easier because there wasn't significant integration to do. They really sort of like installed the right manages trusted them to run it. Um, 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 at auctions, but when they did identify something they wanted and they 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 David and I, like what uh you know so what have you guys learned from the show? Like what are the 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, you know, running this this combination of decentralized and lean really did allow them to uh
efficiently make acquisitions that were very likely to be successful. Yeah.
It's been fun learning about uh capital cities and learning from learning from you. Ben did most of the research on it.
It's not a story that's oft told, you know. Uh Tom Murphy is, you know, nobody knows Tom Murphy like everybody knows Warren Buffett. Um
But uh you can just learn so much from
how these how these people have have allocated capital and operated. Yep. You know, my big one my big learning from this is uh
In a lot of ways this is obvious, but 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 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.
you know, technology wave. Uh
In this case, the technology wave was uh cable. But you also, if you can marry that with a business model innovation, like that's how you can become just so incredibly dominant. You know, in ESPN's case, like literally five X bigger than any other cable network. I think you talked about this a bunch on the LP show, like really digging into what is the appropriate and sort of
the highest form of perfection of business model for a given medium. And can you really exploit that new piece of technology with the appropriate business model to sort of, you know, flank an industry from the side instead of ever needing to attack anyone head on. Totally. And I think about like Tencent
Did this.
equally as well, right? Like, you know, they ride the wave of
uh PC usage and then mobile, you know, usage and penetration in China.
And they marry that to a huge business model innovation with the freemium business model. And uh no one can touch them, you know?
Uh except maybe by dance. That's my big one.

Well I'd uh just to revisit one that we mentioned earlier, I think
It is interesting reflecting back on
what activities did ESPN per uh perform that were sort of market capitalizing, effectively wave riding, and what ones did they do that were market creating?
I
Think
they mostly are um in the business of market creation. And I think that their uh
You know, this even continued after, like far after
uh where this episode ends, sort of with uh with fantasy football being the driver of why people like the NFL. I think ESPN has actually done a lot of work in creating why
The NFL is a
platform for American social activity. And I I think uh just like they did with March Madness and NASCAR and so many others. Yep, yeah, they're it's i you can almost think of them as 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 too. They were just a sort of an unlock for creating a ton of value in the ecosystem. Yeah, totally.
Um, and then lastly, it's interesting to just reflect on uh 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 to uh uh with AOL Time Warner to
achieve the the dream of marrying content with distribution. Um and we're kind of seeing Disney do that now in a new era where they're trying to, you know, pull this is a again a foreshadow, but pull off of Netflix and pull off all these streaming services and introduce Disney Plus. Um and I think it's it's interesting to just look at this this acquisition in the context of
that eventual dream of of marrying both together. Mm-hmm. And it's funny that it 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 you know, uh another thing we
Haven't talked about here that um
Probably wasn't as important.
In the
time period of history where we're focusing on ESPN here, but it's
Critical now.
Is the live component.
Especially as, you know, everything has transitioned over the last few years to streaming and whatnot. Like what is
The most
only really remaining defensible piece of
traditional television type programming. It's live and what is
m the most live compelling live programming. It's sports.
Yep.
Yeah.
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 the I think the Disney acquisition of capital cities was A.
Or an A plus or something, and we can talk about that. I th the capital cities acquisition of ABC
Is whatever.
Whatever we decide for Disney is the same thing for Capital Cities acquiring ABC because really like it's was it a good idea long term to own ESPN for a much more nominal price than the super high value that it's worth today was yes in both cases. The A B C acquisition of ESPN.
That's just like no no doubt A plus. Right.
Whatever w enterprise value of two hundred 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 uh is Getty.
When they sort of acquired it from the Rasmussen's. It was a ten X they did have to pour a lot of money into it over time to
Uh.
Getty.
I think the yeah the
It's almost like you can you can bucket out the winners and losers here, or like the the winners the big winners and the not so big winners.
Getty in the not so big wine air. Texico for sure. They were like
Barely even played at the table. Yep. Uh Nabisco Loser. Hurst. Hurst might be the biggest winner of all. They didn't have to do anything. Uh paid a hundred and seventy five million for
twenty percent of the company.
Are they publicly if they were a public company, I wonder if their market cap would be lower than their sh share of the company. If you have like a Nasper's situation with Tencent, it's like discounted'cause you can't get it liquid. Yeah, yeah. I I'm sure it would be, but yeah, Hurst is still a uh private family owned company.
Is ESPN too expensive now with
not enough perceived headroom for where it could grow.
For
Uh anyone to want to buy it from Hearst.
Could be. Yeah. Why wouldn't Disney But uh it doesn't matter, right? Like they've they've been getting cash flow distributions for
Decades you know. Yeah, but that is a good question. Like would anybody want to buy that from Hearst right now?
I don't know.
Yeah.
All right. All right. Where are you on uh Disney acquiring A B C.
Slash capital cities.
Well, I mean
No doubt it's an A, right? Like uh
Even without the exact numbers at my fingertips. If half of your operating income as an entire company is coming from
ESPN, you know, uh within a decade of the acquisition.
No matter what you paid for it and and the nineteen billion I forget what Disney's market cap was at the time. Um
Whatever it was. Anyway.
I would say with plenty of fudge factor based on what these numbers were that we don't have at our fingertips. I I'm fairly confident it was an A. Yeah. It is worth noting the contrast to like
uh our our sort of two biggest A pluses of all time, or maybe three are
Next
Reverse acquiring Apple. Yep. Uh
Facebook acquiring. Facebook acquiring, Instagram, and uh booking.
Uh Priceline Acquiring Booking. Priceline acquiring booking. Yep. And
This is different than next in that it was not company saving, like Disney.
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 I'm not a plus. I'm a I'm an A. It's an A. Because they still paid nineteen billion dollars for it. Like, you know, it's not like Right. I mean, yeah.
Yeah.
It's not like they uh, you know, invest uh uh when uh this isn't like ten cent here. Right, and let's even say half. So in ninety five they paid call it ten billion dollars ish for ESPN just kind of as a conservative thing, and today or in
I w I won't say peak. In the late two thousands it was fifty billion. Like it's a five X over a decade. It's great and it's But that's that's value. The they also have been getting tons of cash flow from it over those years. So
Um
Uh yeah, I think definitely today. Only ESPN today. For sure.
Yeah.
For sure.
Now when we talk about Star Wave and ESPN going forward, next time.
Mm.
We can't promise it will be actually next time, but at some point in the future unacquire.
Yeah.
Carbouts?
Carve outside.
I have an inc incredibly appropriate one.
So there's a very cool podcast uh that has been started by the folks at GeekWire, um, in addition to their their regular podcast.
uh called Numbers Geek. And uh Todd Bishop, the co founder of GeekWire, uh, you know, uh special guest on the Push Pop Press episode. Boy, that was early on.
his co host, or or say maybe his featured guest every time is Steve Ballmer. And Steve uh Steve Ballmer, of course, the former CEO of Microsoft, owner of the LA Clippers, now the uh that he's used sort of his his private family wealth to uh release
USA facts. So really diving into making it easy to understand sort of um the important numbers about the the US, both in government spending, but across a lot of important issues.
So
They do this great podcast called Numbers Geek. The most recent episode was fascinating. It was called the Basketball Box Score Mystery. Todd presented Steve with a uh stat sheet, very, very detailed stat sheet from
uh basketball game, a famous basketball game, and obfuscated the names of all the players and the names of the teams. And he said, Steve
Analyze this and give me your best guess at what two teams were playing, what this game was, and who each of these players were on the stat lines. And it's really fun,'cause uh uh, you know, Balmer's such a uh uh basketball geek and has been for a long time, long before buying the Clippers, to sort of have him sort of uh
try and analyze and and understand
Everything from oh, I bet this player was injured and this other player was taking some of his minutes'cause he was injured. I think this might have been a playoff game. So it's a really cool and I as I was thinking through this episode, you know, just a great tie in with the SPN.
Mm.
Uh my carve out. Uh I'm gonna have to listen to that. That sounds awesome. Um
My carve out is uh also near and dear to the show and and our community's heart is
A great
great long piece that Fast Company just released on Softbank and
Masa and his ambitions.
And where
the vision fund and soft bank and we work and everything goes from here.
By uh Katrina Brooker.
And championed by editor and huge supporter of acquire.
David Lidsky. So thank you so much for all your support. Uh yeah, David is uh I mentioned the slack earlier. David is like a
Awesome, awesome member in the Slack that So great. Uh and this piece is is really, really good. I I wish it uh I wish it had been out when we did our episode on the Vision Fund.
Um
But so the my favorite moment is this image of when Softbank uh corporate acquired ARM, uh, which we'll have to do an episode on someday. Oh yeah. And the deal getting done in the Turkish Mediterranean in an empty restaurant that Massa had bought out and then like
Helicoptered in all the principals from our leg. Amazing. Why not? Amazing.
So
Awesome.
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