Every company has a story. Learn the playbooks that built the world’s greatest companies — and how you can apply them as a founder, operator, or investor.
Mon, 21 Jan 2019 18:21
Booyah! Acquired, the worldwide leader in acquisitions and IPOs, kicks off Season 4 with a classic: ESPN. How did a failed former TV weatherman end up building the world’s most valuable media company on top of a dump (quite literally) in Bristol, Connecticut? We follow the incredible entrepreneurial journey from Getty Oil diversification strategy to Berkshire Hathaway home run to Disney crown jewel. This Is Awesome, Baby!!
In a David, I'm kinda sick of the old theme music and to be completely honest, I never really liked it. Welcome to season 4, episode 1 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today we are covering a company that is absolutely synonymous with sports, ESPN. The worldwide leader. Indeed. And as they say, in the very first moments of their 1979 broadcast, if you're a fan, if you're a fan, what you'll see in the next minutes, hours and days to follow may convince you you've gone to sports heaven. Indeed, Acquired has gone to sports heaven here. It was obligatory. For a long time, listen to this show, you know that we cover, you know, typically one acquisition and that we talk about it and we grade it and we pre-standard format. This episode covers not one acquisition, but three. Each one is sort of fairly monumental. And I want to outline what that's going to be so that the story has a little bit of structure to it. As I mentioned, the first broadcast was in 1979. ESPN was acquired by ABC in 1984. Just one year later in a surprising turn of events, the smaller capital city's broadcast incorporation, incredibly bought ABC, took its name and got ESPN along with it. And then finally in 1996, 1995, 96, there was a 19 billion dollar buyout of ABC by the one in all the Disney. And a little teaser. The capital city's acquisition held a little help on the way from a certain Oracle in Omaha. Indeed. And we'll get into. Excited to dive into that. So as David was pointing out to me when I was sort of teeing up, you know, how should we introduce this? The through line and the most important part of all of these acquisitions that each sort of included ESPN was ESPN itself. And so much so that by 2006, a UBS estimate was that ESPN alone was worth 40% of Disney's total value. Yeah. I love the UBS estimate, man. That was like, that was right before I joined UBS. Oh, well, it definitely wasn't accurate. That's it. It was worth it. Yeah, yeah. Not yet a David Rosenthal last time. But what have been two years later? Indeed. So this episode will largely focus on ESPN through the mid 90s. And the sort of digital and streaming areas are a whole another story that will need to tell at some point, but this era of ESPN and it's sort of rise to truly be the worldwide leader in sports really deserves its own episode that we're going to dive into today. Speaking of ESPN and inside baseball, yes, pun definitely intended. We did a really fun limited partner bonus show last week. We took our LPs behind the curtains of how VC firms really work from corporate structure to incentives. If you're interested or just want to support the show, you can click the link in the show notes to become a prestigious acquired LP or go to kimberlight.fm slash acquired. If you're new to the show, you should check out our slack at acquired.fm. It is full of brilliant people that are providing their hot takes on the tech news of the day, often M&A and IPO related. And it's also just a really great, really helpful, really friendly community. So I've really enjoyed, particularly over the last month or so, we've been on break over the holidays, just getting to chat with folks in there has been really cool. Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founders. So we knew there's a natural fit. We know the host of founders. Well, David Senra. Hi, David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how they group us together and then they say it's like the best curriculum for founders and executives. It really is. We use your show for research a lot. I listened to your episode of the story of Akio Marita before we did our Sony episodes. This incredible primer. You know, he's actually a good example of why people listen to founders until acquired because all of his greatest entrepreneurs and investors, they had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again. If you do the research, Jim, but I think this is one of the reasons why people love both of our shows and they're such good compliments is on acquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of founders listeners. The other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did. David, it was the third, fourth time you've done Polaroid. I've read five biographies of Edwin Land and I think I've made eight episodes of them because in my opinion, the greatest entrepreneur to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs, he's talking about Edwin Land's my hero. So the reason I did that is because I want to find out like I have my heroes who were their heroes and the beauty of this is the people may die, but the idea is never to. And so Edwin Land had passed away way before the apex of Apple, but Steve was still able to use those ideas and now he's gone and we can use those ideas. And so I think what requires doing what a founder trying to do as well is find the best ideas in history and push them down to generations. Make sure they're not lost history. I love that. Well listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. David, how are you feeling about the history and facts on this one? And I'm cool as the other side of the pillow. I'm glad you teed me up to say that. I'm glad I didn't know how you were going to respond. That was both awesome and so awkward. All right, listeners, let's take it in. We start back in the 1970s. It's disco time. Things are crazy in America, particularly crazy in the burgeoning cable industry, which is brand new where all the entrepreneurs in America are headed. And we start with a guy named Bill Razmeson. Bill was a former Air Force supply officer. He ends up getting into the television business first as a weatherman at an NBC station in Western Massachusetts. But his lifelong dream is to get into sports and he just loves sports. He's a sports nut. So he's doing the weather in Western Massachusetts. And he starts this like reading sports scores at the end of the weather telecast and turns out people like it. He moves around to a few stations in New England, ends up kind of transitioning from weather into sports because he's a natural, becomes a sports director. And then in 1974, he becomes the communications director at the Hartford Whalers hockey team. This is a real auspicious beginning here. The Hartford Whalers at the time, their big star was Gordy Howe. And he was like larger than life. He had his own business interests and Bill starts working for him personally as well in his family. It also going well until Memorial Day weekend, 1978, when Bill gets a call from the Hartford Whalers that he's being fired as communications director. And then gets another call from Gordy's wife actually saying, yeah, and we're firing you from the family as well. Rough day. Rough day. I couldn't verify this, but I believe his son Scott Rasmussen, who had dropped out of college was pretty young as early 20s, was also working at the Hartford Whalers also gets fired that day. Oh my gosh. Too many eggs in one basket. A lot of eggs in one basket. But you know, they're pretty optimistic guys. They decide that father and son they're going to team up, figure out what's next. So the first call they place is to a local guy, they're in Hartford's in Connecticut, right? Yeah, they're in Connecticut. Local guy in Connecticut, who is an insurance agent named Ed Egan. He's working for Edna. You can see this leads to ESPN. We promise. And Ed, this went from like the most exciting episode ever to like, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, this is the most boring episode. But we promised there's more to come. Ed just like Bill, when he was a weatherman, he really wants to get into sports and he's been trying to convince Bill to start a cable network focused on Connecticut sports. And this is when Bill was, of course, the communications director at the Whalers and the center piece he thought would be showing the Whalers games on this new cable channel. Bill calls him up and he's like, hey, I just got fired. I'm looking for something to do. What do you think? I like your idea. I may not be as helpful anymore. Yeah, I used to be able to. And, but Ed is, Ed is undaunted. They chat and they decide like, okay, well, we're not going to get the Whalers, but like, there's still pretty interesting, like people care about local sports. We can show Connecticut sports. We probably just need some stuff to kind of fill in the gaps between Connecticut sports. There's not enough of that. So why don't we add some entertainment programming as well? And then they're like, oh, this is perfect. We've got the perfect name for this. It's going to be the entertainment and sports programming company. ESP. Like, what good, like, it's perfect. Very descriptive. It's short. It's only three letters. Exactly. You know, it's just like ABC, NBC, ESP, ESP, ESP. So they incorporate the company, the entertainment and sports programming company on July 14, 1978. And so we're taking a step back here. I mentioned earlier that cable is kind of the, it's like the internet of the time, like where all the entrepreneurs are heading at this point in the late 70s. So at this point, it's less than 20% of US households have cable. The big over-the-air terrestrial broadcasting companies, you know, NBC, ABC, CBS, they're still what people think of when they think of television. UHF, VHF, over-the-way. Exactly. You've got the big rabbit ear antennas, you know, on top of TVs and on top of houses. And cable really got started as a delivery mechanism for houses in rural, in rural parts of the US, where the terrestrial broadcast signals didn't reach. Which is amazing in its own right to think about, gosh, we can't reach this over the airwaves. So we will run a cable. We're literally going to run a cable there. And so, and that's more efficient. Like, that's kind of mind-blowing to me that like, it's more efficient than I guess the CapExa building big radio towers is tough. And yeah, I guess so. Well, I think it could be wrong, but I think this is also part of like, they ran wires cables along railroad lines, right? And that was for telegraphs, but they might also then use that for. I know that was like sprints beginnings that we talked about on the sprint team mobile episode. Sprints go up. So by this time by the late 70s, people had started to realize, oh, there's something slightly more interesting here than just rebroadcasting the big three stations. Like, this what's cool about cables is it's not regulated. So like over-the-air broadcasting. That is cool. Yeah, that like is kind of like the internet, you know, you know, you can ABC, NBC, CBS, like they're basically controlled by the government, not controlled by the government, but they're regulated on what they can show, what they can say, by cables, the Wild West. And so HBO was the first kind of cable network got launched in 1975 a couple years earlier. And then there's this crazy guy who's going to resurface down in Atlanta named Ted Turner. He owns a bunch of broadcast stations and he's experimenting. He's like, well, I'm going to take my Atlanta station. And I'm just going to rebroadcast it all around the country. And everybody's going to get my Atlanta, see he had bought 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 Rasmussen's and Egan, they're digging in. And they hear about this new kind of sustaining technology, if you will, in Clay Christians in terms that's coming along for the cable industry called satellite transmission. And it's supposed to be this like great new thing. They don't they've no idea what it is. They're just like, great, we're starting a new cable network. We want some of that satellite stuff. So they find out that RCA, the big electronics company, they've just launched two satellites in the space for video transmission. So the Rasmussen's they call up RCA and they're like, hey, we want some of this satellite stuff. Will you sell it to us? RCA, they're trying to sell satellite space. Nobody's bought it yet. So like, oh, great, we got a customer. Great, we can sell you that. What do you guys, you know, you ESP guys? What do you want to show? You must be, you know, traditional media folks, like you know about this. We assume there would be this mad rush of all these media people that wanted to use them. So, you know, take your deep media background and pitch us. Yeah, pitch us. What are you, what are you going to show? And they're like, Connecticut sports. And the RCA, you guys are like, um, so you know the thing about satellite, like what it does is it takes a video signal and it instantaneously transmits it all around the world. So you think Connecticut sports are going to be entertainment and entertainment are going to be what people want to see all around the world. And they're like, huh. And then RCA is like, and there's this other thing too that you know with satellite, like it doesn't go down, you know, it's, it's all 24 seven. So like whatever you put on this video feed is going to go out 24 seven. And this is like kind of blows their minds because at this point before satellite cable and satellite, the broadcast networks and even most cable networks that we're using satellite, they signed off at like 11 o'clock Eastern. So like people used to this is crazy. I mean, this is before our time, but like, you know, our parents generation, you'd watch TV. It get to be 11 o'clock. And then you know, NBC CBS would be like, well, we're signing off for the night. TV was done. TV was over for the day. And then you just get like a test pattern on the screen. So they're sitting in this meeting and they're like, huh, interesting. So how much would it cost to get a feed on one of your satellites? And they're like $35,000 a month, actually $34,167 a month. And so they're like, done. We'll take it. They have no money at this point. Like send us the invoice net 30. Can we have like net 90? Yeah. How about net 180? So they go back and they're like, okay, great. Now we got to scramble some money together. We got to not only pay RCA for space on their satellite transponder, but we need to set up like a whole studio to broadcast. We need to buy some satellite dishes to broadcast where are we going to do that and how are we going to get the money? Turns out there's a town nearby called Bristol Connecticut, which ESPN, EFishing Auto is known as still the home of the worldwide leader in sports. Yeah, worldwide headquarters. The town had this big open space, a bunch of acres that they were looking to lease out to a commercial business. And it's just a field, like a muddy field. But it's nearby. And so they say, great. And do you know what it was before it was a field? I didn't find that. What did it? It was a dump. ESPN's headquarters today are still built on an old dump. An old dump. Amazing. The most valuable media business in the entire world. Yep. And what's interesting about that is since there's no like trees that are growing there, it's this big wide open thing. It's actually perfect for broadcasting satellites. It's a complete clear shot. Exactly. They talk about this. They'd actually first looked at another nearby town, but they couldn't get enough space. And it was, they didn't have a clear line of sight for the satellites. So obviously, the dump in Bristol was the perfect spot. Also, just like RCA, they leased this land. They have no money. And they start a plan to build the studios and truck in some satellite dishes. So they go out and they start like they hit the fundraising trail. There is their seed round, a little bit of money from other members of the Rasmussen family. And they get a venture capitalist in King of Prussia, Pennsylvania of all places, just like right where I grew up. Still a kind of Prussia. Yeah, still a kind of Prussia. Who invests, I think the exact amount of one month of the RCA, at least, so like $34,000. And so like, okay, great. This will get us going for like a little bit of time. Let's hit the fundraising trail for real and go get some real dollars to fund this whole thing. And interestingly, I was thinking about what their pitch must have looked like. So 20% of the US had cable at this point. So they're very much doing the same sort of philosophy and pitch that Netflix was doing when Netflix started, you know, starting this DVD-based business when no one yet had DVD players. It's like, all right on this inflection point, everyone's about to have cable. Like we got that we timed it perfectly. Yep. Yep. And indeed they did. But also just like Netflix in the beginning, all the sources of investment dollars at this point, they're looking at these guys and they're like, no. We're going to need some very protective provisions. Yes. And these documents. Yes, exactly. That's anyone who's even interested for a long weeks, months, nobody's interested. They end up getting connected somehow with the Getty family in Los Angeles. So like, you know, listeners, if you've been to LA, you've been to the Getty Museum, which is an amazing art museum in LA. You might know of Getty Images, the Stock Image site, which is one of the sons or nephews. But of course, the big behemoth and true sort of money maker and parent of the Getty Empire is Getty Oil. Yeah. 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, this is again, 1978, they're trying to as much as possible diversify out of the oil business. The family's going through generational transfer. They're looking for ways to get their money out of oil and diversify. And so this comes along and they're like, well, okay. Why not? And there's a guy, a story TV who works for the family who he's really like the champion of getting this done. So they start talking to the Rasmussen about funding this and they're like pretty, pretty interested. The deal's taking a while though and the Getty Board and the senior family members, they're like, these guys for real. Who are these guys? And Bill? Yes. That doesn't have a good ring to it. Yeah. Bill realizes he needs to prove that they have something that like is gonna once they get the money and get all this live that they have like really compelling content to put on to put on the channel. So he flies to Shawnee Mission, Kansas. Ben, do you know what is in Shawnee Mission, Kansas? No. The headquarters of the NCAA. Indeed. And so in March of 1979, they're still negotiating with Getty and Bill emerges from Kansas with a deal in a hand sign deal with the NCAA to air all of their championships across all sports and regular season games across 18 sports. Everything including the then super prestigious men's basketball tournament, the NCAA tournament. They think the year before was the magic Johnson and Larry Bird faced off in the how on earth? As I was doing research, it became apparent that they would have a hard time getting pro sports, right? So they're like, oh, we'll go with amateur. But like the NCAA at the time, it was no small thing. No, it was like, they in college football was huge. Bill, you know, great entrepreneurial fashion manages to get this contract. So he gets rights to every game that hasn't already been given to the big three networks. But that turns out that that's a lot of games because even in the NCAA tournament, the big three networks were only showing like the final four. So all the games leading up to it, they thought nobody cared about them. Turns out they were wrong. So Bill emerges with this contract and then immediately after that gets getting across the line, they invest $15 million, which is going to be enough to pay RCA for in a couple of years, build out the Bristol facility, get the satellite, dishes, hire the first talent. I think they know that what they bought was 85%. Yeah, so okay, this is what I'm going to get into. They invest $15 million for 85% of the company. So like, listeners out there, man, you think BC's are rough today. It's a tough series. Now $15 million was a lot of money. So to be fair, it was kind of like doing your seed A, B, and C rounds all at once, but still. Yeah. The other interesting thing is, do you know what else happened as a part of that financing? There's a commercial agreement as well, but not with Getty. Are you referring to the beer agreement? I am. Yes. Yes. So Anheuser Bush came to an agreement with ESP. This is still before his ESPN. It's the largest advertising contract in cable television history at $1.38 million that they will be the exclusive beer advertiser on the new ESP network because and there's some quote that one of the executives there had where they say something like, because we just thought, you know, beer and sports just go together. This will come back in one second. On the day, it goes live later in the fall. But before they go live, after they sign this deal, I couldn't find out who kind of initiates this, but somebody, whether it's Getty or Anheuser Bush or somebody within ESP, they're like, you know, guys, this ESP thing. It sounds kind of corny and 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, dot LY, you know, domain name of the, it was labs or whatever. Yeah. Which is fascinating. Because like what, you know, we have all sorts of different definitions for network today. It doesn't quite make sense of why you would call your one sort of channel that runs across a cable and network. I guess because all the endpoint homes were networked to over cable to the one broadcast source. Maybe it was that they had affiliate distribution agreements with different cable operators. That could be which we'll get into in a minute here too. Anyway, everybody loves it. And they say, great, we're going to change the name of the company. We are now the entertainment and sports programming network ESPN. Worldwide leader. Worldwide leader. And actually, I think there was a brief period there where they, they changed it to ESPN TV. It was like ESPN dash TV. And they're like, oh, we can't launch with that. Yeah, that's, that's too much. That's too much. Let's go with the ESPN. So they launched, they end up launching with ESPN. Also before they launched though, remember, Getty just bought way more than controlling interest in this company. 85%. Yeah, you're now an oil company subsidiary. Yeah, exactly. And if you know anything about, you know, the history of investing and 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's were amazing entrepreneurs. I mean, getting that NCAA contract was like, nobody else could have done that except somebody who is a true entrepreneur and at EGEN2. But they weren't really equipped to like, you know, build out a media empire into illustrate that point. So they got sold by these cable guys that they should spend all this money on a satellite transponder. And the way that they sort of orchestrated getting that all connected, apparently, this is like ESPN, urban legend, the cable was connected to the satellite only five minutes prior to the first broadcast. So like not exactly sort of like operational experts in this industry. I believe it. But, you know, and extremely un-arprising entrepreneurs. Extremely. So that summer, Getty family basically forces Bill and Scott and had to kind of step back from day to day involvement. They make Bill the chairman of the company. But it's kind of in name only. He ends up leaving fully the next year in 1980. But they bring in this guy, Chet Simmons. And Chet was a legend. He had been president of NBC sports at NBC. And they convinced him to come in and take over as president of ESPN. And he brings along with him this guy named Scotty Connell, who was his kind of number two at NBC sports and who was responsible for all talent. And the two of them, they bring into ESPN even before launch. And then in the first few months after launching, like some names you might have heard of George Grant, who depending on your age, may or may not have heard of Chris Burman, Dick Vitale, Bob Lee, Greg Gumball, amazing talent into this brand new startup cable network. And almost all these guys except for Dick Vitale are like 23 to 26. So like the Chris, you know, we all sort of like no of Chris Burman today, you know, you know, I think Bob Lee was 23. Yeah, I think that's right. So young, you know, super young hot shot broadcasting crew. Yep. They were absolute pros that identifying and nurturing talent. Yep. So September 7th, 1979, they go live. And the first show that they have, they had talked about this before launching, they thought, you know, we're going to have sports. They decided to drop the entertainment, you know, I don't know if that was the Rasmussen's or if that was when Chats Simmons came on board, they made this really. We're going to be 24 seven, the world's first 24 seven cable network. And first 24 seven sports destination. It's kind of amazing. They kept it even though they decided before launch, they were never going to be anything besides sports. But they thought the Lynch pin to all of this would be, they would do a half hour highlights show at 6.30 p.m. kind of right in the middle of prime time every day. They're going to do this every day. And they would recap the highlights and the scores of all the sporting events in the country throughout the day. 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 into the next morning. And even opening up the paper next morning, the paper went to print in the East Coast before the West Coast games were done. So there was no way to get scores real time. They thought this would be like kind of the Lynch pin to all of it. And they decided, oh yeah, it's like the center of the day. It's the sports center. And so when they launched at 6.30 p.m. on September 7th, 1979, the first thing that went live was sports center. And it was beamed via satellite to 1.4 million US households on day one. And the network has been going ever since. Lee Leonard and George Grant on for 30 minutes. On for 30 minutes followed by by an incredible fast paced action of a slow pitch softball game. The teams of which were the, oh shoot up light and right now, it was two other beer companies that the teams were that was their names. It was not Budweiser. And so they got into a huge row with Aniser Bush, which is just a very close broadcast. $1.4 million. And then on the first broadcast. I think then they had wrestling. They had some college soccer. Like it was a it was a long night following. Yeah, it was a hot patch. Yeah, shall we say. We will put this link in the show notes. And we just tweeted out a link before recording this episode too with just some sort of photographs. The whole thing you have to watch this like first few minutes of the first sports center broadcast to understand how different it was than the sports center you know today. They say like welcome to the sports center. And there's like a five to 10 second video clip of like zooming in on some clouds. And then there's like this weird slow pan to a guy in a studio who's sitting at the desk. And it's like I think George Graham. Yeah, you're kind of like whoa you're like an abandoned warehouse. This is not this is weird. This is and it's all terribly colored. And you know it was 70's television. And apparently there was no air conditioning in the studio. But of course they have to wear suits. And of course they have to wear suits. And so people are just like sweating. Not to mention 70 suits being so stuffy. Yeah, polyester. Yeah, it was great. It was great. So from that you know, especially just beginning again on the back of this NCAA agreement March comes around of 1980. They start showing the tournament games and they had hired this guy former coach to be the announcer for most of the tournament games. Dick Vitale. And it just like takes off. People can't stop watching all around the country. All this you know these exciting games in the single elimination tournament. This great announcer gets super excited. Calling them and people start calling. I don't know who actually who if it's attributable who first coined the term. People start calling this March madness. It didn't exist before 1980 when ESPN starts showing it. And this is a theme that I want to keep sort of listening for throughout the episode is ESPN in the business of market capitalization or market creation. And 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. Yeah, later on we'll get into Sunday night football and Monday night football and actually what ESPN did was create a platform on which live sports entertainment could become the phenomenon that it is rather than sitting there and capturing the the phenomenon. Yes, yep. I think it's worth a pause here. We've talked about this a little bit, but there were two real innovations that ESPN kind of had right off the bat. One that we alluded to is this concept of 24 hours. Like they were the first 24 hour television network. Obviously Ted Turner was was re-broadcasting the Atlanta Super Station, but CNN hadn't launched yet. And like what's crazy is like the media business you got to think back to then like it was headquartered in New York and all anybody thought about was the East Coast prime time. So again, this you know the sign off at 11 p.m. Eastern. That's eight o'clock on the West Coast. It probably really benefited. I mean, I know Bristol Connecticut is not too far from New York, but it really probably benefited them to be sort of out in the middle of nowhere and not caught up in sort of the group think of how do you run a media company in the city. I think most of the a huge portion of the cable penetration at that point was in the middle of the country and on the West Coast. Again, where like the whole media industry in the broadcast industry hadn't built up as much. So that was one. And then two, they were like they 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. And I mean niche in terms of like a hyper focus on one thing that like lots of people are passionate about not niche in terms of small. Yeah. Because like the broadcast networks, they did everything like NBC sports, you know, it was a small portion of what NBC did. Right. 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 it. It's like, oh, there's only 50 cable stations. The internet has infinite. But like going from three to 50 was kind of you know, you could there were still some pretty big niches available for you to own. Yeah. Totally. So on the back of this and the innovation they were driving around it like March madness and the like they also got the NFL draft in April. And they made the NFL draft a thing like it was never broadcast before ESPN. And they were always trying to get into the NFL. And this was the first thing that they could get was the draft. The NFL throws them away. Like you can have any of our you know games. Certainly not the the Super Bowl that here take the draft. Take the draft right. And they made it into like you know, an appointment viewing an event in the clock and everything. Yep. So a couple years later, they're growing like gangbusters. Also, don't forget in 83 they did have the USFL. That's right. That's right. There were there was a period in time where there were a few leagues competing with the NFL in the US around this point. Yeah. And I think the AFL may have been a separate league and then got folded into the NFL. They were one or two others as well. Yeah. I think the USFL was around for three years. The ESPN got exclusive rights to it. They were like, oh my God, this is going to be huge. We're going to blow. And then ESPN has definitely had some for as much as they've sort of bet correctly and created waves. They definitely have also had some where that just sort of fell apart. What part of what happened? I think this is right. So the Chet Simmons who had come into replace Bill as president from NBC Sports. After three years, he left and he became commissioner of the USFL. I think that's what Kadeh got that relationship going. But yeah, despite that, growth was great. And a few years later, they're in like 1982 at this point. They're growing. They're adding more cable operators that are carrying ESPN. They're adding more advertisers, but all this is costing money. And of course, they're covering more events. That costs money. They're at a point where they're burning $8 million a month in 1982. And getty. Three years after they start broad. Three years after they start. Yeah. And getty is financing all of these losses because they own the business. You know, it's not like they're out raising money because they already own the business. Right. They're getting pretty nervous, though. They don't like this. And as we mentioned already, the family is starting to think about like, hey, we might need to exit this whole thing. We're not actually sure why they did it in the first place. Well, this whole thing and their oil business as well, which will come up in sec. So in 1982, the family getting family sells a 10% stake in ESPN to ABC to help offset some of these losses. I don't know. They're a broadcasting company. It kind of makes sense. They can be helpful here. Yeah. Exactly. You know, help professionalize this thing and chat to it come from from NBC. I just left. So they do that. Now that was a pretty bad move. I couldn't I don't remember exactly how much they sold it for. It wasn't that much money. And it came with the right for ABC to buy a majority share later on. Kind of like the Disney BAM tech deal that we talked about earlier and what's that price season one or something. But yep. Yep. Yeah. That was back in season one. Oh, because right around that time, ESPN comes up with a third super critical innovation. And that is that they changed the business model for cable. So up until this point when ESPN first started and they were going out to all these local cable operators all throughout the country, they were having to pitch them to carry this channel in their lineup. And and for most of them, they said, yeah, great. Like I'll carry it if you pay me. So ESPN was actually paying most of their operators to carry the channel. And then you get sponsors to offset the costs that you have to pay for distribution distribution, right? Right. So a couple of people at this point come in. So so Chet Simmons leaves a new president comes in from CBS Bill Grimes. So now ESPN has DNA from NBC ABC and CBS all in the executive ranks. And another guy starts like right out of college, a super young guy named George Bowdenheimer. And he starts as a driver. Like literally he would drive to the Hartford airport pick up all the talent that's coming back from like broadcasting these games all around the country, bring them into the studio and ESPN him. He kind of gets to know everybody and he quickly moves into affiliate relationships. So now he's going out flying around the country and talking to these cable operators. And he starts to realize like, hey, ESPN is like the customers of these cable operators, they love it. They can't get enough if they didn't have it. Yeah, 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 got to pay us. And if you don't pay us, we'll pull the signal from you. And this happens a couple times. And this has happened in a few sort of instrumental moments and businesses in history where they realize, wait a minute, we're actually doing them more of a favor than than they're doing us. And you can actually successfully reverse the flow of money. We cannot overstate how important this was to ESPN and to the entire cable network industry, all the cable industry. This completely changes everything. So much so that George Bodenheimer, years later in the 90s under Disney, after Disney acquires what ESPN would become, he becomes the president of ESPN. Pretty good idea. Yeah, pretty good idea. So they pull the plug on a couple stations and exactly that happens all the subscribers of these cable distributors, they start revolting, they start like picketing, they start showing up at the offices, like demanding ESPN back. All right. So basically, if we want to take this to business school, basically what happened is the end customer developed a stronger relationship with a supplier to the cable provider than the cable provider itself. Exactly. And would sort of they were provider agnostic and would go wherever that supplier was. And so if you're the cable networks, like, is there anything you could have done to prevent this? You mean the cable distributors? Yeah. Yeah. Is there anything you could have done to prevent this sort of disintermediation of you where you become commodity and the real value is content? And really the question is here, there's two ways to create a ton of value, own the linchpin of content or own the linchpin of distribution. And I suppose they needed to maintain a monopoly on distribution in order to secure that they would be the only game in town to have access to that content. And as soon as they became commoditized and what people viewed as unique was the content, they were going to get, you know, I think this was probably inevitable. I mean, the same thing played out with the internet, right? Like in the first boom of the internet, remember telecom companies were so highly valued and like ISPs and all that and they controlled distribution and blah, blah, blah. And AOL was this integrated provider. They were an ISP and content company. But you know, fast forward to today and like Netflix, Google, you know, what Facebook would have you are exponentially more valuable than Comcast, you know, 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 Dolan's Dolan family in Long Island, who went on to own the Cleveland Indians. Yeah. And the New York Knicks and many other and Madison Square Garden. Anyway. But mostly the Cleveland Indians. They do a deal where cable vision is now going to pay ESPN 10 cents per subscriber for every cable vision subscriber. And that's the dawn of the affiliate fee era. Beginning ESPN's real behemoth business. And that becomes two thirds of ESPN's revenue over time. Shortly after this, by 1983, ESPN has now become the biggest cable network in the US. And not just the biggest, but you know, the only one that's like making money from the cable providers in addition to advertising. In January 1984, we mentioned the Getty Family woes. They end up selling the whole thing, Getty Oil, to Texaco for $10 billion. And Texaco, of course, is this huge oil conglomerate. They're not a family run business. And they like, you guys have all that like, there's all this stuff that comes like Getty Oil. Yeah. We got to get rid of this thing. So turns out, there was a guy on Texaco's board named Tom Murphy. And Tom Murphy was the president of a little company called Capital Cities. And then what was Capital Cities? Boy, so Capital Cities, it is worth winding back the clock to understand what Capital Cities is and just what an incredible business story this is. So Capital Cities started with Tom Murphy in 1954 when he was recruited to run a struggling TV station called WTN in Albany, New York after graduating from Harvard Business School. So Murphy was a lean operator and he was able to get the station to profitability by 1957. So just a few years after taking over, it's sort of new ownership, he's new management. They lean it out and make it profitable. So he and the owner, Frank Smith, then decided to buy two more stations over the next couple of years in Raleigh, North Carolina and Providence, Rhode Island and Capital Cities broadcasting was born. So Capital of these states, like is that the... I think so. I mean, Providence, I think is Albany definitely is. I think Raleigh is. Yeah, I don't know. Yeah. Interesting. I wondered where like the Capital came from. Yeah. Yeah. So Murphy, of course, you know, he's got responsibilities across Capital Cities. He needs to get out of running the Solvedi station. So he needs to hire someone to do that. He hires Dan Burke, who's another HBS grad. Also, no broadcast experience, but you know, really clear, linear thinker, trust him. I think it's an intro from one of their brothers or something like that. So he hires him to run that station. So from this day forward, the DNA of Capital Cities was set. They were completely like bottom line driven super lean and they were very decentralized. So what was important was that if you think about sort of the Berkshire Hathaway style of management, we're not going to have a big, you know, central staff. We trust the managers. I'm going to everybody. They're just like, you guys are on the stations. We're allocating capital here. Exactly. Exactly. So Murphy and Burke were a fantastic duo over the next several years with Murphy who became CEO as kind of the master strategist and the capital allocator. And Burke, who was the COO, the lean mean operator, sort of this dream team of executives. So throughout the 70s and through sort of the mid 80s, they operated a super calculated strategy of expanding across local TV stations, some newspapers, and in this new cable medium, buying some cable stations all across the country. Cable distributors, right? So they're they're they're starting to buy up. Yeah, that's right. Yeah, it was distributors of the, you know, of the, is there much smaller than cable vision, but the types of folks that, you know, ESPN is a network is then going out and doing these affiliate agreements with exactly. Exactly. And another sort of tenant here is, they only expanded within their media and publishing vertical, while others in the industry, like CBS were embracing sort of an 80s era conglomerate mentality really hard. They were buying minor league baseball teams. They were taking limos around town, you know, just wait till we get to RJR Navisco. Capital cities, their their playbook was extremely simple. They would buy a station. They would operate leanly and profitably. So they would get some great cash flow from it. Then, you know, with those nice cash flows, and on the their ability to show those cash flows, they would raise some debt capital at favorable terms, then they would go buy another station, then they would quickly pay down that debt that they used, and then they would expand. Lather Rinse repeat to dozens and dozens and dozens across the 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 discipline businessmen. They were totally obsessed with decentralization. They actually printed on their 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 can take us through in January of 1986, they made one very unconditional action. Well, before we get to that, so we just mentioned, you know, Texco and just bought Gettie. And Tom Murphy, you know, the CEO of capital cities is on the Texco board. So Bill Grimes, you know, the new president of ESPN who'd come from CBS, he figures all this out. And so he's like, all right, you know, he's worried about his job. He's worried about ESPN. What's going to happen to it as part of Texaco? He goes to see Tom and he says, you know, Tom's based in New England, just like him, he says, hey, you should buy ESPN. You know, you're on the board of Texco, like, you know, like they don't want this. They want to get rid of it. You should buy ESPN. It's a natural fit. We're the best cable network out there. You own cable distributors, you own all this stuff. Keep it decentralized. Do all this. Tom says, you know, that's a great idea. I just can't do it right now. I'm working on something bigger. And this is a trademark Tom Murphy thing where he would know exactly what price he wanted to pay for something. He would know exactly how operationally efficient he could run it afterwards and he wouldn't pay a dollar more. So it was one of those things where he would look at it. And then it was just obvious to him. Nope. Sorry. It looks great, but no, not right now. So, but he has this master plan. He's working on something bigger to come in one sec. But he's on the board of Texaco. Texaco starts a bidding process for ESPN. They're divesting the company. There are two main parties who are interested in buying it. One is Ted Turner, down in Atlanta. I think CNN has launched at this point. So he's like, the canonical cable entrepreneur. It turned out it wasn't Atlanta sports that people wanted to watch nationwide, but it was a cable news news. And so he sees ESPN, ESPN's bigger. And in fact, the 24-hour aspect of CNN was copied from ESPN. And so he's like, great, I want to own ESPN. He's like putting together bids. The other interested party is ABC. ABC, they already have this 10% stake that they owned in ESPN and option for more. So the first thing they do, they buy 5% more from getting in Texaco. So they get up to a 15% stake. I'm not sure why they did that or how much they pay for it, but they do that. Bidding is going back and forth between them and Turner. And again, remember Tom Murphy's on the board of Texaco somehow, ABC ends up winning the deal. Now they probably would have any way because they already owned 15% of the company and had the inside track. Anyway, they buy the remaining 85% that they don't own of ESPN from Texaco, Getty, and the Rasmussen still owned their original 15%. They buy it all out. They now own 100% of ESPN. Which I think is the first and last time that somebody owned 100% of ESPN. Well, the first time was when the Rasmussen started it. And then this is now the only moment in history where ESPN is wholly owned by ABC. They pay $188 million for the 85% that they don't own. And remember, it was valued at like $18 million when Getty sort of first bought it. Yeah, of course, put a ton of cash in to it along the way. Hey, 10x. We'll take it. It's like the 10th set episode. Yeah, 10x. I'll get that bid. Yeah. Again, for like the reasons that are completely unknown and just terrible decision. For some reason, ABC, remember Tom Murphy has no control over ABC at this point. They turn around immediately and they resell 20% of ESPN to RJR Nabisco. I thought it was Hurst. No, no, no, Hurst then buys it from Nabisco. This is crazy. This is nuts. This is where... Can you elaborate on the RJR part of Nabisco? Yeah. Okay. So, so Nabisco, people probably, at least our US listeners probably know Nabisco. They think, you know, it's like cookies and crackers and it's a CPG company. It's like, you know, a proctor and gamble or whatever. They had merged with RJ Reynolds. What's RJ Reynolds? Sounds innocuous. Turns out RJ Reynolds is a tobacco company. Camels, Winston's, Salem's, they're recorded in Winston's, Salem. It's the biggest US cigarette company. And at the time, cigarettes were, you know, a big thing. And they would become embroiled in all sorts of lawsuits. But because they had, of course, their CPG products to sell, but mostly these cigarettes that they're trying to pump out to the US. They had all of these spokespeople who were professional athletes. Oh my god. And in particular, one of their strongest channels for advertising cigarettes was NASCAR and professional racing. And ESPN had really put NASCAR on the map. So NASCAR was one of these kind of backwater sports that ESPN, as they were starting, like they needed content. They really kind of elevated. And so, Nabisco, RJR, Nabisco was super interested in ESPN. I thought they would have this great synergistic relationship. They ended up buying, buying this 20% stake from ABC. There was something like ABC did that to like free up cash. Like they wanted cash for some reason. Yeah, I'm not sure why they did it. I mean, it was terrible idea on so many levels. So now, and Tom Murphy, meanwhile must have been just like just watching this. Just watching this. FACE POMMING, watching all this. Because his grand plan soon gets revealed. Yeah. So in January of 86, this is their, you know, they made a series of very conventional small acquisitions that, you know, were in total something to write home about, but individually, nothing to write home about. This is very different. So with the help of some financing from Warren Buffett, who sort of identifies the twinkle of a soul and another in Tom Murphy. Very simpatico. Yes. Yes. Invest both debt and equity. And capital cities executes a 3.5 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 1985. So like, you know, months after all of this went down with ESPN and ABC and Nabisco. So why would they even need to raise the debt capital to do this? Capital cities itself was not even worth 3.5 billion dollars at the time. So even if they sold every single share in their company to buy ABC, they would not have been able to raise enough money. And in fact, this purchase was the largest non-oil and gas transaction in business history to this point, which is like, you know, we're watching WhatsApp get picked up for for 20 Bill, like this 3.5 billion dollars completely unheard of outside of oil and gas. Completely unheard of. So just to kind of close the loop here in capital cities, Murphy and Burke had the track record to show that they could run this same playbook and bring in, you know, they're the operating margins that they were used to of over 50% with all the capital cities properties to ABC, which was currently in the low 30s. And so indeed they did this, they generated a ton of cash and they were able to pay back all that debt in less than three years, which was earlier than expected. And so three years out suddenly, like, you know, capital cities is not, you know, under all this debt anymore, they're looking really good. And remember ABC, again, which had just acquired ESPN, ABC broadcasting, they only made revenue from advertising. They weren't getting these affiliate fees from the cable operators. ESPN now, they're good to this, the importance of operating. That's the real true of this. Yeah, that's the true. Like they're getting, 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 ABC because, you know, they own it. It's an unbelievable brand. It was really much more of a sort of reverse acquisition for ABC. So their, their culture, product, headcount, balance sheet, everything looked much more like capital cities than I'd ever did ABC, even though the company is sort of called ABC now. So crazy aside for finishing this up, Dan Burke's son Steve Burke also arose to prominence through, through Disney and then through the media industry. He's now in 2019, the current CEO of NBC Universal. So total dynasty. Crazy. It's worth noting. So a decade later, well, actually, I'll come back to this as we dip into Disney here. Well, so okay. So that transaction gets done of the capital cities, Mino swallowing the whale of ABC in March of 1985. Immediately, remember in Namisco, like they're trying to pump out these cigarettes. They go see Tom Murphy and say, oh, hey, you know, you really wanted ABC, right? You didn't want the CSPN thing. Let us just buy it all out from you. We'll pay you $500 million for it. And actually, that probably was really hard to turn down for Tom and capital cities because they just raised all this debt to buy ABC. Namisco thinks they're going to get it, but Tom is smarter than that. And he says, thank you very much for your offer. I am going to turn it down. But that's pretty incredible. Namisco is willing to pay $500 million for ESPN. I think it was valuing it at $500 million. And what's the time frame from when? This was 1985. And it was just before in 1984 when ABC had bought it for $188 million for 85%. Wow. So, you know, people are starting to realize the value in this thing. Yeah. 1986 was a huge year for ESPN on the business side. Together now with ABC, all under one house, they get ABC and ESPN together under capital cities. They get NFL rights for the first time. Boom. Boom. And this is Ben as you were alluding to Sunday night football, Monday night football. It becomes huge. And not only that, the business innovation at ESPN, like we can't overstate how important it was. They've already started extracting fees from cable operators. They had to pay a ton of money to get the NFL rights. The NFL of course knows how new how valuable this was. But it was nowhere near sort of the crazy prices that it is today. But still for the time 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 going to be, you know, ESPN was already super valuable. Now it's going to be astronomically valuable. But it cost us a lot of money to do this. We're actually going to, you know, the amount that we paid for these rights. We're going to push it down to you. And we're going to increase your affiliate fees commensurately to offset 100% 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 it. 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. And to give you a sense, it's been sort of climbing. I think originally we talked about it being 10 cents 2013. It rises to like five bucks. I think it may have risen to somewhere in sort of the eight dollar range. Like it's really over time. It really grows. Yeah. And on the back of the, 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&E, like all these other cable channels. ESPN just dwarfs all of them. Yeah. ESPN is the thing people watch on cable. And ESPN knows it. Yeah. So, okay, quickly back to RJR Navisco, our tobacco pedaling friends. If you are familiar with the Warren Buffett type of history, not more in himself, but, you know, private equity and leverage buyouts, you might know a little bit about the most infamous deal that the firm KKR ever did, which was in 1989, they do the largest LBO in history, leverage buyout in history. They acquire our JR Navisco for $24.5 billion. And this becomes the subject of the book Barbarians at the Gate, Classic, Classic Book also got made into a movie. We should note here too a lot of the history that we're taking for ESPN comes from a great book. Those guys have all the fun. Focus is really more on kind of the cultural history of ESPN, but it's such, so great. Like oral history is interviews with everyone. It has a bunch of business history too. So, Navisco 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 one of the things that they sell off is their 20% stake at this point in ESPN that they sell to the Hurst Corporation for $175 million. Oh my gosh. First got a deal. People just like, especially these non-media businesses that own 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. You're now a seller, not a... It's not like you're not raising right now. You are very actively raising right now. Very actively. That's not a good place to be. So, Hurst still to this day owns 20% of ESPN and have been repaid on their investment, which many hundreds of times over. Can we talk about that? We're about to get to this Disney thing, but in everybody's head, Disney owns ESPN. Disney owns 80% of ESPN. They operate ESPN, but Hurst still owns 20% of the freaking business. It's crazy. Hurst does... They don't do anything. They're a minority shareholder. So, Disney operates it. The P&L flows through to Hurst, but Hurst, of course, the William Randolph Hurst to organization, the publishing magnet, subject of the movie Citizen Kane. There's other things within the Hurst Corporation now, Kanye Naston, and the likes of that. But their 20% stake in ESPN is all of it, basically, all the value there. It's totally crazy, especially, and the price of this deal, like by the late 80s, early 90s, ESPN is ESPN at this point. We're talking Dan Patrick and Keith Alberman on Sports Center, Stewart Scott, like, Boo-ya. You know, you get rich Isod and Ketty Maine and Linda Cohn. It is a cultural icon. It's what you leave on in the living room while you're making breakfast. Totally. Or 24-7. In my house growing up, it was literally like ESPN was on all day. You and Levory Day. 40 to 50 other million Americans. I know. It was awesome. 1994, they hire the famed ad agency, Wyden Kennedy, that, of course, always done Nike to do that. This is Sports Center commercials. Oh, my God. So good. The best one ever, I think, is the Lance Armstrong cycling in the basement. Yes. Yes. Or LeBron's Throne. Yes. Yeah. Yeah. Yeah. It's like Stewart Scott or someone who walks or LeBron tries to walk back to his cube in Bristol. And he sort of looks and his chair is not there. And he looks in the cube next to him. And I think it's like Stewart Scott is sitting in a throne and his desk and his story turns around. He's like, oh, sorry. Is this your chair? So good. I mean, those guys, like, we go read those guys have all the fun. The book is really gets into all this. But, you know, just every the popular culture, like you cannot understate the impact of, you know, Stewart Scott and cool as the other side of the pillow and boo-ya and just like, it changed everything. Yep. Everything. So anyway, ESPN is crushing it through the early 90s. And then in the summer of 1995, our friend, Mr. Buffett, makes another reappearance. He does. And he, he suggests to Tom Murphy that he should get together with Michael Eisner, who's the CEO of Disney. This is at the Allen and company. Yes. When they're both in Sun Valley, at the Allen and company gathering of media and now technology, 100 millionaires and billionaires, this is amazing kind of how fast this deal got done. So in a matter of days, they had worked out the terms and Disney buys. Of course, because Berkshire Hathaway is still a large investor in capital cities at this point. Mm-hmm. Disney buys ABC, which contains capital cities or is capital cities and contains ESPN for $19 billion, which represents 13X cash flow and 28X net income. Yeah. And was at the time the third largest acquisition ever. Of course, the Argera. Nibisco buyout had happened a few years before. That was the largest and goes well. But third largest deal ever. And of course, the cable network division of ABC capital cities is the jewel at this point, and of which all of that is ESPN. Yeah. I think it's something like of that 19 billion. I think it was something like 4 billion alone as attributable to ESPN. It may have been, it may have been more than that. I mean, hard to say exactly. Whatever it was, by the kind of mid-2000s, the cable network division within Disney, which does include the Disney channel and some other things. But ESPN is 90 plus percent of it or whatever. That is driving over half, over 50 percent of all the operating profit for the Walt Disney company, like theme parks, movies, everything, merchandise, all of it, ESPN is over half of the profit. Yeah. And if we really want to fast forward, and I think the modern era of ESPN is a very, it's a different story that we should tell in its own right, but a quick snapshot. So there was an analyst estimate from an investment bank in 2015 that ESPN alone was worth $50 billion. Yeah. Crazy. I mean, really, it's funny. We did our back in season one, our Disney trilogy, which was great, and there certainly are more episodes we'll have to do to add on to that in the future. But this is like, this is the foundation of it all. Like, of course, Disney was a great company before the ABC capital cities deal. But like, if you look at just pure value creation within Disney, like, you know, Lucasfilm, Pixar, Marvel, whatever they've done, you know, in the past, like, these are peanuts compared to ESPN. So one really interesting way to reflect back on this is a phenomenal book called The Outsiders, which is about unconventional CEOs who sort of defied what other people were doing at the time in their industry and ran their business a different way. And the first chapter is about capital cities. So super instrumental to the research for this episode had this great comment to give the rise of capital city some context. If you had invested a dollar with Tom Murphy when he became CEO in 1966, that dollar would be worth $204 at the time he sold to Disney. That's a remarkable 19.9% IRR over the 29 years, which significantly outpaced the S&P 500 10.1%. I mean, just continuous maniacal ludicrous growth. Well, you see why Warren Buffett likes him. Yep. We're going to wrap up History and Facts on this episode here. Ben, as I think you alluded to, at some point, there is another major acquisition in the story here that happens in the, I don't know, the 90s or 2000s want to do the work of a company called Starwave, actually here in Seattle. Yeah, like a mile from where we're sitting. Yeah, which becomes, we're doing an in-person episode today, which is awesome. That becomes the backbone of all the digital assets of ESPN. Yes, we can become fantasy. What would become the apps, you know, the streamers, podcasts, all that. That'll be a super fun one 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. Because there's not that much integration that really happens here in any of these things. It's not like they're integrating a product into their sales channel. They're, of course, by like ESPN just had an insane amount of talent. One of their differentiators where they were an amazing sort of magnet and talent development pipeline. But like a lot of these times where we talk about plugging in a product to improve your flywheel effects, there was 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, then like the ESPN zone and all these different ESPN, the magazine was fine. But like the core business is still really there, the carriage fees. But the ESPN didn't need Disney to do a magazine, like, you know. Right. And it's not like, you know, prominent ESPN things in the theme parks are driving a material piece of it. So to me, it was an amazing business line that with sort of the right continued management and access to capital and could kind of keep growing on its own. And the business line itself just kept getting bought. Yeah. And even going back to the original Getty oil investment, like that's what it was diversifying out of oil as a business line. Like we're going to integrate that into the oil company. And for folks new to the show, we have categories for this people technology product business line asset consolidation or other. And that's sort of grown over time. The way that we differentiate between product and business line is, you know, if a product would be Facebook buying Instagram and then plugging it into their existing business, this is sort of this is not that this is its own business. Yeah. Our next section that we do is what would have happened otherwise. I was also struggling to think about this, but I actually think that to me, the interesting story here is not what would have happened otherwise. It's like what should have happened otherwise, but didn't like, you know, Nabisco, like cigarettes, like all that like there were so many things along the way, like, getty oil, like any other business that hadn't captured such huge waves and brought such huge innovations to the industry would have been capsized by all these machinations, like Getty, Texaco, RJ or 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. Yes. Unfortunately, a lot of the time that ownership was minority, so they could sort of continue to run the business. Or at least acted like minority even when they were majority. Yeah. Yeah. So I think it's almost like it really threaded the needle on managing to realize this true potential without anything disastrous happening. Yeah. Yeah. You know, again, these huge innovations, you know, 24 hours, like community and like especially around sports center and, you know, and the affiliate fee business model, like these are these are huge innovations. Yep. Tech themes. Yeah. So my first one is a point that was made in the outsiders. There are studies and this kind of I think happens over and over again that show that two thirds of acquisitions destroy value. And of course, that's why we are doing this show because we thought it'd be fun to cover ones that manage to not and figure out how do they manage to not destroy value. Capital cities over and over again was masterful at it. So I was trying to sort of tease out what made them so good. So Murphy was able to acquire companies with confidence because the first piece is the business was already so decentralized that whenever they would acquire a company, integration would be easier because there wasn't significant integration to do. They really sort of like installed the right managers and sort of trusted them to run it. And number two was they were so efficient at growing margins in their own business and knew that sort of their playbook could do that. That they could effectively lower the acquisition price because they knew that they could accelerate payback. And so when they could bid higher than someone else. And of course, they didn't really end up buying a lot of auctions. But when they did identify something they wanted and they'd go after it, they know exactly what their price could be because they knew exactly what the resulting cash flows would be five years out or at least could do pretty effective forecasting. So they were able to get conviction in acquiring these assets. So I just thought that was worth mentioning. As we really people often ask David and I like what, 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 and this media business, you know, running this this combination of decentralized and lean really did allow them to efficiently make acquisitions that were very likely to be successful. Yeah, it's been fun learning about capital cities and learning from learning from you, Ben did most of the research on it. It's not a story that's off told, you know, Tom Murphy is, you know, nobody knows Tom Murphy, like everybody knows Warren Buffett. But 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 a lot of ways this is obvious, but hadn't really quite crystallized for me until this episode that like to often to get a like huge, huge generation defining company, which ESPN absolutely is like, I put it in the same category as Google or Facebook or 10 center, Alibaba or whatever, just wasn't an independent entity. This combination of like you have to both ride a huge, you know, technology wave. In this case, the technology wave was cable. But you also, if you can marry that with a business model innovation, like that's how you can become just so incredibly dummy. You know, an ESPN case, like literally 5x bigger than any other cable network. I think you talked about this a bunch on the LP show, like really digging into what is the appropriate and sort of the highest form of perfection of business model for a given medium. And can you really exploit that new piece of technology with the appropriate business model to sort of, you know, flanking industry from the side instead of ever needing to attack anyone head on? Totally. And I think about like 10cent did this equally as well, right? Like, you know, they ride the wave of PC usage and then mobile usage and penetration in China. And they marry that to a huge business model innovation with the freemium business model. And no one can touch them, you know, except maybe by dance. That's my big one. Well, I had just a revisit one that we mentioned earlier. I think it is interesting reflecting back on what activities did ESPN perform that were sort of market capitalizing, effectively wave riding. And what ones did they do that were market creating? I think they mostly are in the business of market creation. And I think that they're, you know, this even continued after like far after where this episode ends sort of with fantasy football being the driver of why people like the NFL, I think ESPN has actually done a lot of work in creating why the NFL is a platform for American social activity. And I think just like they did with March madness and NASCAR and so many others. Yeah. Yeah. Yeah. There it's you can almost think of them as a platform company in the way that sort of Microsoft created a platform on which other people could make more money than Microsoft itself made in total. I think that's probably the case with with ESPN too. They were just sort of an unlock for creating a ton of value in the ecosystem. Yeah, totally. And then lastly, it's interesting to just reflect on the media industry and sort of there's content and there's distribution. And ESPN has always been content and reflecting back on the Kara Swisher episode, many people have tried throughout the years, including AOL to with AOL time Warner to achieve the dream of marrying content with distribution. And we're kind of seeing Disney do that now in a new era where they're trying to, you know, pull this is a again, a foreshadow, but pull off of Netflix and pull off all these streaming services and introduce Disney plus. And I think it's interesting to just look at this this acquisition and the context of that eventual dream of marrying both together. And it's funny that 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, another thing we haven't talked about here that probably wasn't as important in the time period of history where we're focusing on ESPN here, but it's critical now is the live component, especially as, you know, everything is transitioned over the last few years to streaming and whatnot. Like what is the most only really remaining defensible piece of traditional television type programming? It's live and what is the most live compelling live programming it sports. Yep. Wanna grade it? Let's do it. What are we? I think we should grade the Disney acquisition of capital cities, but it's worth talking about the others too. So I think the Disney acquisition of capital cities was a or an A plus or something and we can talk about that. The capital city's acquisition of ABC is whatever whatever we decide for Disney is the same thing for capital cities acquiring ABC because it really like it's was a good idea long term to own ESPN for a much more nominal price than the super high value that it's worth today was yes in both cases. The ABC acquisition of ESPN, that's just like no no doubt a plus. Right. Right. Whatever enterprise value of 200 and some odd million that they paid for it. Yeah. And then the only people that I suppose it may not be an A plus four or an A four or whatever is is getty when they sort of acquired it from the Rasmussen's. It was a 10x. They did have to pour a lot of money into it over time. Yeah, I did. Getty, I think the yeah, the it's almost like you can you can bucket out the winners and losers here or like that the winners the big winners and the not so big winners getty in the not so big winner. Texaco for sure. They were like Bailey even played at the table. Nabisco loser. Hurst, Hurst might be the biggest winner of all. They didn't have to do anything. I paid 175 million for 20% of the company. I wonder if Hurst's market cap, they're not a public company. If they were a public company, I wonder if their market cap would be lower than their share of ESPN. Yeah, you have like a NASPERS situation. Yeah. It's a discounted because you can't get it liquid. Yeah. Yeah. I'm sure it would be. But yeah, Hurst is still a private family owned company. Is ESPN too expensive now with not enough perceived headroom for where it could grow for anyone to want to buy it from Hurst? Could be. Yeah. Why wouldn't Disney? But it doesn't matter, right? Like they've been getting cashflow distributions for decades. Yeah, but that is a good question. Like, would anybody want to buy that from Hurst right now? I don't know. Yeah. All right, where are you on Disney acquiring ABC slash capital cities containing ESPN? Well, I mean, no doubt. It's an A, right? Like even without the exact numbers of my fingertips, if half of your operating income as an entire company is coming from ESPN within a decade of the acquisition, no matter what you paid for it. And 19 billion, I forget what Disney's market cap was at the time. Whatever it was. Anyway, I would say with plenty of fudge factor based on what these numbers were that we don't have at our fingertips, I'm fairly confident it was an A. Yeah. It is worth noting the contrast to like our sort of two biggest A pluses of all time or maybe three are next reverse acquiring Apple. Yep. Facebook, Instagram, Instagram and booking, price line acquiring booking. Yep. And this is different than next in that it was not company saving. Like Disney would have been fine. Yeah. But nowhere near what they are. Right. So, you know, if we're like reserving the pluses for company saving or something, it wasn't that. Yeah, I agree. And I'm not a plus on an A. It's an A. Because they still paid 19 billion dollars for it. Like, you know, it's not like. Right, I mean, yeah. Yeah. It's not like they invested when this isn't like Tencent here. Right, let's even say half. So in 95, they paid, call it 10 billion dollars ish for ESPN just kind of as a conservative thing. And today or in I won't say peak in the late 2000s, it was 50 billion. Like, it's a five X over a decade. It's great. And it's that's that's value. They also have been getting tons of cash flow from it over those years. So, yeah, I think I definitely day only ESPN today. Yeah, for sure. For sure. Now, when we talk about Starwave and ESPN going forward next time, we can't promise it will be actually next time. But at some point in the future on the quiet, she did. Carvouts. Carvouts. I have an incredibly appropriate one. So there is a very cool podcast that has been started by the folks at Geekwire in addition to their regular podcast, called Numbers Geek. And Todd Bishop, the co-founder of Geekwire. Friend of the show. Todd Bishop. Indeed. And, you know, a special guest on the push pops. Exactly. Press episode. Point that was early on. His co-host or maybe his featured guest every time is Steve Balmer. And Steve, Steve Balmer, of course, the former CEO of Microsoft owner of the LA Clippers. Now that he's used sort of his private family wealth to release USA facts. So really diving into making it easy to understand sort of the important numbers about the US both in government spending, but across a lot of important issues. So they do this great podcast called Numbers Geek. The most recent episode was fascinating. It was called the basketball box score mystery. Todd presented Steve with a stat sheet, very, very detailed stat sheet from 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 sat lines. And it's really fun, because Balmer such a basketball geek and has been for a long time, long before buying the Clippers to sort of have him sort of try and analyze and understand everything from, oh, I bet this player was injured and this other player was taking some of his minutes because he was injured. I think this might have been a playoff game. So it's really cool. And as I was thinking about this episode, you know, just a great tie in with the SPN. My carve out, I'm going to listen to that. That sounds awesome. My carve out is also near and dear to the show and our community's heart is a great, great, long piece that fast company just released on Softbank and Masa and his ambitions. And where the Vision Fund and Softbank and WeWork and everything goes from here by Katrina Brooker and Championed by Editor and Huge supporter of Acquired, David Litzky. So thank you so much for all your support. David is, I mentioned the Slack earlier. David is like an awesome, awesome member in the Slack. So great. And this piece is really, really good. I wish it had been out when we did our episode on the Vision Fund. But so my favorite moment is this image of When Softbank corporate acquired arm, which we'll have to do an episode on someday. And the deal getting done in the Turkish Mediterranean in an empty restaurant that Masa had bought out and then helicoptered in all the principles from our amazing. Amazing. Awesome. Well folks, thanks as always for going on this journey with us. If you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client. If you like the show and want to dive deeper with us as a limited partner, you should join the club where you can click the link in the show notes and get access to a special deeper episode in between every episode that we release on the main show. Or you can go to Kimberlite.fm slash acquired. We'll see you next time. We will.