Episode 36: The LA Clippers

In episode 36 of Acquired, hosts Ben Gilbert and David Rosenthal, neither avid NBA fans but lovers of acquisition analysis, discuss Steve Ballmer's 2014 acquisition of the Los Angeles Clippers for $2 billion. They explore the Clippers' troubled history, from their start as the Buffalo Braves to their lackluster performance under Donald Sterling's ownership. Despite the team's past, Ballmer's purchase came amidst a surge in NBA valuations and the league's growing appeal to younger audiences. With the NBA innovating both on-court play and its business model through direct-to-consumer streaming, the hosts speculate on the future potential of sports franchises as serious business ventures, considering Ballmer's enthusiastic and hands-on approach to ownership. They also touch on the Clippers' current challenges, such as upcoming player free agency decisions, and the unique role of a sports team as both an asset and a business line.

• Episode 36 of the podcast "Acquired" shifts focus from technology to sports, specifically the acquisition of the Los Angeles Clippers by Steve Ballmer in 2014.
• Hosts Ben Gilbert and David Rosenthal admit they are not huge NBA fans but are enthusiastic about analyzing acquisitions.
• The hosts invite listeners to join their Slack community for discussions on various topics, including sports and technology.

"Today's episode, David and I are venturing away from technology into the world of sports."

• This quote indicates the unique focus of the episode, diverging from the usual technology theme to sports.

"We do love digging into the analysis of any acquisition, and there's no shortage of writing and opinion on this one."

• The hosts express their passion for analyzing acquisitions, which is the basis for discussing the Clippers' purchase.

"We've done a bunch of kind of serious, more hard hitting episodes in a row, and we wanted to do something light."

• The quote explains the intention behind choosing a lighter topic for the episode, aiming for a more relaxed discussion.

• The Los Angeles Clippers were originally founded as the Buffalo Braves in Buffalo, New York, in 1970.
• The team struggled with scheduling home games due to competition with the Canisius Golden Griffins, which hindered the development of a fan base.
• Ownership changes led to the team moving locations and eventually becoming the San Diego Clippers, named after the sailboats in the bay.
• Donald Sterling's controversial ownership began in 1981, marked by false promises and minimal investment in the team.
• Sterling moved the Clippers to LA without NBA approval, resulting in a lawsuit and fine.
• The Clippers had a poor track record, with ESPN naming them the worst franchise in professional sports in 2009.
• Despite Sterling's mismanagement, the team improved in the early 2010s with players like Blake Griffin, DeAndre Jordan, and Chris Paul, and coach Doc Rivers.

"The team, after just a couple of years, gets sold to the then owner of the Kentucky Colonels... he basically just decimated the team's roster, traded away all the stars."

• The quote details the damaging decisions made by the team's ownership, leading to a decline in attendance and performance.

"In 1981... Donald Sterling vows to spend, quote, 'unlimited sums to build the Clippers into a contender.' He later becomes famous for spending no money on the Clippers."

• This quote highlights the empty promises made by Donald Sterling, which characterized his ownership tenure.

"Sterling owns the Clippers from '81 until 2014... The Clippers actually have the worst winning percentage of any team in any major American sport."

• The quote summarizes the extent of the Clippers' underperformance during Sterling's ownership.

• In April 2014, TMZ released a recording of Donald Sterling making racist remarks to his mistress, causing widespread outrage.
• The Clippers players protested by obscuring the team logo during warm-ups and considered boycotting a playoff game.
• The NBA responded swiftly, with Commissioner Adam Silver issuing a lifetime ban to Sterling, fining him $2.5 million, and barring him from any NBA activities.

"A taped phone conversation with Donald Sterling... in which he reprimands his mistress for posting an Instagram photo with her and Magic Johnson."

• This quote describes the contents of the recorded conversation that exposed Sterling's racism.

"The NBA issues a lifetime ban of Donald Sterling from the game and fines him two and a half million dollars."

• The quote outlines the NBA's decisive actions against Sterling following the scandal.

• Adam Silver, the NBA commissioner, announced a ban and the intention to force Donald Sterling to sell the LA Clippers.
• The NBA has a franchise ownership structure similar to owning a McDonald's franchise.
• The NBA corporate governance allows for decisions to be forced upon an owner with a three-quarters vote from the other 29 team owners.

"Adam Silver, the commissioner, states that he is planning and he will try to force Sterling to sell the Clippers and that they are basically going to kick him out of the league, which the league can do with a three quarters vote of the other 29 team owners."

The quote explains the NBA's power structure and how a team owner can be compelled to sell their franchise if three-quarters of the other owners agree.

• The Clippers' sale was a distressed sale due to the ban on Sterling.
• There was an expectation of a low sale price due to the urgency and circumstances of the sale.
• Despite being historically a poorly performing team, there was significant interest from high-profile individuals and groups in purchasing the Clippers.

"You would think that this would be a fire sale. But there are quite a few people who are interested in buying the team."

This quote highlights the unexpected high interest in purchasing the Clippers despite the distress situation.

• Steve Ballmer, the former CEO of Microsoft, made an over-the-top bid to purchase the Clippers.
• Ballmer had previously attempted to keep the Sonics in Seattle and to buy the Sacramento Kings.
• The Clippers were valued at $575 million by Forbes, but Ballmer's bid was $2 billion.

"So Balmer comes in with a bid of 2 billion."

This quote indicates the magnitude of Ballmer's bid in comparison to the Clippers' valuation.

• The Clippers' valuation and sale price were influenced by the LA market.
• NBA teams have been selling for increasingly high prices in recent years.
• The Milwaukee Bucks sold for $550 million earlier that year, which was a quarter of the Clippers' sale price.

"No NBA team had ever sold for anywhere near that amount of money."

This quote emphasizes the unprecedented nature of the Clippers' sale price.

• The Clippers continued to perform well, making six straight playoff appearances.
• Despite not reaching the Western Conference finals, the team had a strong starting five.
• Forbes valued the Clippers at $2 billion three years after Ballmer's purchase, which was the same price he paid.

"The clips are up to number six, but still at 2 billion, the same mark, the same price that bomber paid for them three years ago."

This quote reflects on the Clippers' valuation maintaining the same level as the purchase price.

• Shelly Sterling, Donald Sterling's estranged wife, facilitated the sale of the Clippers.
• She received various privileges as part of the deal, including titles, tickets, parking spots, and the right to run a charitable foundation.

"As part of the deal, Shelly Sterling gets the titles of owner emeritus and Clippers number one fan, as well as ten tickets in section 101 or 111 for all Clippers games."

This quote details the benefits Shelly Sterling received from the sale of the Clippers.

• NBA franchises are a limited supply asset, making them highly desirable among billionaires.
• The exclusivity of owning a major market team contributes to the high sale prices.
• Sports franchises are enduring assets, expected to exist and generate income for many years.

"It's a very exclusive club of people that own teams like this, and not every billionaire can get in."

This quote captures the allure and exclusivity of owning an NBA franchise.

• The NBA has experienced significant growth, especially among young viewers.
• NBA teams have high valuation multiples based on revenue and operating income.
• The enduring nature of sports franchises contributes to their high valuation multiples.

"Sports franchises are such an enduring part of the fabric of a city and the fabric of american culture that we just trust that these things are going to continue to be around and continue to be popular."

This quote explains why sports franchises command high valuation multiples due to their long-term stability and cultural significance.

• The NBA is considered the most innovative and fastest-growing sports league.
• The league has the youngest audience among major American sports.
• Growth in the NBA is tied to its appeal to younger demographics and its innovative approaches.

"The NBA has the youngest audience of any of the major sports in America and has almost half of its viewers under 35."

This quote highlights the NBA's unique position in attracting a young audience, which is key for future growth.

(Note: The transcript contains an advertisement for Vanta, which has been omitted from the study notes as per the instructions.)

• Discussion about fitting the acquisition into a category.
• Debate whether it's a business line or an asset.
• The unique aspect of attributing value to player contracts and their depreciation.
• Future growth potential of the franchise as a brand.

"Mister Balmer, 58, is likely to enjoy significant personal financial benefits. When an investor purchases a sports team, he can attribute a large part of the purchase price to the player contracts he is acquiring. As those contracts expire, their depreciation can offset income."

• The quote explains a technical financial advantage of acquiring a sports team, where the purchase price can be allocated to player contracts, which depreciate over time, providing tax benefits.

• Speculation on the team's direction without Steve Ballmer's ownership.
• Comparison of the investment in the team to an S&P index fund.
• Ballmer's impact on the team's operations and decisions.
• The aggressive acquisition strategy employed by Ballmer, similar to his approach at Microsoft.
• Ballmer's deep involvement and willingness to invest heavily in the team.

"According to that Forbes list, at least the business hasn't appreciated at all. And if he had just parked it in an S&P index fund from that day that he bought it until today, the day that we were recording, it would have been a 20.8% return."

• This quote suggests that the investment in the sports team has not appreciated in value as much as a standard financial investment in an S&P index fund would have over the same period.

"He did the same thing with the Clippers here, and in bidding 20% over the next highest bidder."

• Ballmer's strategy in acquiring the Clippers involved outbidding competitors significantly, which parallels his approach to acquisitions at Microsoft.

• Analysis of Steve Ballmer's personality compared to other CEOs.
• His hands-on and enthusiastic approach to owning the Clippers.
• Comparison to Mark Zuckerberg's more reserved acquisition style.
• Ballmer's public persona and its influence on the team.
• The unique situation of Doc Rivers holding both the head coach and president/GM roles.

"He's ridiculously involved, and much more so than I think most owners are, and probably maybe even to a fault."

• This quote highlights Ballmer's high level of involvement in the Clippers organization, which is unusual for an owner and may have both positive and negative impacts.

• The evolving business model of sports franchises.
• Innovation in sports broadcasting and streaming services.
• The disruption of traditional TV by direct consumer relationships and subscriptions.
• The potential for sports teams to become more significant business entities as a result of these changes.

"I think there is business model innovation that is happening in sports right now in American sports."

• The quote discusses the current transformation within the sports industry, where business models are innovating, particularly in how sports content is distributed and monetized.

• The shift in the NBA's style of play and its impact on viewership.
• The application of data science and analytics in basketball strategy.
• The Golden State Warriors' influence on changing basketball dynamics.
• The need for innovation in other sports like baseball and football.

"They're optimizing for exactly the three pointers they should be taking, not taking the ones that they shouldn't be taking."

• This quote reflects the strategic use of data and analytics in basketball to improve team performance and the way the game is played on the court.

• Emphasizing the importance of innovation in sports, breaking away from tradition.
• Baseball and football examples highlight conservative approaches versus potential strategic innovations.
• NBA is seen as potentially influencing other sports towards more innovation due to positive audience reactions.

"There is so much value and power in not feeling like we have to stick to tradition in the way it's always been done, in how these games are played, and that fans will react super positively and love new innovations."

• This quote emphasizes the potential benefits of breaking away from traditional sports strategies and the positive reception of innovation by fans.

• NFL's transformation into a family-oriented sport over the past 20 years.
• Broadcasts now focus on entertainment, with the Super Bowl exemplifying this shift.
• The NFL is currently successful, but there's an implication that the NBA might be a better investment due to its continued evolution.

"The NFL had an amazing 20 year run up to call it five years ago where they really turned the NFL into a family sport... But I don't think we've seen much evolution beyond that yet."

• The quote reflects on the NFL's past success in rebranding as a family sport but suggests that further evolution is needed to maintain its position.

• The NFL faces significant challenges with concussion issues, considered a huge liability.
• Personal anecdote from a former football player who would not choose to play again due to the risks.
• The discussion implies that concussion concerns could impact the NFL's future.

"The NFL has a huge liability on their hands that I don't see any way out of it with the concussion issues."

• This quote highlights the seriousness of concussion problems in the NFL and the lack of a clear solution, which poses a risk to the league's future.

• The upcoming free agency of NBA players JJ Reddick, Blake Griffin, and Chris Paul raises questions about the franchise's future.
• The lack of a true president or GM could affect the team's ability to manage these changes.
• The conversation draws parallels between sports management and tech company management, emphasizing the importance of strategic responses to challenges.

"The most interesting phase is coming soon when JJ Reddick is likely to sign for more money elsewhere... That's the challenge for Ballmer."

• This quote points out the management challenges faced by NBA team owners, particularly in player retention and team strategy.

• Discussion of whether Steve Ballmer's acquisition of the Clippers was a good decision.
• Ballmer's personal enjoyment and the rarity of owning a sports team are considered alongside the financial aspects.
• The acquisition is seen as an innovative move, but the lack of a president is criticized.
• Overall, Ballmer's purchase is viewed as a positive decision, with the potential for significant impact on the NBA's business model.

"Was this a good decision for Steve Ballmer to acquire the Clippers?... For him, what are you going to do with the rest of your life? This is a really fun thing to do."

• The quote discusses the personal fulfillment aspect of Ballmer's decision to buy the Clippers, beyond just the financial implications.

• Instagram Stories surpasses Snapchat in daily active users (DAU).
• A listener corrects the hosts' previous misunderstanding of DAU, explaining that it represents the portion of the user base active on any given day, not necessarily every day.
• The discussion underscores the importance of understanding key metrics in evaluating social media platforms.

"Instagram Stories now has more than 200 million DAU, which is more than all of Snapchat."

• This quote presents a significant milestone for Instagram Stories, highlighting its success relative to Snapchat.

• A podcast called "Pop Race in the Sixties" is recommended, exploring the intersection of music and race during the 1960s.
• The series provides insights into the impact of artists from different racial backgrounds and their societal perceptions.
• The conversation also draws parallels between the counterculture movement of the sixties and the tech industry of today.

"Pop Race in the Sixties...comparing [white and black musicians] against each other and how they were viewed by society at the time and their legacies and impact."

• The quote encapsulates the podcast's exploration of the cultural and musical dynamics of the 1960s, emphasizing its continued relevance.

• The success of Starbucks' IPO is attributed to consistent financial delivery and growth in same-store sales over many months.
• The hosts discuss the importance of such metrics in assessing the success of store chains and IPOs.
• The conversation highlights the strategic focus necessary for sustained growth in retail businesses.

"One reason that the Starbucks IPO is so successful... they had tens and tens and tens, or I think it was maybe even 100 months of month over month growth on average in same store sales."

• This quote points to the impressive and consistent growth in same-store sales as a key factor in Starbucks' successful IPO.