Season 4, Episode 1 ESPN

In the season four premiere of Acquired, hosts Ben Gilbert and David Rosenthal discuss the complex history of ESPN, a sports broadcasting titan that has become a cultural icon. They trace ESPN's journey from its 1979 inception by Bill Rasmussen, through multiple acquisitions—first by ABC in 1984, then as part of Capital Cities Broadcasting Corporation's surprising purchase of ABC in 1985, and finally, its significant role in the $19 billion Disney-ABC deal in 1996. ESPN's value, driven by innovative 24-hour broadcasting, community building around sports, and a game-changing affiliate fee business model, was so substantial that by 2006, it was estimated to represent 40% of Disney's total value. The episode also touches on ESPN's potential market creation role, its digital era, and the importance of live sports content in the evolving media landscape.

• Ben Gilbert and David Rosenthal discuss their distaste for the old theme music.
• They introduce the podcast, Acquired, which focuses on technology acquisitions and IPOs.
• The episode covers ESPN, a company synonymous with sports.
• ESPN's history is highlighted, starting from its first broadcast in 1979.

"And David, I'm kind of sick of the old theme music, and to be completely honest, I never really liked it. Welcome to season four, episode one of acquired, the podcast about technology acquisitions and ipos."

This quote introduces the new season of the Acquired podcast and sets the stage for the discussion about ESPN.

• ESPN was acquired by ABC in 1984.
• Capital Cities Broadcasting Corporation bought ABC and ESPN in 1985.
• In 1995-96, Disney executed a $19 billion buyout of ABC, acquiring ESPN in the process.
• The episode will focus on ESPN's growth and its significance in these acquisitions.

"ESPN was acquired by ABC in 1984. Just one year later, in a surprising turn of events, the smaller Capital Cities Broadcasting Corporation incredibly bought ABC, took its name, and got ESPN along with it."

This quote outlines the sequence of acquisitions involving ESPN, demonstrating its increasing value and influence in the media industry.

• By 2006, ESPN was estimated by UBS to be worth 40% of Disney's total value.
• The episode will focus on ESPN's rise to prominence until the mid-1990s.
• Digital and streaming eras of ESPN will be covered in a future episode.

"By 2006, a UBS estimate was that ESPN alone was worth 40% of Disney's total value."

The quote emphasizes the significant financial contribution of ESPN to Disney's overall value, highlighting the importance of ESPN to the company.

• Bill Rasmussen, a sports enthusiast, founded ESPN after being fired from the Hartford Whalers.
• Bill and his son Scott Rasmussen teamed up with Ed Egan to start a cable network focused on Connecticut sports.
• The network was initially called ESP (Entertainment and Sports Programming Company) and later became ESPN.

"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."

This quote provides background on Bill Rasmussen, whose passion for sports led to the creation of ESPN.

• Less than 20% of US households had cable in the late 1970s.
• Cable was the new frontier for entrepreneurs, similar to the internet later on.
• HBO and Ted Turner were early pioneers in the cable industry.
• Satellite transmission technology was emerging as a new way to broadcast content.

"Cable is kind of like the Internet of the time, like where all the entrepreneurs are heading at this point in the late seventy s."

The quote draws a parallel between the cable industry in the 1970s and the later rise of the internet, both serving as new frontiers for media distribution and entrepreneurship.

• The Rasmussens secured a location in Bristol, Connecticut, for ESPN's headquarters.
• They raised initial funding from family and a venture capitalist in King of Prussia, Pennsylvania.
• The Getty family invested $15 million for an 85% stake in ESPN.
• Bill Rasmussen secured broadcasting rights with the NCAA for various sports events.

"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."

This quote describes the humble beginnings of ESPN's headquarters, which was built on an open space in Bristol, Connecticut.

• The idea of broadcasting Connecticut sports to a global audience was initially met with skepticism.
• ESPN had to broadcast 24/7 due to the nature of satellite transmission, which was a new concept at the time.
• Anheuser Busch signed the largest advertising contract in cable television history with ESPN, providing significant funding.

"So they find out that RCA, the big electronics company, they've just launched two satellites into space for video transmission."

The quote highlights the innovative step ESPN took by utilizing satellite technology to broadcast their content, which was a novel approach at the time.

• Anheuser Busch signs an exclusive beer advertising deal with the new ESP network.
• The executive quote highlights the natural association between beer and sports.

"Because we just thought beer and sports just go together."

This quote illustrates the reasoning behind Anheuser Busch's decision to partner with ESP, emphasizing the cultural link between watching sports and consuming beer.

• Concerns arise that ESP sounds corny, unprofessional, and is confusing.
• Decision made to change the company's name to the Entertainment and Sports Programming Network (ESPN).
• The term "network" is adopted following the trend of other cable networks, despite the somewhat confusing terminology.

"They say, great, we're going to change the name of the company. We are now the entertainment and sports programming network. ESPN, the worldwide leader."

This quote marks the official decision to rebrand ESP as ESPN, aiming to present a more professional image and align with the naming conventions of other cable networks.

• Getty buys controlling interest in ESPN and decides to replace the founders with professional management.
• The Rasmussens are recognized as entrepreneurial but not equipped to build a media empire.
• Operational issues are highlighted by the last-minute satellite connection prior to the first broadcast.

"The Rasmussens were amazing entrepreneurs... But they weren't really equipped to build out a media empire."

The quote acknowledges the Rasmussens' entrepreneurial skills in securing contracts such as the NCAA but questions their ability to scale the business into a larger media empire.

• Chet Simmons and Scotty Connell from NBC Sports are brought in to lead ESPN.
• Notable talent such as Chris Berman, Dick Vitale, Bob Lee, and Greg Gumble are hired.
• ESPN goes live on September 7, 1979, with SportsCenter being the first program broadcasted.

"They go live, and the first show that they have... they decided to drop the entertainment... It's the sports center."

This quote describes the strategic focus on sports content and the launch of SportsCenter, which would become a flagship program for ESPN.

• ESPN's programming initially includes a mix of sports, including wrestling and college soccer.
• The innovation of SportsCenter as a daily highlights show is noted for its novelty and value to sports fans.

"This was like super innovative because the only way to get sports scores was if your weatherman decided to read it on your local tv channel or to open up the paper the next morning."

The quote emphasizes the innovative aspect of SportsCenter in providing real-time sports scores and highlights, which was a significant departure from the existing ways audiences obtained this information.

• ESPN's broadcast of NCAA tournament games contributes to the popularity and coining of "March Madness."
• Discussion on whether ESPN capitalized on existing markets or created new ones, with the conclusion that ESPN played a significant role in creating the phenomenon of live sports entertainment.

"No, they created March Madness."

The quote asserts that ESPN was instrumental in creating the cultural phenomenon of March Madness, not just capturing an existing market trend.

• ESPN changes the cable business model by charging cable operators to carry their channel.
• This shift results in ESPN becoming a highly profitable network, with affiliate fees becoming a major revenue source.

"What if we flip the script on these cable operators and we say, yeah, I know we've been paying you, but now you got to pay us."

This quote captures the strategic pivot that transformed ESPN's business model and had a far-reaching impact on the cable industry by reversing the flow of money from networks to cable operators.

• ESPN experiences rapid growth but also faces financial challenges, burning $8 million a month by 1982.
• Getty sells a stake in ESPN to ABC, which later enables ABC to acquire a majority share.

"They're getting pretty nervous, though. They don't like this."

The quote reflects the Getty family's concern over ESPN's financial losses and their decision to sell a stake to ABC as a means to mitigate these losses.

• Capital Cities, led by Tom Murphy, takes over ESPN after Getty Oil is sold to Texaco.
• Capital Cities' lean and decentralized management style is introduced to ESPN.

"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."

This quote provides background on Capital Cities and Tom Murphy, setting the stage for their eventual acquisition of ESPN and the influence they would have on its management and growth.

• Berkshire Hathaway's management style is characterized by a lean central staff and trust in managers to handle operations.
• Capital allocation is a key responsibility, mirroring the approach at Berkshire Hathaway.
• This style emphasizes decentralization and operational efficiency.

"think about sort of the Berkshire Hathaway style of management, we're not going to have a big central staff. We trust the managers, everybody."

The quote highlights the management philosophy similar to Berkshire Hathaway, where a small central staff is maintained and a high level of trust is placed in individual managers to run operations effectively.

• Murphy (CEO) and Burke (COO) formed a powerful executive team at Capital Cities.
• Their strategy involved expanding across local TV stations, newspapers, and cable stations.
• They focused on media and publishing, avoiding the conglomerate mentality of the era.

"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."

This quote describes the successful partnership between Murphy and Burke, highlighting Murphy's strategic and capital allocation skills and Burke's operational prowess.

• Capital Cities expanded by buying stations and operating them profitably for strong cash flow.
• They utilized the generated cash flow to raise debt at favorable terms for further acquisitions.
• The company was known for its disciplined approach and focus on decentralization.

"Capital cities. Their playbook was extremely simple. They would buy a station, they would operate it leanly and profitably so they would get some great cash flow from it."

The quote summarizes the business strategy of Capital Cities, which involved purchasing stations, running them efficiently for cash flow, and using that cash flow to fund further expansion.

• ESPN was seen as a valuable asset by various parties including Ted Turner and ABC.
• ABC, which had a stake in ESPN, eventually acquired the remaining shares from Texaco and Getty.
• Capital Cities, under Murphy's leadership, was indirectly involved due to Murphy's position on the Texaco board.

"ABC. They already have this 10% stake that they owned in ESPN, an option for more. So the first thing they do, they buy 5% more from Getty and Texco."

This quote explains ABC's initial stake in ESPN and their actions to increase ownership, which eventually led to full acquisition.

• ABC made questionable decisions, such as reselling part of ESPN to RJR Nabisco.
• Capital Cities, with financing from Warren Buffett, executed a major purchase of ABC.
• The acquisition was historic for its size and was seen as a reverse acquisition due to the influence of Capital Cities' culture.

"So in January of 86, they made a series of very conventional, small acquisitions that were, in total, something to write home about, but individually, nothing to write home about."

The quote refers to the strategic acquisitions by Capital Cities leading up to the major purchase of ABC, which was unconventional and significant in scale.

• ESPN secured NFL rights, which greatly increased its value.
• The network innovated by passing the cost of NFL rights to cable operators through increased affiliate fees.
• ESPN's affiliate fees became significantly higher than those of other channels.

"1986 was a huge year for ESPN on the business side. Together now with ABC all under one house, they get NFL rights for the first time."

The quote marks a pivotal year for ESPN, noting the acquisition of NFL rights as a major milestone that contributed to its business growth.

• ABC's decision to resell a stake in ESPN led to RJR Nabisco and later Hearst owning shares.
• Despite common perception, Disney owns 80% of ESPN, while Hearst owns the remaining 20%.
• Hearst has been passively benefiting from ESPN's success as a minority shareholder.

"Hearst still to this day, owns 20% of ESPN and have been repaid on their investment, which could many hundreds of times over."

The quote emphasizes the enduring ownership stake that Hearst holds in ESPN and the substantial return on their investment over time.

• Disney acquired Capital Cities/ABC, including ESPN, for $19 billion.
• The acquisition was one of the largest at the time and reflected a significant premium based on cash flow and net income multiples.

"Disney buys ABC, which contains capital cities or is capital cities and contains ESPN for $19 billion, which represents 13 x cash flow and 28 x net income."

This quote details the financial terms of Disney's acquisition of Capital Cities/ABC, highlighting the valuation metrics and the scale of the transaction.

• ESPN was a significant asset within the ABC Capital Cities portfolio acquired by Disney.
• ESPN alone accounted for a substantial portion of the acquisition's value.
• ESPN was driving over 50% of all operating profit for the Walt Disney Company.
• An analyst estimate in 2015 valued ESPN alone at $50 billion.

"Yeah, I think it's something like of that 19 billion, I think it was something like 4 billion alone is attributable to ESPN. It may have even been more than that." "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% of all the operating profit for the Walt Disney company."

These quotes highlight ESPN's financial importance to Disney, emphasizing its contribution to the company's operating profit and its high valuation.

• Capital Cities' acquisition history was marked by high returns and efficient management.
• Tom Murphy's tenure as CEO was notable for its exceptional investment return rate.
• The decentralized nature of Capital Cities' business made integrations post-acquisition smoother.
• Capital Cities' management was adept at growing margins and accelerating payback on acquisitions.

"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 5 10.1%."

The quote demonstrates the exceptional performance of Capital Cities under Tom Murphy's leadership and its ability to outperform market averages significantly.

• Disney's acquisition of ABC Capital Cities was categorized as a business line rather than a product integration.
• ESPN had a unique talent and brand that Disney could leverage, but integration into Disney's other channels was limited.
• The acquisition did not fundamentally alter ESPN's operation or profitability.

"It's not like they're integrating a product into their sales channel. ESPN just had an insane amount of talent, one of their differentiators, where they were an amazing sort of magnet and talent development."

This quote explains that ESPN's acquisition was more about adding a business line with its own strengths rather than merging products or services into Disney's existing operations.

• ESPN's success was attributed to strong management despite various ownership transitions.
• The company rode significant industry waves and brought about innovations in sports broadcasting.
• ESPN's management was effective even when ownership was not optimal, allowing it to thrive.

"Often really what it was was amazing management under questionable ownership. Fortunately, a lot of the time that ownership was minority, so they could sort of continue to run the, or at least acted like minority even when they were majority."

The quote reflects on the dynamic between ESPN's consistently strong management and the fluctuating quality of its ownership throughout its history.

• ESPN's success was linked to its ability to ride technology waves and innovate business models.
• The combination of technology adoption (cable) and business model innovation (affiliate fee model) was key to ESPN's dominance.
• ESPN's content creation and community building around sports were seen as market-creating activities.

"This combination of like, you have to both ride a huge technology wave. In this case, the technology wave was cable. But if you can marry that with a business model innovation, that's how you can become just so incredibly dominant."

The quote underscores the importance of combining technological advancements with innovative business models to achieve market dominance, as ESPN did with cable television and its business strategies.

• ESPN is compared to a platform company, creating value for the sports ecosystem.
• Its activities in promoting sports, such as NFL and March Madness, contributed to market creation.
• ESPN's role in the media industry focused on content rather than distribution, which was unique compared to attempts to merge content with distribution by other companies.

"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."

The quote draws a parallel between ESPN's role in the sports industry and how platform companies like Microsoft create ecosystems where others can thrive and generate value.

• The acquisition was highly successful, with ESPN significantly contributing to Disney's operating income.
• Hearst's minority stake in ESPN is highlighted as a potentially huge win given the value growth.
• The acquisition is graded as an 'A' due to the substantial value it brought to Disney over time.

"I think we should grade the Disney acquisition of capital cities, but it's worth talking about the others, too. So I think the Disney acquisition of Capital Cities was an a or an a plus or something."

This quote suggests a high grade for the acquisition, recognizing the immense value ESPN brought to Disney and the strategic success of the deal.