Ben and David continue Acquired's "tech and sports" mini-series with Disney's 2016 acquisition of a minority stake (with the right to purchase a majority stake at a later date) in BAMTech, the internet streaming company originally founded as part of Major League Baseball in the early 2000's. However the importance of this story goes deeper than just sports, with major ramifications for nearly every major technology company from Amazon to YouTube. Even if you're not not sure if baseball's played on a diamond or a gridiron, tune in as we swing for the fences in predicting the future of TV!
Topics covered include:
Followups & Hot Takes:
The Carve Out:
Full Transcript below: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
David: Freaking Forbes! I kind of hate these quotes of the day. Most annoying website ever.
Ben: Welcome back to Episode 37 of Acquired, the podcast about technology acquisitions and IPOs, and today, spin-outs. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And we are your hosts. So today, David and I are continuing our journey along sports and technology by diving into Major League Baseball’s 2015 spin-out of a company called BAMTech from their Advanced Media or MLBAM group, and the 2016 minority investment into BAMTech by Disney. So David, I’m ridiculously pumped for this episode.
David: Me too. Not only and for our listeners, even if you don’t care about sports, you should keep listening because not only is this one of the most interesting sports tech deals that’s happened in the last decade plus, but this is actually I think really important to understand from just a pure technology standpoint when it comes to the future television and things we’ve talked about on this show a lot with Twitch and Amazon and YouTube and even Snapchat. So stay tuned for this one.
Ben: Yeah. It’s like there was a secret big tech company hiding inside of a sports league for like a decade and a half. And they had more foresight and more premonitions than the best streaming services out there and had their technology. I mean reading into all this, I really couldn’t believe it. Like we give a lot of credit to a lot of these other companies, Netflix being one of them, for being these sort of digital pioneers, and baseball is making bets five years earlier.
David: Totally agree. This is going to be fun to dive into.
Ben: Yeah. Well before we get to it, a couple of administrative things as usual. We love iTunes reviews. Listeners, if you like the show, if you’ve been listening for a long time or if you’re brand new to the show, it’s how we grow the show, it’s how others find us and it lets us do more cool things and bring on more cool guests. So if you have a minute, we’d love a review on iTunes and thanks so much for that.
Our Slack has been blowing up recently. So we’ve got a thing called Slack and I’m sure many of you use it at work, and there’s over 600 of us that are hanging out in the Acquired Slack now. You can get to it by going to Acquired.fm and there’s a little widget on the right. There’s a ton of cool conversation in there, a lot of great criticism and feedback of episodes after we release them where we hop in and talk about it with you guys. But then also a lot of people link to breaking news and yesterday was a great discussion of Amazon’s earnings call. And honestly, we get a lot of great color for upcoming episodes from the community. So thanks to everyone who is an active participant in Slack.
Ben: And we’ve got a great sponsor for this episode – Silicon Valley Bank. SVB has been sponsoring our last several episodes and it’s been fun to talk with different members of their team since they have a lot of visibility into different sectors in the tech world. I’m joined today by SVB’s San Francisco market manager, Marshall Hawks.
Marshall, what’s an innovation that you’ve seen recently by a sports league or team?
Marshall: “The NFL in particular. They’ve broadened their places or locations where you can access their content. You’ve got Facebook, you’ve got Twitter now buying the rights to stream some of their games and at some point, hopefully, we’re going to have maybe ala carte being able to watch the team sport you’d like, maybe starting because of the NFL, but hopefully applicable to all the sports leagues soon enough where the broadcast channels don’t have the consistent rights to those teams every day they’re playing.”
Awesome. Thanks to SVB for sponsoring this and the last several episodes.
So David, I think we’re ready to dive in.
David: Let’s do it. History and facts. Okay. So question #1 I bet on many listener’s minds is, what is BAMTech? So Forbes calls BAMTech the “biggest media company you’ve never heard of.” This story, as Ben alluded to, they are probably as much as Netflix and Amazon and Twitch doing as much to shape the future of television in America and around the world than any other company.
Ben: Well, it’s funny I bet a lot of our listeners haven’t heard of BAMTech. There are some out there that are probably nodding their heads that have heard of. I’d come across it in a lot of research I was doing for some of the things we’re working on at Pioneer Square Labs. But it really took kind of like diving in for a few hours yesterday to really understand how the structure of this whole thing works and how the timeline lays out. A lot of cool stuff in here.
David: Yeah. I knew it because I have been a baseball fan for a long time and a subscriber to MLB.tv which is where BAMTech gets its origins. So all the way back in the year 2000, Major League Baseball the sports league, had the foresight to start a new division within the league and they called it Major League Baseball Advanced Media. The mission that they gave this new division was to build and operate a website for each of the 30 teams in the league rather than saying to the Mariners, the Giants, the Yankees “you guys all go off and build your own websites,” we’re going to centralize this in the league.
Ben: Which is kind of brilliant in its own right, right? When you think about in that era what the worst website would have been of 30 sort of random owners who are hiring random web development firms to do the contract work for that, it’s probably a good thing they centralized that function.
David: It certainly is. But it kind of got off to an inauspicious start because the league and BAM itself made the same poor decision right off the bat and they, like any super corporate IT department because this is basically Major League Baseball’s IT department, they decided to outsource the website building to a consulting firm and pay them a ton of money. And as expected fashion, the consulting firm basically fails to deliver and the websites totally suck. So Robert Bowman who was the newly appointed CEO of Major League Baseball Advanced Media, which we’re just going to call BAM for the rest of the episode, he quickly made the decision which ends up being probably the best decision that Major League Baseball has ever made, to build a tech team inhouse, bring on really good developers and start owning and building out all the technology inside of BAM.
Ben: Yeah, pretty interesting.
David: Yeah, very interesting.
Ben: Also probably, I mean for anyone out there, you know, our audience is probably mostly a tech audience but for people that don’t work at tech companies, it’s probably actually hard to know what the right things to hire for are in this area. I mean it not only is web development but they’re looking to do things in ticket rights and they’re looking to do things not yet in streaming but very shortly thereafter, and thinking about like how do people that have backgrounds in sports, sports law, contract negotiations, media, how do they build like a strong tech team inside. Kudos alone to them for that.
David: Yeah. And Bowman, he really reinvents himself. So he had been before becoming the CEO of BAM within Major League Baseball, he hadn’t been a tech guy either. He was the COO and the CFO of a big conglomerate called ITT. It was funny reading about this. I remembered all those commercials growing up for ITT Technical Institute.
Ben: Oh yeah!
David: Same thing. So that's where Bowman came from. Also he had been the treasure of the State of Michigan and had thought about running for governor. And much earlier in his career, he was an investment banker at Goldman Sachs. So he’s not your typical Silicon Valley executive. But this was also relatively early days for the internet and kind of in the middle when they started the first tech bubble. So he figures it out along the way and they pretty quickly start doing a lot of really innovative things with this team that they build in New York. The headquarters of BAM are actually really cool. They’re in the Chelsea Market in New York, this amazing building. And pretty quickly thereafter once he brings it in-house, so in 2002, the season before Ichiro Suzuki had joined the Mariners from Japan – and oh man, Ichiro is so much fun to watch. His first season, he had won the rookie of the year and the AL MVP. Of course, he had this huge following in Japan. Pretty much the whole country was and still is obsessed with Ichiro and they wanted to follow his games. So Bowman decided and BAM decided that they were going to start streaming audio of the Mariners’ games on the internet so that people in Japan could follow Ichiro. And unfortunately though, that also doesn’t go too well. They spend millions of dollars building all the tech to do this, millions of dollars advertising it, and they only get about a thousand subscribers. So we’re two years into BAM at this point and they kind of have two fails. They made the wrong call on outsourcing the websites and then they sunk a ton of money into streaming audio – and that failed.
Ben: And David, it’s probably worth talking about the way that the agreement is structured between BAM and the teams because Major League Baseball I believe is owned by the owners of the teams. Each team has committed $1 million for 4 years between the 30 teams for a total of $120 million to capitalize this project. And so they draw their first $30 million, they draw their second $30 million. Here we are in 2002, big failure. They’ve drawn $60 million from the teams that they’ve promised this is going to be – I think they’ve actually said this is going to be a revenue-generating organization within Major League Baseball and like big flop $60 million in.
David: So this is where things start to turn around and where I have to imagine Bowman really kind of gets forged through the fire and learns how to be a great executive and technology executive. So he makes one really good decision later in 2002, and that's that he realizes that because of as you were saying, Ben, the way the deal was struck between BAM and all the teams that they have the rights to sell tickets to games online via the company’s website. And so, Bowman does a deal with Ticketmaster in mid-2002 to partner with them to power the sale of tickets on the team’s websites and still to this day if you go to the Mariners or the Giants or the Yankees website to buy a ticket, it’s done in partnership with Ticketmaster. And as part of that deal, Ticketmaster pays BAM $10 million upfront. That’s really the moment where things start to turn around and they can now invest that money. They stop drawing money down from the teams, they now have their own revenue stream and can start do even more innovative stuff.
Ben: Yeah, add some nice cashflow.
David: Yeah. So, towards the end of that same season in 2002 where they’ve had this horrible failure with audio, but what they learn from that is that audio failed because people really wanted to watch the game. That's why people watch baseball on TV and live. They just didn’t want to hear it; they wanted to see it.
Ben: So unlike most of these sort of online media failures, you think about the technology didn’t fall down or anything. It was actually just insufficient, like didn’t have enough people willing to pay for just the audio.
David: Yup. So again, this is where it’s really impressive. By the end of the season, same season in 2002, they started experimenting with streaming video online. And nobody’s doing this in these days, this is 2002 - three years before YouTube. The first game that they streamed is in late August. They streamed a Texas Rangers and New York Yankees game online. The quality is terrible but people loved it. And then they kind of raised to build a product around this and then by the end of the season, they sell a nine-game pennant race package. So streaming games online, people are paying for this. Then they sell a $20 post-season package and people love it. So then they scramble during the off season and by the start of the 2003 season, they do a full launch of MLB.tv and for $80 for the whole season, you can stream every out-of-market game on the internet.
This is huge. Until this point, whenever people wanted to watch baseball, they had to turn on ESPN or their local sports or regional sports network and they could only watch what was being shown. Now all of a sudden you pay $80 directly to Major League Baseball and you can watch every out-of-market game whenever you want at any time on the internet. It’s pretty awesome.
Ben: Yeah. The speed at which they were able to do that is pretty laudable and the way they were able to do it. Because you sort of think in a business that’s dangerously cyclical and seasonal like this where you sort of only have one shot per year to introduce something new for the season, the idea that they did their first little test with just streaming one game and then another little test with a post-season package you can buy and then came out with the real deal for that $80 full season package which I think got 100,000 subscribers, so like $8 million in revenue from that first season that went fantastically well. I mean, that's iterative development and they were able to do it even within the constraints of this. You could very easily see management saying, “Well, you know, we’re going to try that for next year.”
David: I think what’s super impressive, like two things. One, this is 2003. Again, we’re years before YouTube. Nobody else is really doing streaming video at this time.
Ben: It's 4 years before Netflix went online.
David: Yup, absolutely. No streaming Netflix. And like you said, they get 100,000 subscribers right off the bat. That's $8 million in subscription revenue. But then they’re also selling ads on top of the game. So this pretty quickly becomes a really interesting high-margin business for Major League Baseball. And BAM is building all this expertise. This is hard. They’re streaming 15 games every single day all around the world. They’re building all this expertise in streaming live video and not just live vide but live video where it matters that it can’t be 10 minutes delayed because if the score changes and you hear about it somewhere else and you’re delayed watching the game, people get upset about that.
Ben: Yup. And a big selling point for them is effectively handling that multiplatform handoff because for them – I was just listening to a podcast that we’ll throw in the show notes where the Commissioner of Major League Baseball is on one of Fortune’s podcasts and he’s mentioning that one big core asset to this, it’s not just the raw sort of video encoding and fallbacks and relationships with the CDNs to distribute the video files themselves. It’s actually the expertise of hey, I'm watching this on my TV or I call it my AppleTV and I switch over to my phone, it better pick up exactly where I left off and it can’t pick up like in the middle of the next inning where I accidentally see the score. Like that destroys the experience. So they have sort of developed expertise in this thing that is initially quite specific to their use case but then we’ll see in the future as it becomes more important to be able to stream live events in sort of this real-time way, cross-device over the internet. That's a huge asset.
David: Absolutely. Then really ride the wave, Ben as you pointed out, not only of video growing on the internet over the next 10 years but also of mobile and devices. Major League Baseball’s app gets featured by Apple at basically every major developer announcement. So when they announce the App Store for the iPhone, Major League Baseball is one of the first partners and first apps featured onstage with Steve Jobs during the announcement, featured onstage during the launch of the iPad, onstage during the launch of the Apple Watch. They really become one of the best technology teams in the business in terms of bringing video to consumer’s devices wherever they are.
Ben: Yeah. I’ll say so far I’ve just been incredibly praiseworthy and it’s good to be a little bit more balanced. I totally remember sometimes call it eight-ish years ago where I was like tuning into a game on the streaming service and it did have some weird hiccup and I saw – I think actually the use case was, I was watching like an hour delayed or something and then it flashforward to the real-time and then I saw the score. I seem to remember that bug being pretty widespread because I remember it sort of blowing up on Twitter as a big problem. But they’ve totally had these hiccups along the way where they’ve had to learn how to be really good at this sort of ensuring a consistent experience “live viewing.”
David: Good point. It definitely did not happen overnight. But the business, it keeps growing year over year. They eventually do raise prices from $80 a year for MLB.tv. They raise that over time but the subscriber base keeps growing to the point where in an interview in 2012, Bowman is quoted as saying that BAM makes about 620 million in annual revenue which is really meaningful for the league.
Ben: So think about this. They were promised to be capitalized with 120 million. It's an interesting stat that they only ended up taking 77 million from the teams after the Ticketmaster deal and then that $8 million in revenue from that 100,000 subscribers in that first season. And so they did really well by the teams of the league.
David: Yup. And along the way, as we’ve been saying, they build all this expertise in streaming video and particularly live video. So back in 2010, they make kind of the first move that starts setting them down another path which is not just streaming baseball and Major League Baseball, but they do a deal with ESPN and they become the technology provider that powers ESPN3 which is ESPN’s new site that they launched then that covers all of their internet streaming. So you still have to be an ESPN subscriber via your cable service but it’s now BAM and Major League Baseball in the background that’s powering all sports that ESPN is streaming online. And so they do that for a couple of years just as the technology backend provider.
Then in 2014, a bunch of really interesting things happen. So one, that's the year that Amazon buys Twitch as we’ve talked about, which obviously is another form of sports in e-sports and live video streaming on the internet. But BAM makes a pretty big move. So they announce a partnership with WWE, the Worldwide Wrestling – I forget what it stands for now. It’s not the Worldwide Wrestling Federation. It’s Wrestling Entertainment or something like that?
Ben: It's one of my favorite rebrands ever because the WWF, the World Wildlife Federation had the trademark, and then the WWE had to get off of it.
David: They sued them, right?
Ben: I think so. Also, WWE is World Wrestling Entertainment, like it needs an organization or like you even just said, the World Wrestling Entertainment organization. Because entertainment is not a noun.
David: Right. Anyway, the point is, this is a big deal because for the first time now, you have multiple sports leagues putting their content powered by the same backend onto the internet. This is when cable companies and media companies are really starting to worry for the first time. It’s been going on for years about cord cutting. The only thing that’s holding the cable bundle together at this point really is live sports. So this is the first crack you can start to see in the seam of the live sports-cable bundle package that it could actually be coming online.
Then in 2015, early the next year, BAM kind of continues that trend and they do a deal with golf, with the PGA tour. And they announce that they’re bringing golf online too. So the momentum is kind of continuing. Then later in 2015, this might have been if you’ve heard of BAM Major League Baseball Advanced Media before, this might have been where you’ve heard of it if you’re not a baseball fan, they do a major partnership with HBO and HBO decided to bring their own sort of cord cutting service online for the first time. You had been able to watch HBO shows on the internet but again, only a few were a cable subscriber. They do their first direct –
Ben: That was HBO Go.
David: That was HBO Go. They announce HBO Now which is you’re able to subscribe as a noncable subscriber directly to HBO. And it’s BAM in the background that is powering all of that.
Ben: Yeah, and fans of Game of Thrones who had HBO Now will remember that there was some big issues with HBO building out their own in-house streaming and like there was an episode of Game of Thrones where there’s too many concurrent viewers and you basically just couldn’t watch it and people were furious and Twitter was blowing up and people had to wait till the next morning to watch it and yaddi-yadda-yadda. They popped their head up and looked around and said, “We’re not willing to take a chance on this for our true over-the-top product,” and outsourced it to MLBAM.
David: Yeah, that's what Advanced Media has gotten really good at over the past decade. So that was in April 2015 and then later in 2015, the first really other big 4 professional sports league does another deal with BAM and this is the NHL. So the NHL announces that they’re going to contract with BAM to power all of their streaming. But what’s interesting here, and this is where really the cable industry really starts to get nervous, is it’s not just powering the backend but they actually do a right steal. So the NHL takes a rumored to be about a 7 to 10 percent equity stake actually in BAM, in Major League Baseball Advanced Media. And in return, BAM promises to pay them a certain amount of money each year and then they get to monetize all of the content. So the subscriptions that people pay to subscribe to NHL, that’s BAM that's monetizing that just like it’s ESPN that gets the cable subscription fees and all the advertising that they run on top of it. This is really a watershed moment where BAM starts to look like a next generation cable provider itself.
Ben: Yeah, you can totally see why this makes you nervous because if you’re in ESPN or any sort of rights acquirer, your whole business model is taking a look and saying okay, well if we buy these rights, what can we get for them in terms of the advertisements we’re going to show viewers and the subscriptions, whatever vehicle you want to use to monetize that, like okay, I’m going to pay hundreds of millions of dollars upfront for these rights for X years. I really hope we can architect a business that’s going to generate more than that. And I think that on its own feel is kind of like a tenuous business model but as that moves closer and closer to the source of the actual rights holder, you can see that that totally looks like it’s going to disintermediate you as someone whose business it is to take on the risk of buying those rights and monetize it if those organizations themselves are getting better and better at monetizing their own unique IP rather than potentially licensing it out to you to figure out.
David: This is disruption of the middle man, this is the internet at work here.
David: So when this happens, The Verge actually does a really great long piece that we’ll link to in the show notes covering kind of the history of BAM, and we’ve taken a lot of this history from and they say (this is a quote from them), “The new approach moves BAM beyond just a white label service provider, putting them in position to become an ESPN of the internet age, competing against the likes of Netflix, Hulu, and Amazon where they have the one thing that those services lack: live sports.” And Bowman himself is actually quoted as saying, “We knew we wanted BAMTech over the long term to be not just a vendor but also a rights holder.” Exactly what you’re saying, Ben. And that also being a buyer of rights was the best business model. So getting these rights has obviously been important. This is something that they were working on kind of for many years and this is the vision of this next generation like what does the ESPN of the internet look like.
David: And BAM is so well positioned.
Ben: Totally. And that Rob Manfred podcast I mentioned earlier, Rob Manfred is the Commissioner of Major League Baseball, he mentions that they look at this in three different ways. One is the obvious way that hey, baseball is going to be broadcast, right now is broadcasting cable bundles as that gets skinnier and skinnier and live sports provides more of the value. This is a hedge against that. It’s just a simple “we need to have a little bit of an option value for the future on how our content gets distributed, and this is kind of our own way to do that instead of outsourcing it.”
Two is hey, this is actually a really great technology company that happened to be invented inside Major League Baseball. That could be a services organization for other content plays which is what we saw with the PGA, with WWE, and potentially more to come. Then what we saw with NHL is their sort of third business model of actually being that rights holder and monetizing other people’s rights. You could imagine a scenario – this is getting into themes later – but what if baseball declines in popularity but Major League Baseball on its own or BAM is an even more valuable organization because they own the rights to many other forms of entertainment and they own the pipes to distribute it. That's kind of a crazy future.
David: That is kind of a crazy future. But it’s also one that – and this is the next thing that kind of happens in the history and facts here. One that doesn’t make a lot of sense, like it doesn’t make sense for the collective 30 teams of Major League Baseball to own basically the future of internet television.
Ben: Totally. And that hamstrings them because they can’t really issue stock to employees, they don’t control their own destiny as much.
David: And this has become a tech company at this point and so they’re competing with engineers and executives with Facebook and Amazon and Netflix, all of whom are issuing stock compensation. But BAM can’t do that. So they realize that they need to fix this. And so immediately after the announcement of the NHL deal, Major League Baseball announces that they’re spinning Advanced Media out into its own separate company called BAMTech and that they’re going to start talking to investors to buy a stake in the company and finance it and they’ll retain a large equity stake, Major League Baseball will. But it will finally become its own independent company.
And so they worked on that deal, takes a whole year and then finally in August of 2016, it’s announced that they have found that partner, that investor that’s going to help spin the company out and it is – surprise, surprise – Disney which of course found ESPN and ESPN which for 20 years at this point has been the largest part of Disney.
Ben: Yeah, almost dangerously so in this era too.
David: And so Disney announces, this is August of 2016, that they’re going to acquire a one-third stake in the company for a billion dollars so they’re valuing BAMTech at $3 billion and then they also have the option to acquire a majority stake in the future. This is just classic Disney. Similar thing happened with ESPN. Disney doesn’t own 100 percent of ESPN. They own 80 percent of ESPN. And actually the Hearst Corporation owns a minority stake.
Ben: Oh, they do currently?
Ben: I thought ESPN was wholly owned.
David: No, not wholly owned. So Disney is very happy to do deals like this and this is one of the reasons I’m sure why they end up sort of winning the investment here and becoming the partner. Major League Baseball as we were talking about, this is such a valuable asset. They I’m sure want to retain their equity stake and Disney says as long as we have a path to controlling this, yeah, we’re happy to have minority shareholders.
Ben: And boy, Disney gets great option value here too. I mean, they just get to see how – I don’t know, every source I’ve read says over the next few years to decide if they want to buy another third to give them a majority share of the company but great –
David: It’s not public exactly what the deal is but it has been announced they have an option to acquire a “majority stake” in BAMTech.
Ben: I think could have it been anyone else, like we’re going to get into that in another section, but like, Disney is just the absolute perfect partner for this.
David: Yup. To BAM and to baseball, yes, because they have a history of and it’s kind of what we saw with Lucasfilm, right? It was really important to George Lucas who the buyer of Lucasfilm was going to be. And for Major League Baseball, even though they have a different set of motivations, they are very motivated to want to retain an equity stake over time and Disney can say yeah, we’ve done that many times, we’re happy to do that. And so concurrently with the announcement that Disney is going to invest and have this path towards control ownership of BAM, they also announced that they’re going to start working on a direct-to-consumer ESPN subscription service powered again by BAMTech. But this is huge. This is going to be the first time that ESPN is going to be available directly to consumers outside of a cable bundle. And it’s been at this point years that ESPN is the only reason so many people continue to subscribe to cable, so this is Disney saying “Okay, now is finally the time we’re going to move past linear television.”
Ben: Yeah. So David, I saw that too. But there’s this weird thing that they also follow that with it. It sounds like hamstringing the deal and it's got to be just like ease the concern of the cable companies.
David: The cable companies. So they’re not going to include any current ESPN content but the door is open. I’m sure the other reason for that is that all these rights deals have already been negotiated for the next several years and are locked up. But as those rights deals come up, you can bet for sure that Disney is going to be moving large portions of their content into their direct-to-consumer service.
Ben: Actually, we keep having this like very serendipitous timing with episodes, we definitely didn’t know anything about the ESPN layoffs that were coming. But this last week, there were very large-scale layoffs inside of ESPN particularly around a lot of Baseball Tonight’s programming. And one really interesting thing that Ben Thompson pointed out in Stratechery this week is that the internet and the availability of instant replay all the time has really taken away a lot of the initial value prop of Sports Center. I mean, you’d have to wait to go see highlights on Sports Center the next morning after the sporting event occurred and that’s really just not necessary now. I mean, I freaking can find – well, it used to be vines – I can find tweets with embedded videos or gifs of that insane diving save seconds after that happens.
David: Yeah. Remember when growing up when you’re staying up until 10 or 11 PM for Sports Center to come on.
Ben: To watch with the frantic editors and put together in a couple of hours since the game.
Ben: Yeah. So the point I'm driving at here is that maybe it doesn’t matter that much that ESPN’s current content is not going to be repurposed for this direct over-the-top service and that it’s much more like who cares, because their current content isn’t what’s going to matter in 5 years.
David: Yeah. And don’t forget, BAM by now is not just direct TV style streaming. It’s all of the apps. They’re on every device with all different types of experiences from highlights to stats overlays and data through to full video.
Ben: And I want to make two points here that I think I just want to make sure before we move on. One is that I don’t know if we disclosed the enterprise value of BAMTech at spinout when Disney bought a third of it was $3.5 billion. So think about that, initially capitalized with 77 million inside of Major League Baseball spun out at a value of $3.5 billion. The other thing that I want to clarify is we keep talking about this over-the-top service. A lot of listeners are probably familiar but that basically refers to the idea that #1, I think OTT is like the stupidest name of all time. But everyone’s talking about the move to OTT services.
David: This is like my doctrine that it’s not a wave as long as you have a title for it that your average person doesn’t understand.
Ben: Exactly. But basically it refers to the idea that everyone has a set-top box, and that set-top box is controlled by their cable company, and that cable company sells them a cable bundle, and then that cable bundle consists of a whole bunch of affiliate or carriage fees that are charged to the cable company by the channels basically. And what over-the-top does is basically saying we don’t need your set-top box, we’re going over-the-top.
David: Direct-to-consumer, yeah. This is serious. This is the business model innovation I was talking about in the Clippers on our last show.
Okay. So August 2016, the spinoff happens, Disney is the partner. Very shortly thereafter in November of 2016, BAM announces that they’re expanding beyond the US and they’re coming to Europe. They’re partnering with Discovery Communications, the media company that owns the Discovery Channel and many other forms of content to buy the rights to stream the Olympic Games in Europe. So, big announcement, they’re going global. And then shortly thereafter in December, this is really interesting going back to Twitch, they do a direct rights deal with Riot Games, the owners and publishers of League of Legends, for BAM to have the rights to stream all official League of Legends competitions through 2023.
Ben: Yup. And that is a big, big deal. That is a guaranteed $50 million per year deal that BAMTech is going to pay Riot. And in the e-sports space right now, we’re all wondering what does this mean because right now, you go and you can watch a league championship series game with millions of other people for free that’s ad supported on either Twitch or YouTube. And there’s this company, BAMTech, that's paying $50 million to Riot per year and so far, nothing. Like they have these rights but we haven’t seen anything with it, and we’re really going to see something, I would assume, in the next six months where there’s a direct offering that is built by BAMTech that is maybe the one and only way to go and watch these League of Legends matches, and I think we will probably get into e-sports in future episodes but that, Disney/BAMTech is making like these big bets throughout their history on things that are before their time, and that's shown here yet again with a big purchase of these rights. In fact, some of the biggest dollars that are moving around in the entire e-sports space probably years before most people have any idea that that’s even a thing.
David: And this is something for BAM to be able to start do this, they really need a partner. This is another reason why Major League Baseball, you know, you couldn’t finance doing this but with Disney and the balance sheet that Disney brings to this, they can really start to be a player in this rights space.
So the last thing that happens just a couple of months ago in February 2017, Bowman after a 17-year run as CEO of BAM, steps back from day to day operations as CEO and they hire a man named Michael Paull to be the new CEO. This is really interesting. Paull had been the VP of video at Amazon and was the person responsible for the development of Prime video, Amazon’s Netflix competitor and of course was super involved with Amazon’s acquisition of Twitch. And before Amazon, he had been a TV exec at Sony and Fox and Time Warner. But this is really interesting. When you think about the rest of Disney’s streaming catalog, Netflix is obviously a big partner of theirs as is Apple and others. But Pixar, Lucasfilm, Marvel, all the Disney videos. And now you have the guy coming from Amazon who built their Netflix competitor, you can start to see how BAM and Disney together could really be the full service, a very compelling full service video provider to consumers over-the-top on the internet.
David: So with that, should we move on to category?
Ben: Yeah. That couldn’t have been the more perfect segue. Because originally as I started doing this research, I was thinking, “Oh, a technology acquisition” or not quite an acquisition but a technology investment because it’s the best technology that provides these services to anyone that wants to do their backend streaming. But really, I mean they’ve been expanding and they’ve been kind of taking over a much more significant part of a business here where they’re actually the rights holder and they’re actually distributing this content on their own. I think they’re really their own business line here at this point that Disney so far has invested in and we will see what they continue to do with it.
David: Yeah, I totally agree. Business line. Right now, it’s sort of a mirroring the ESPN business line for Disney and their hedge against the decline of the cable model to be the ESPN of the internet age. But as we talked about, when you think about all the content that Disney has, there’s really potential here to be a business model disruption for the whole company and how the relationship to consumers of that content, right now all Disney content is mediated through a movie theater or through cable or through Netflix or some other distributor. This is really a way for Disney for the first time for their content to start to have a direct relationship with customers.
Ben: The magic of these internet business models is shortening value chains where we start to say oh, it’s sort of the ESPN of the internet era, well it’s the ESPN and the cable company of the internet era.
David: The ESPN and the Comcast of the internet era.
Ben: Right, right. Because previously, you just need so many more steps because distribution is hard. Like offline distribution is hard and so these cable companies have an incredible moat around them against other cable companies, but not against low-end disruption from internet-based services where in that old world, the model is content and then they sell that to a rights holder and then the rights holder gets a carriage fee from selling that into or distributing it through a cable company, and then it goes to consumer. But you really combine those middle men here with the internet and have the ability to go much more direct. And that happens in every business.
David: It's so ironic here. This is I believe over 10 years ago at this point, Comcast actually once made a hostile takeover offer for Disney and tried to buy Disney. Fate is a cruel mistress here and it’s Disney that’s making the play to not buy Comcast but just obsolete them.
Ben: Yup. I mean it’s the smiling curve, right? I feel like half of my life is informed by Ben Thompson right now, but that piece was so great about self-driving cars and making the reference that way upstream you have the kind of component makers or in our case the content producers. Way downstream you have the actual whoever goes direct to the consumer and everyone in the middle, their value gets diminished over time. So if you’re in Netflix and effectively all you have is distribution, well, like the internet changes that. Right? The internet makes it so you become much less valuable and if you’re the content producer of Disney, you’ve dramatically grown your value and if you’re in the middle of Comcast, you’ve dramatically lessened it.
David: And Netflix of course gets this and this is why they and Amazon too were investing so much in producing their own content. But it will be interesting now that Disney, the 800-pound gorilla has really also stepped in as a direct competitor in this space.
David: Okay. So what would have happened otherwise?
Ben: So I’ll just kick it off with this one excerpt that I grabbed from that Verge article that I thought was really great. “BAM has been flirting with the idea of a spinoff since 2005, when it made the rounds with investors and bankers. But its revenue at the time was under $250 million, and streaming video was still far from mainstream. A decade later, BAM is on pace to earn $900 million, and says it’s been turning a steady profit.” And so it’s really interesting to think about MLB for the longest time, you know, over a decade now has known that this thing is probably different enough from what we do and serves us as one customer but it’s really a horizontal they could serve a lot of customers or in fact be a rights holder itself that we got to get this thing out of here. But it sort of took until now for them to find the right partner and make it a big enough business on its own to make it happen. I wanted to get your thoughts on that. Why couldn’t they do it any sooner?
David: Yeah. I mean, I think the opportunity here is so much larger than just being the streaming service for Major League Baseball, but that you actually could build the television network of for the internet.
David: So yeah, in terms of who else do you think could have been the investor here for the spinoff? I mean, we talked about why Disney was in many ways a perfect fit. Is there anybody else?
Ben: Maybe Netflix? But like they have so much duplication with Netflix. When you think about the people that are really good at this in the world, this sort of video content distribution right now. It’s BAMTech and they historically have been more backend because they sort of white label their front end, whereas Netflix really aggregates all users into one frontend but there are differences between that, but the people that are really good at this streaming technology and have all the right agreements and infrastructure in place across all the different CDNs and everything necessary to distribute this content are: BAMTech, Netflix, Amazon. Can you think of any others? Maybe Verizon.
David: Well, Twitch obviously is part of Amazon.
Ben: I mean, Verizon is sort of like one layer deeper in the stack when you actually start to go look at the Telcos. But they actually own the pipes where this gets distributed so you can see that being an interesting partner.
David: Yeah. I mean, Google and YouTube, you know, the one that comes to mind for me and I'm sure they must have looked really hard at it, and quite honestly, I’m surprised they didn’t really try to make a run and outbid Disney because I think Disney probably got a pretty good deal valuation-wise here relative to the potential as Amazon and especially with Michael Paull coming over to be the CEO. I mean, clearly he had been thinking about this. But if you look at Amazon and then they were so prescient in the acquisition of Twitch and maybe the path that they’re taking is that they want to broaden out Twitch and compete directly here too. But again, the rights are so important for physical sports. I’m very surprised that Amazon didn’t try and make a harder run at buying BAM here.
Ben: Yeah. And maybe they did. I mean, maybe there was some kind of bidding war, we don’t know. I mean, it’s not a crazy enterprise value for the spinout, right? If they’re generating 900 million in revenue to have sort of a 3.5x to 4x multiple on that.
David: I mean it’s really very reasonable relative to other tech company valuations. I guess the only thing I can think of is that historically, Amazon is pretty cheap when it comes to M&A and so maybe they just weren’t willing to go higher but I have to imagine given the huge investment that Amazon has made in video over the last few years, and Bezos talks about it potentially being – he always talks about how he’s looking for the fourth pillar for Amazon that's going to be the next big business unit and that video could be that. Again, I’m very surprised that they let this get acquired by somebody that can threaten them as much as Disney.
Ben: Yeah. And we’re bridging here. Let’s just call a spade a spade and say that we’re into tech themes.
David: Per usual.
Ben: Yeah. I think one thing that I’ve been thinking about is, did MLB screw up in giving Disney the option to buy the whole thing at some point. Or at least buy a majority share because you look at the growth of this business and you look at the potential ahead and the very clear wave that they’re surfing on in going over the top and actually starting to own a lot of these rights and at the very least do a lot of the distribution for the important content out there for live sports specifically. Like if I'm Major League Baseball or if I'm Major League Baseball’s shareholders and this is probably where the nuance comes in, I would love to own that for the next 20 years. And maybe this is all sort of an artifact of the fact that Major League Baseball is not a publicly traded company. It’s I think, I keep saying this, I'm pretty sure I'm right because that’s the way it is in other league. It’s actually owned by all of the owners of the teams.
David: Yup, it is.
Ben: And so maybe you don’t have the same sort of investor pressure because a lot of these owners of baseball teams aren’t really in the business of owning an asset that needs to appreciate over the next 20 years in a very high growth tech company way. Like that’s just not the business they’re in and if they were going to do that, they’re going to invest elsewhere other than their 1/30th ownership in a league.
David: Yeah. As we talked about it before, there was no way that BAM was going to be able to realize its full potential, being fully owned by Major League Baseball here.
Ben: Right. But could they have found a partner where like they weren’t at risk of losing the majority of this business?
David: Yeah. But again, I think it probably comes down to we weren’t privy to the negotiations but I have to imagine that Disney ended up being the perfect partner in that they’re very willing to let Major League Baseball retain a minority ownership stake in the future. Which even though, you know, it’s not a majority ownership stake but they’re going to realize, be able to participate in the economic benefits here without having to control it and again, like we talked about, the control structure was definitely hampering BAM from realizing its potential.
Ben: Right. I also wonder too like what is... maybe there just will be a fantastic return. Let’s say takes their option in two years and it's doubled by then or maybe three years and it’s doubled by then. I mean, if it’s a $7 billion company and Disney’s buying another third, like maybe MLBs is like, “wow, awesome. Great.” Actually, what do they do with that money? Pay it as a distribution?
David: Well, and again think about who is MLB. Like they’re a bunch of rich people who own baseball teams. Maybe some of them are tech investors but certainly they’re not living this and thinking it every day like we are here on Acquired.
Ben: It’s much older money too than the MBA. Actually, I’m going to dance forward to follow-up and then come back to tech themes here. But my follow-up is going to be boy, do I wish I had listened to that Bill Simmons interview with Steve Ballmer before we recorded the last episode. The good news is, I’m not like radically changing of my thinking. I think it reinforces a lot of the same points. But it was just super enjoyable to listen to. Ballmer is incredibly candid, and Bill is obviously an amazing interviewer. But you really get a sense of who the owners are in different leagues. Like Ballmer talks about the NFL but I think the MLB is the same way. It’s a lot of older money from sort of varying industries that families may have owned the team, things like that. And when you look at the NBA, it’s like a bunch of hedge fund managers, tech billionaires. And like, they’re sort of looking at these businesses in a very different way and I really think that if owning a majority share of BAMTech as it grows as a tech company through your 1/30th ownership of Major League Baseball by the nature of you owning a team, it’s just not the thing they’re optimizing for. Like it’s a lot of old money. They’re not dumb by any means but it’s not why they own the team.
David: Yup, totally agree.
Ben: But then coming back, I have this other question that baseball... so the MLB is growing year over year. It itself even after the BAMTech spinout is a great growing business. And I have a little bit of dissonance here because it seems like of all the major sports, baseball seems to be declining. And so with baseball, the MLD posting record earnings and teams getting more and more valuable, in fact the average Major League Baseball team is more valuable than the average NBA team. Like the sport itself doesn’t seem to be growing. So maybe listeners can help us out with this in the Slack and we can talk about it as feedback in the next episode, but I’m trying to figure out why I feel like baseball is less prevalent in my generation than it was in my parent’s generation and yet, the teams continue to appreciate in value and are even more valuable than other sports leagues. Same with the NFL.
David: Yeah. Without being an expert on this by any means, my hypothesis would be that there really is a difference here between the game on the field and innovation and interest growing or waning there and business model innovation. We talked about this on the Clippers episode and the NBA has their own streaming tech with League Pass that maybe they will think about outsourcing to BAMTech or selling the rights to BAMTech in the future. But I think it's this business model innovation and developing, again, collapsing the middle man, taking an internet-based business model approach and developing a direct relationship with your customer, direct paid subscription relationship with your customer that’s probably accounting for a lot of the increase in value here.
Ben: Yeah, I agree. Do you think that Disney is going to take their option in the next couple of years and buy another third?
David: I mean, I don’t see how they don’t, right? I guess this is bleeding into grading a little bit but working on through this episode both in our discussions and the research, I kind of have this aha moment like we talked when we were introducing the episode, that what we’re talking about here is the future of television. We’re not talking about just sports. And that is so core to everything that Disney is. I mean, their cable networks division of which ESPN is the crown jewel has been the vast majority of the profits, the EBITDA and accounts for the vast majority of the market cap of the entire Walt Disney company for the past 20 years.
Ben: Yeah. So then I’ll pose this to you. So if BAMTech, you say it’s all about television. Well, television is a bundle of live and pre-recorded content. So let’s say that the cable bundles in X number of years don’t exist or are unimportant. For Disney, BAMTech is their replacement for live. Rather than selling into the bundle and taking a carriage fee like Disney is able to put all of their live content directly through BAMTech. Right now, all their pre-recorded content is locked up in deals with Netflix with others, and I think those go through 2019-2020. Will Disney renew those agreements with those other content aggregators and keep all of their non-live content going out through those channels? Or are they going to try and a build a direct-to-consumer offering through BAMTech where they’re actually a portal and they’re aggregating live or bundling live and non-live together in a way that that consumers want going direct to the content owner.
David: Yeah, this is super interesting and then we’re alluding to this at the end of history and facts. But I think this is the question, right? My mind is coming back to superior consumer experiences here and I wonder if there is some danger in the path that Disney is taking here from a consumer perspective that, are they just recreating that cable bundle online and doing it with better economics for themselves. But what consumers hate about cable is you have to pay for all the stuff you don’t want. It’s a much better experience really in the current world that we live in for consumers where you can choose hey, if I care about baseball, I’ll subscribe to baseball. If I care about basketball, I’ll subscribe to League Pass. If I care about movies, I’ll subscribe to Netflix and TV shows. Are we going to see a re-bundling here that actually would be negative for consumers.
Ben: It’s like that Jim Barker’s quote There are two ways to make money in business: you can unbundle or you can bundle. I mean, I really think like if your entire business strategy is read what consumers will want in the next 5 to 10 years and unbundle or bundle appropriately, like if you can execute on that, you’re going to do well. Right now, what consumers want is unbundling. But big open question to when all of the content is too disparately scattered around everywhere and we have like... you remember like 10 years ago when every network had their live TV or like ABC had lost “available to watch on ABC.com” and some other company, you know, NBC had The Office available on NBC.com, and like it took Hulu and Netflix and like rebundling all this content back together in a way that you want to view it. Maybe right now what we want is unbundling and to be able to nicely get content directly from the source. But at some point, we’re going to have fatigue of that and there’s going to need to be a rebundling and who’s going to do that.
David: How many subscriptions are you going to have? Do you really want to pay Netflix and MLB and League Pass and, and, and... Or, could a really compelling, I don’t know, $20 a month, $30 a month, $40 a month package from Disney that includes all of that, that could be very compelling as well.
Ben: Yup. All right, let’s grade the thing.
David: Before we do, one quick tech theme I wanted to attack on. We’ve talked about this so many times in other shows but I just think this is another really good example of a kind of lesson for me in terms of building companies and for entrepreneurs. BAM started by solving a real problem. They didn’t start out by trying to invent the future of television. They started out with like the teams needed websites and they solved that problem poorly at first and then better. Then the problem was, you know, a lot of fans in Japan wanted to see Ichiro and they solved that problem poorly at first and then better. Then the problem was, well, there’s a whole bunch of other folks on the internet, that folks that have live content, they want to stream it on the internet and, well, BAM had a good solution to that problem. Then it was consumers wanted a new way, a new relationship to sports and wanted to find, have the final reason to cut the cord and BAM solved that problem. I think it's just a great example of stair-stepping your way up into an enormous company by solving real problems kind of one at a time.
Ben: Counterfactual to that are more of just the counter theory to that, is yes, it’s a really great way if you want to become a platform to solve one problem first and then figure out what under there you can serve other people by doing. But boy, you have to make sure you don’t get into a vertical versus horizontal mess there and then be both a services provider and care about your own core business that utilizes the services provider. I don’t think we anticipated this being a theme when we started acquired, but boy, has it sure become one especially hot on the heels of the Oculus episode.
Ben: Interestingly enough, like it doesn’t really seem to be an issue in this case. Like Major League Baseball isn’t trying to hamstring BAMTech by not allowing BAMTech to serve Major League Baseball’s competitors and until now, it made tons of sense for BAMTech to prioritize or for BAM to prioritize the needs of MLB because that was their only customer. And so with the spinout, I mean, it’s really like a great way to solve for that problem.
David: And I hadn’t quite thought about it. I mean, you’ve been right to be asking this question and bringing it up throughout the episode. I think this might be why the deal took a year to get done. They announced that they’re going to spin it out in August of 2015. The Disney deal doesn’t happen until August of 2016. Man, that has been such a negotiating process to wrangle all 30 owners and get everybody’s interest aligned here. I’m sure not everybody... Ben is going to take the rationale, you know, thoughtful approach that you just laid out about why this should be a horizontal play, not a vertical play.
Ben: Well, it seems like they’ve got the incentives lined up right now especially if Disney in pretty short order here buys the rest of it and that’s really a non-issue.
David: Yeah. All right, should we grade it?
Ben: Yeah. So listeners, David and I were having a debate before this show over iMessage of whether this episode was going to be grading the spinout or grading Disney’s minority investment with the option to buy a majority share later. I was kind of pushing for like well, I think the thing that’s fairly well understood is the spinout and it’s highly speculative to talk about the future purchase. But, like the spinout is so clearly like David and I were like a no-brainer, like that’s a great decision. Why wouldn’t they do that?
David: On the part of Major League Baseball to spin it out.
Ben: Yeah. Like they totally would have hamstrung that thing by keeping it in-house and it’s just like value destruction to not spin the thing out. So we’ve decided as we’re going to grade it from the Disney perspective which actually, David, I want to hear your thoughts first on that.
David: Okay, I’ll go first. I think this is an incredible acquisition by Disney. We’re somewhat hamstrung in grading it as thoroughly as we would like given that we don’t know exactly how much revenue is coming along with BAMTech versus staying with Major League Baseball. But let’s just say for argument’s sake sort of the latest number we have is kind of 900 million in revenue. And of course, they have to pay a lot for rights to go along with that revenue. But still they’re essentially paying, what is that, for $3.5 billion enterprise value, call it just under four times revenue for this. Think about that relative to the multiples that we typically see in the technology space that’s very low. And then think about that relative to the massive opportunity that Disney has here to really have a credible shot at building the future of long-form video customer relationships on the internet. This feels like a great purchase to me. And then I also wanted to think about this through if you go back to some of our earlier episodes on Disney, Pixar, Lucasfilm, and Marvel, we talk a lot about the Disney flywheel and the playbook that Walt Disney so many years ago laid out that really was the forefather of the Bezos flywheel and how Disney is going to be able to take all of their other activities and pieces of content that they have throughout the rest of the company and start to push it through this direct customer relationship that they’ve now just acquired for the first time really in company history. I think the potential is enormous here.
Ben: Is it a direct customer relationship? Like BAMTech doesn’t have any audience.
David: Well, BAMTech doesn’t have any audience but they’re managing the subscription for relationship with the consumers. So consumers aren’t paying them both for MLB.tv and NHL and anything they do in the future now, right?
Ben: Oh yes, I see. But in siloed basis.
Ben: Like they don’t necessarily have some consumer eyeball portal where Disney can plug their content and get that distribution.
David: No. BAMTech itself isn’t a consumer portal, but through it, Disney or Major League Baseball and the NHL and now Disney can operate a direct consumer relationship where consumers are paying them a subscription for the content that in the past Disney had to mediate everything through whether that was Comcast or movie theaters or Apple or Amazon or whomever. Now, there’s finally a vehicle that consumers can over the internet just pay Disney directly.
Ben: I think it's brilliant hedge by Disney. I’m assuming you’re driving an A there?
David: Oh yeah. I said everything except the actual grade. Yeah, A. This is I predict will go down as one of the most important, most transformative acquisitions in Disney history of which we’ve already covered several that they’ve done.
Ben: And it’s only in process. We’ll have to revisit this one for the rest of it.
Ben: I agree with you. I also am giving it an A and I think the biggest thing is their mastery of positioning. To me, it's sort of a hedge like it’s a hedge that oh, what it cable bundles decline? But like, cable bundles aren’t going to decline. They already know that they don’t currently own their highest value content and that will come in the future and that will come through a lot of the rights that BAMTech already owns. And that this is a bet on whatever their future content and this distribution mechanism to go direct to consumers is.
David: One last thing I’d throw in. It’s kind of been a while here on Acquired since we’ve talked about the people aspects of acquisitions which going back to our early shows we focused so much on and so many of our guests talk about, you know, BAMTech as an organization has this history of operating within not as a startup but as part of a much a larger conglomerate which now will continue to as part of Disney. So I wonder, a lot of times you see startups get acquired by a large company and then the mojo gets lost and equity compensation isn’t as much as it once was. In this case, there’s going to be more equity compensation and probably a more innovative culture that BAMTech will be joining versus baseball. So I wonder if from a people standpoint, the company is also well-positioned to succeed here.
Ben: Yeah. I think that's right.
David: Okay. Should we move on to follow-ups?
Ben: Yeah, let’s do it. So I mentioned earlier, I’ll just call it one more time, if you liked the last episode or you want to hear more or you just want to hear more from a very honest and clear thinker about the current state of the NBA and how he operates his basketball team, go listen to Steve Ballmer on the Bill Simons show.
David: Yeah, it’s a great episode. Unfortunately, he doesn’t do a “head coaches, head coaches, head coaches!” chant. The classic Ballmer enthusiasm is on display as always.
David: A bunch of real quick ones for me. A whole lot has happened in the last couple of weeks. We won’t analyze of these but just to list out and we’d love to jump in the Slack and chat about them with folks. Some of this has already been talked about in the Slack. Apparently, a lot of publishers are now abandoning Facebook Instant Articles for a whole bunch of reasons. Two, Microsoft is killing Wunderlist very, very sadly. It is my to-do list app. I love it and I’m bummed that it’s going away. Three, Instagram is on fire. Growth just continues to accelerate. They announced that they passed 700 million MAUs this past week which is they’re starting to rival the same size as the parent company as Facebook.
Ben: I mean, Instagram is just crushing it at being Snapchat.
David: Nobody does Snapchat better than Instagram. Next, the Echo look. So Amazon announced, and actually a big shout-out to our good friend Zoey in Seattle who had a big role in playing and developing the Echo look. So now you can not only talk to Alexa, but Alexa can watch you in your home. And I don’t know, I can’t decide if it’s creepy yet or awesome. Probably both.
Ben: As with everything. As I record this episode in my apartment in Capitol Hill in Seattle, like Alexa is listening to the entire thing. So listeners, if you’re at Amazon and you have the encryption keys, you get a first look at this episode.
David: A first look of the episode, right?
Ben: Which they don’t.
David: We’re just joking. But it is one of those things like I think a lot of people will think this seems creepy right now but I bet we’ll be surprised at how quickly it becomes normal.
Next, two more real quick ones. Cloudera priced their IPO yesterday at $15 a share, at a price value market cap of about just under 2 billion which is sort of flat from there – well, actually it’s half of their last private race but the last private race was more of a secondary that Intel did. So, big enterprise IPO happening.
Ben: Which is their fifth or sixth this year, the march goes on.
David: Yeah, the march goes on. The IPO window is open. Then finally, follow-up on our Uber/Didi episode. Obviously there’s been lots of Uber news over the past couple of weeks but Didi yesterday raised $5.5 billion in the largest private company fundraising round.
Ben: With a B.
David: Ever. B. 5.5 billion dollars in one fundraising round. Man, if you are on team Uber and you thought that – we talked about this on the show with Brad Stone, but if you thought that doing the “merger” with Didi meant that the war was over and you didn’t have anything to worry about, guess again. The Didi giant – and this $5.5 billion specifically was raised to expand internationally. Didi is coming and gunning to be a competitor to Uber and everyone else in this space. So, watch what happens in the future.
Ben: Yup. Carveouts?
David: Carveouts. Okay, real quick. I have a real quick carveout that will take many hours to read and I’m still not done. But the latest Wait But Why was months in the making and it’s just fascinating. All about the new Elon Musk company Neuralink that Wait But Why refers to as the “wizard hat”. I won’t even get into it here but it’s very worth reading and very thought-provoking.
Ben: I feel like Elon companies at this point are like the blockbuster hit of the summer. Like, coming this July!
David: It's like the new Star Wars movie. Yeah. It’s all coming full circle here.
Ben: It is. And while you chose one that is largely about the future of humanity and incredibly important, mine is quite trite but fun. So the New York Times operates a Twitter account called the NYT 4th Down Bot. It basically crunches a whole bunch of numbers and I'm sure – I haven’t really looked into the... these days I just assume something has a data scientist doing machine learning behind it and that is just like oh yeah, everything that involves data is surely machine learning now. But basically–
David: It's really just a man behind the curtain.
Ben: Yeah. Somebody applying 20-year-old mathematics and statistics to pop this out, but basically it tweets for every NFL game what decision they would make on 4thd own, and it is awesome because there’s this non-data driven – basically there’s this joke going around that NFL owners play it safe because that’s the accepted wisdom and they don’t want to risk it and go for fourth more often than is generally accepted. Go for it on fourth down rather than punting or going for a field goal more often than is commonly accepted because will, if they fail, face the wrath of fans and potentially the owner.
David: Which we were lamenting on the last episode and in the Slack.
Ben: But if you “money ball” it and if you really look at all the data that you possibly can, coaches should go for it on fourth more often than they do. And so this is a live actually working bot that analyzes every NFL game and every decision on fourth down. So I followed it, it’s a fun –
David: So great. Actually, I saw it and found out about it – you might do in the Slack. So thank you to everyone for posting about it.
Ben: All right, well, listeners. That is all we’ve got for you today. Thank you so much as usual for joining us. Thank you to SVB for sponsoring the show and if you’ve been a long-time listener or if you’re just joining us, we would love a review. Seriously, if you’ve got two minutes right now and you’re bored on your phone and you’re trying to decide what app to open next, please open. It’s actually not iTunes reviews anymore. We’re technically on Apple podcasts. So, open up Apple podcast and leave us a review. Thanks so much. We’d love for you to join the Slack and help us decide how to pick the next episode. We will likely continue on kind of the sports tech trend for maybe one or two more episodes and then there’s plenty of other great stuff to cover. So, plenty, plenty.
David: It's an embarrassment of riches everywhere here at Acquired. Thanks everyone. We’ll see you next time.
We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten.
Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!
Purchase Price: $4.2 billion, 2009
Estimated Current Contribution to Market Cap: $20.5 billion
Absolute Dollar Return: $16.3 billion
Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…
Total Purchase Price: $70 million (estimated), 2004
Estimated Current Contribution to Market Cap: $16.9 billion
Absolute Dollar Return: $16.8 billion
Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!
Total Purchase Price: $188 million (by ABC), 1984
Estimated Current Contribution to Market Cap: $31.2 billion
Absolute Dollar Return: $31.0 billion
ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”
Total Purchase Price: $1.5 billion, 2002
Value Realized at Spinoff: $47.1 billion
Absolute Dollar Return: $45.6 billion
Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.
Total Purchase Price: $135 million, 2005
Estimated Current Contribution to Market Cap: $49.9 billion
Absolute Dollar Return: $49.8 billion
Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.
Total Purchase Price: $429 million, 1997
Estimated Current Contribution to Market Cap: $63.0 billion
Absolute Dollar Return: $62.6 billion
How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.
Total Purchase Price: $50 million, 2005
Estimated Current Contribution to Market Cap: $72 billion
Absolute Dollar Return: $72 billion
Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.
Total Purchase Price: $1.65 billion, 2006
Estimated Current Contribution to Market Cap: $86.2 billion
Absolute Dollar Return: $84.5 billion
We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”. With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.
That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.
Total Purchase Price: $3.1 billion, 2007
Estimated Current Contribution to Market Cap: $126.4 billion
Absolute Dollar Return: $123.3 billion
A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...
Purchase Price: $1 billion, 2012
Estimated Current Contribution to Market Cap: $153 billion
Absolute Dollar Return: $152 billion
When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.
Methodology and Notes:
Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
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