Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: I'm excited for this episode. I got this CO2 detector to tell me how many parts per million are in here when I close the door in the studio. I'm kind of scared of what it's going to get up to based on what my peloton was the other day.

David: That's awesome.

Ben: It may be the case that I actually get dumber toward the end of episodes, which obviously is bad for a podcast that ends in grading. I want to see if that's the case.

David: That's amazing.

Ben: Welcome to Season 7, Episode 4 of Acquired. The podcast about great technology companies and the stories and playbooks behind them. I’m Ben Gilbert and I'm the co-founder of Pioneer Square Labs, a startup studio and venture firm in Seattle.

David: I'm David Rosenthal and I'm an independent angel investor and startup advisor based in San Francisco.

Ben: We are your hosts. Today, our tech focus podcast takes a turn to cover a different powerhouse business, the National Basketball Association. Whether you have been following the play-offs in the COVID bubble at Disney's Wide World of Sports or not, there is no better time for an absolutely exhaustive deep dive on the history and strategy of the NBA than the week of the finals.

How did David and I get here? Our original plan was to cover the business of the Jordan Brand. Halfway in, we realized that the story of Jordan is really a part of the Nike story, and we want to cover that another time. As we dug in, we realized that there's actually a great story in the NBA itself. It's one that's very relevant through an Acquired lens, how it built itself from very much the underdog of major American sports, started 50 years later than the others, and now it's the second most popular sport in the world globally after soccer (or as many of you call it football). It has done so using a playbook that is very much in the Acquired wheelhouse.

David: Yes. Spoiler alert, it is quite appropriate that the NBA is playing in the Disney bubble right now because there's so much that we've covered about Disney on these shows over the years. It's going to echo here with the NBA.

Ben: Indeed. With that said, today we are bringing you a story of a business at its inflection point, making huge bets for the future compared to other major sports leagues. The average team valuation has grown a staggering 6X in the last decade, which, talk about an amazing investment return just on its own. Today, we will try and understand all the factors that have made that.

David: These teams used to trade for $20 million and now I think every single NBA team is worth more than a billion dollars?

Ben: Yeah. All triggered by Steve Ballmer's $2 billion purchase of the Clippers about five-ish years ago?

David: Yeah. It's covered on episode 34 of Acquired or something like that?

Ben: If you know the number, that is very impressive. Yes, quite, quite early.

As always, if you love Acquired and you want to hone your craft of company building, you should join the community of Acquired Limited Partners. You’ll get access to the LP show—the bread and butter of the LP program—where we dive deeper into the fundamentals of company building and investing, in addition to our monthly LP calls where we talk with all of you directly. And of course, our Book Club and our Zoom calls with the authors.

Exciting announcement on that front, our next Book Club will be reading Brotopia by Emily Chang of Bloomberg TV Fame. Emily has graciously agreed to join us and all of our LPs for a discussion on the book next month. LPs, keep an eye out in your email for the announcement on that.

David: So excited.

Ben: If you aren’t a limited partner, you can click the link in the show notes or go to acquired.fm/lp. All new listeners get a 7-day free trial.

On to our presenting sponsor for all of Season 7, Tiny, and its founder Andrew Wilkinson. Andrew, last episode we talked about why Tiny is a great place for a founder to sell their profitable business. If a founder has raised venture capital, does it make sense for the VCs for this to happen? Why or why not?

Andrew: I think it depends on how business is doing. VCs look at their portfolio as all or nothing. It’s zero-sum; either you're a billion-dollar business or you're nothing. There's a gradation in between there where a lot of businesses that don't get to venture scale still build great products, still build pretty good businesses, and have happy customers. Often, they just get shut down or they get merged into a larger company in their acquihire.

We offer a third path to that where we say to the VC, look, this isn't going to return your fund, but it's a really great story. It's a soft landing for the team. The founder will get to participate in the real business that's underlying it. Maybe this does turn into something. Maybe in 5 or 10 years, we're able to actually grow this into something substantial. I just think it's a much more positive story than saying, you're a billion dollars or you're nothing. We're going to shut you down or sell you off to the highest bidder for scrap.

Ben: Yeah. That makes a lot of sense. When you think about how a lot of people describe venture capital returns and the portfolios being power-law distributed, you're potentially a really great place for those companies—maybe in that second or third quartile—to land. If they are profitable and are a good business but maybe their market isn't big or they just can't achieve a higher growth rate, it may make sense for them to be owned by Tiny.

Andrew: Yeah. We're not going to return the fund. I really doubt it. I think we made a couple percent of return over 5 or 10 years. If they want us to, we can just let them write off the investment, and we can pay them some nominal amount. But if they're interested—and some VCs have wanted this—they just want the future upside to be able to say to their investors we did the best possible thing for you, instead of just casting it out and throwing the baby out with the bathwater.

Ben: Fascinating. Thanks.

If you own a wonderful Internet business that you want to sell or know someone who does, you should get in touch. You can learn more at tinycapital.com or by clicking the link in the show notes. Now, into the episode on the NBA.

David: Time indeed. One caveat before we dive into the history in this podcast.

Ben: You say that all the time.

David: I know, but this is an important one. Listeners, if you have ever met Ben or me in person, it will become immediately obvious that we didn't really play basketball growing up, and we are casual fans.

Ben: I played.

David: Really?

Ben: Oh yeah. It just wasn’t close and pretty. I think I scored 10 points, one season in total.

David: Oh, nice. Actually, I had the best basketball of my career ever. I played seventh-grade JV basketball. I was a total scrub on the bench. In the last game of the season, the scrubs get to play at the end of the game. I was like, all right I'm doing this. I just launched up a three pointer with two hands. It went in a swish and I was like, done, I'm never playing basketball again. I'm going out on top.

Ben: That's amazing. In middle school transition, as part of my duties as being the light and sound person for the theatre shows—that flashes forward to where I am today pretty well—part of the responsibilities there was I did run the scoreboards at basketball games in middle school.

David: Nice.

Ben: Yeah. That's a pretty experience in basketball technicalities.

David: The point of this way-too-long caveat is that this show is not going to be about the history or analysis of the game itself. There are much, much better sources for that than Acquired. It is going to be about the business history and analysis of basketball and the NBA from one man during a snowy Massachusetts winter in 1891, to now the second largest sport in the world consumed last year by an estimated one billion people.

Ben: I was kind of hoping you would only go back to the start of the league, and not actually the start of basketball at all so I can go back earlier than you, but nope.

David: Oh, come on. Any chance I have to go back to the 1800s, it’s fantastic. All right, so what were you talking about?

Ben: James Naismith, Canadian-American. Who was he?

David: He was a Canadian-American. He found himself teaching at the Young Men's Christian Association Training School—what would become both the YMCA and Springfield College specifically—in Springfield Massachusetts during the winter of 1891. He was the phys-ed teacher there.

He was trying to find ways to keep his gym class active during these cold, dark, harrowing New England winters. He goes to all the existing indoor games and things he could do in a gymnasium, but he doesn't really like any of them. He's like, maybe I'll just come up with my own.

He writes down some basic rules. The crux of this little game he invents is that he takes a peach basket, and he nails it into an elevated track that is running around his gymnasium there in Springfield. He kind of invents basketball. I say ‘kind of’ because this peach basket that he nailed up to the track—first, I don't know if there were one or two, I think there’d only been one, I'm not sure—he didn't take the bottom out of it. It's literally a basket with a bottom so when the balls—and by balls, I mean soccer balls that they were playing with—went into the basket, they just stopped the game. Somebody is just going to climb up there and get the ball out of the basket.

Ben: That's awesome.

David: Is that awesome? A couple other things about this game that he invents. There's no dribbling. It's kind of like ultimate frisbee with a soccer ball. Once you touch the ball and you have possession of it, you are to stop. You couldn't move. The only way you could move was by passing the ball. There was also no set number of players on either side. It's just like, hey, how many kids are in class today? Great, we're going to divide you up and put you into this game.

Ben: And on halfcourt ball, that sounds like that would be a crowded space.

David: Nonetheless, there's some magic to this little game. People like it, and it ends up spreading like wildfire through YMCAs and other Christian organizations in the US, in Canada, and then very quickly, internationally too. We're going to come back to the game in a minute, but before 1900—only 4–5 years after 1891 when Naismith invents this—the game lands in China through the YMCA organizations there. Actually, still today, the oldest existing basketball court in the world is located in China at the former YMCA there.

Ben: Also, how crazy is it that there are YMCAs in China before 1900?

David: I know. God, amazing. It's crazy to even think about that.

Ben: This is our very first playbook theme of the episode, all the way at the very front of history and facts here. What an amazing distribution channel. We talk a lot about what's more important—the product or the distribution? This is one where the product had found product/market fit for a variety of reasons, one of which was it didn't take that much equipment, and it wasn't full contact. People could easily get on board with the idea of, this is good, it's healthy, but it won't injure you. Distribution is the reason why it permeated China and permeated the whole world so quickly.

David: That missionary zeal. Also on the contact point—it's important to note, too—it's not just men that are playing this. Women start playing basketball right at the beginning too. It actually becomes just as popular with women. It becomes—pretty quickly—the largest women's high school sport in America. And then it’s played in colleges. Unlike the other major American sports, it has a long history of both sexes playing.

Ben: I got to give one anecdote. I wasn't going to bust this out, but this is just a great quote from an Atlantic article that we will link in the show notes. "Some of the first groups that embraced basketball in China were college students, western-minded scholars, and most importantly, members of the Communist party, who loved the sport for its cohesive power. During the Long March—the Red Army's storied year-long retreat in the 1930s to evade the Nationalist army—Communist soldiers and officers played basketball to lift their spirits and solidarity."

It goes on to saying that the party continued to support the sport after it took power in 1949. During the Cultural Revolution, Mao declared war against almost all Western bourgeois affections, from classical music to novels, but he never wavered in his support of basketball.

It's just so crazy to me that in China, amidst this revolution—for the 50 years after this—that basketball sort of thrived even though the NBA hadn't even been started yet.

David: Hey, who's the number one ambassador to North Korea these days? Dennis Rodman.

Ben: Dennis.

David: We’re going to talk much more about basketball in China later in the episode. It really is this amazing story of product/market fit plus distribution. On the product/market fit—they do eventually, within the first 10 years or so of the game—most of the kinks, the basic kinks get worked out of the game. In the late 1890s, some Yale students—of course those plucky Yale students—there's a loophole in the rules. They think they can advance the ball themselves by passing it to themselves. Thus, the dribble is born.

Ben: It's shocking. These students thought that they could find a loophole in the rules. That they could exploit to advantage themselves.

David: The number of players—the five players in each team—gets standardized because American football was the big collegiate sport at the time. At that time, American football was played with 10 players. Football teams in the winter—once it got too cold to play football outside—they just come in and play basketball. They just divide the team in half, and boom. There you go, five on five. That's how it happened.

Ben: Speaking of, do you know that James Naismith is also credited with inventing?

David: Oh, I don't know that.

Ben: Am I actually going to get one that David Rosenthal has not?

David: I think you are.

Ben: Let's see. He is also the inventor of the football helmet.

David: No way.

Ben: Yeah.

David: Dude, what a guy.

Ben: Quite the gym teacher.

David: What an illustrious career. Basketball ends up really taking off around the world pretty quickly, as you said. In America—especially in high schools and colleges—it becomes the winter sport in the American collegiate sports landscape. Interestingly, certainly unlike baseball—and football had its fits and starts in the professional leagues, but it certainly started much earlier than professional basketball leagues—professional basketball leagues don't really take hold, but what does is professional basketball teams. I didn't know this until starting the research, but the original Celtics actually started as a barnstorming squad in Boston.

Ben: What does that even mean?

David: It was a travelling team. They travel around the country and play with other teams in exhibition games around the country. Of course, two other teams that started right around the same time or the 20s, 30s here, are the Harlem Globetrotters who actually are from Chicago. They didn't move to Harlem itself until the 60s. It was like a branding thing.

Ben: I did know that they predated the NBA and that they were not originally started as this goofy exhibition team.

David: No, they were probably the best professional team in America. They were legit and played legit, real games. A team that actually was from Harlem was the New York Renaissance Five or the Rens. Both the Globetrotters and the Rens were all Black teams and were wildly popular. Both of them will play 200 games a year across the country, and then eventually around the world, just exhibiting great professional basketball.

Ben: And no league. We made it all the way through two world wars in America before we had the semblance of a professional basketball league.

David: Yeah. That's how things were until right after World War II. In fact, exactly two years to the day after D-day, on June 06, 1946, the Basketball Association of America is founded in New York City by—inauspicious beginnings here—the owners of a bunch of ice hockey arenas in Northeastern and Midwestern United States and Canada, who wanted to make more money from their arenas on the nights when there weren't hockey games happening.

Ben: This is just an amazing full-circle thing. Now, the ice hockey owners are trying to get the off nights of the NBA owners' arenas, so that they can make a little bit of money for the ice hockey teams that are playing. That sport is getting more and more popular now—go Seattle Kraken—but what an incredible reversal that that's why they started the NBA.

David: Yeah. Let's monetize these off nights for the hockey teams. I didn't even think about this growing up. I think now, more so, these teams have their hockey and basketball teams. Sometimes they share an arena. Sometimes they operate their own arenas. But growing up, of course, the basketball and hockey team shared an arena and never thought about it. That's why basketball and what would become the NBA was like a subsidiary of later what would become the NHL.

Ben: I am certain that any basketball arena that was around when you were a child was more built to be a basketball arena than a hockey arena.

David: Yeah, probably. The Spectrum in Philly. That place was a dump.

Ben: Back when arenas have real names.

David: Yeah. This is a pretty big deal, though. There had been some other early attempts at professional basketball leagues but none of them worked. One of the big reasons why none of them worked is none of them had good venues, either in terms of the cities that the teams will play in, but more importantly, the arenas. They didn't have access to big enough arenas where they could attract large enough fan bases to economically support the teams and the league.

The American Hockey League was the league that founded this. They take the current commissioner of the AHL, Maurice Podoloff, and they say we will give you some extra job responsibilities. Go set this thing up. Make us some money on the off nights. We're going to talk about this here. It's amazing and wonderful how much things changed. They also were like, make sure that no Black people play in this league. This is 1946 when this was set up. Jackie Robinson wouldn't break the color barrier in baseball until the next year, in 1947.

One, full stop. That's awful, terrible, racist, wrong—all of these things. Two, it’s just stupid, because the Globetrotters and the Rens. You've got these examples of professional basketball teams that have the best talent, that make the most money, and are by far the most exciting brand of basketball available anywhere.

Ben: Right, and these guys are letting racism get in the way of good business sense.

David: Yeah. They're like, nah, we don't want any of that.

Ben: It's crazy.

David: Crazy. Ridiculous. Nonetheless, that same year, the first professional basketball game in what would become the NBA takes place in Canada—appropriately, given these mixed origins in Toronto—where the Toronto Huskies hosted the New York Knickerbockers at Maple Leaf Gardens, and what would become the first NBA game in history on November 1st, 1946.

Ben: One of these teams has a storied franchise afterwards, and the other one makes it what, a year?

David: Yeah.

Ben: I think the Huskies were a one- or two-seasoned team.

David: Yeah, I don't think they lasted very long. In fact, the whole league is kind of doing this promotional side thing for the Hockey League.

A couple years later in 1949, they decided they needed two more cities. They need two more teams. They merged with the rival league called the National Basketball League, the NBL. Together, they changed the name of this merged league to the National Basketball Association. Thus, the NBA is officially christened in August 1949. In a more typical bone-headed owner fashion in this time, it takes them five years to come up with the idea for a shot clock. Unlike the Globetrotters and the Rens—they're playing real basketball—the NBA at this time, whatever team was leading in the fourth quarter would just sit there and hold on to the ball as long as possible.

Ben: Whereas now it's like, why even watch it until the fourth quarter, that's when the game really starts. It's crazy to think about the strategy being, try and be the one in the lead by the time there's twelve minutes remaining running on the clock.

David: So they take some five years to come up with that idea. Another three years to test it, and actually implement it and decide it's a good idea across the league. As I said, in 1947, Jackie Robinson breaks the color line in baseball and wins the first rookie of the year award that year. Clearly, this is a great thing and lots of Black players come into the major league baseball. But it takes the NBA owners another three years after that to even sign the first Black player in 1950 which was Harold Hunter with the Washington Capitols, and the Capitols cut him in training camp that year. Several other Black players did end up joining the league and playing that year, but come on.

Ben: Not off to a great start.

David: No, not off to a great start.

Ben: Do you know who the first non-white player in the league was? It was actually not a Black person.

David: Yes, I don't know what his name was, but he was a Japanese-American player, I think. Right?

Ben: Yeah. Wataru Misaka in 1947–1948, so a couple of years before that.

David: Yeah, crazy.

Ben: Another crazy thing that will be a flashforward to today is in the first couple years, in the mid-1940s, the league created the salary cap for the first time in hopes to create a little bit of fair playing field among their very small number of teams. I think maybe a maximum of eight teams at this point. They just kept it for a single year because whoever—I assumed the Knickerbockers—the teams were in the largest geos basically said, we're not doing this thing.

David: Couldn't help themselves from violating.

Ben: Yeah, and it didn't come back until the 1984–1985 season. They went 40 years with no salary cap.

David: Yeah. The brainchild of one David Stern. Anyway, the league bumps the line for another few years. Then in 1957, the big moment happens. The Celtics drafts Bill Russell, and he becomes the first—there have been other superstars in the NBA before that, white superstars—Black superstar in the first, real modern era. Bill Russel's a legend across so many dimensions of the game, a player in the NBA, and then the flood gates opened after that.

Red Auerbach was the legendary coach of the Celtics. Red retired during the late-1966 NBA finals. This is back when coaches still had way more power within the organizations they do now. He named Russell the coach of the Celtics while retiring during the finals. Russell becomes the player coach of the Celtics from 1966–1969. He becomes the first Black head coach of any North-American professional sports team and the first to win a championship later in his tenure. Such an amazing guy. I think President Obama will give him the Presidential Medal of Freedom later in life. Did you know also that he lives on Mercer Island these days? In Washington?

Ben: What? No way. Two miles from my house.

David: Yeah, crazy. Things you can learn in Wikipedia.

Ben: That's wild. Here's another thing. Right during this era—speaking of the Celtics, I realized while I was digging through this—they were possibly the biggest dynasty in the history of sports. In that 12-year run, from 1957–1969, the Celtics only had two years where they were not the NBA Champion, and only one year where they weren't in the finals. There's a lot of talk about the Patriots in the NFL from 2000 to today but they only played in half the Super Bowls those years. The only comparable dynasty in major US sports is probably the Yankees in the mid-30s to mid-50s, but still not nearly as dominant as the Celtics were in that era. It sounds like you said in 1966, the coaching transition happens, so still reigns champion through multiple coaches.

David: Well, immediately after that would be the beginning of the Celtics-Lakers rivalry. Wilt Chamberlain wouldn't go to the Lakers until 1968, I believe. But in 1959, he was drafted and joined the league with the then Philadelphia Warriors who moved to San Francisco a couple years into Wilt's tenure there. Any listener who knows anything about Wilt Chamberlain knows there are so many crazy stories about Wilt. He was an extraordinary character. If you don't know about Wilt Chamberlain, pause this episode. Go Google him now.

Ben: He's still the only player to ever score 100 points, right?

David: Scored 100 points in the game, had over 50 rebounds multiple times. I think he also, at least once, if not multiple times in his career, averaged over 50 points a game for the entire season.

Ben: Oh my God.

David: So many stories. My favorite one though is Wilt played college ball at the University of Kansas. But he wasn't super happy there. He wanted to leave and start playing professional early but the NBA did not allow it at the time. He left after his junior year, joined the Globetrotters, and played for a year for the Globetrotters. Did you know this?

Ben: What? No. What were the Globetrotters at that point?

David: They were still really big at this point.

Ben: Were they doing what they do? They sell tickets, they come to town?

David: Yeah. It was more of a show than it was an actual game. This is amazing. During that season, in 1958, when Wilt's with the Globetrotters, they did a sold-out tour of the Soviet Union. This is the height of the Cold War. They traveled to the Soviet Union, and ended up playing in front of Nikita Khrushchev in Moscow.

They’ve seen the crazy Harlem Globetrotters, like zany stuff. There's this part in their schtick at the time where (I forgot the name of) the captain of the team will pretend to faint and pass out on the floor. Wilt was so big and strong that he would go up and pretend like he was going to help him up. Instead he'll literally throw him into the air wrestling style. He did this for Nikita Khrushchev in Moscow. Crazy.

Ben: Unbelievable. What a global sport.

David: Oh, my God. Amazing.

Ben: Just to paint a picture, too, when Wilt came into the league—I think that was late 50s, but let's just rewind a couple of years—the league—I think it was the 1953–1954 season—was only eight teams. It's worth walking through the eight just to know where they ended up today. As we know, today, the NBA has 30 teams (and should be 31 with Seattle).

David: When is that expansion going to happen by the way?

Ben: It's been a couple of years out for many years now. You got the New York Knicks, the Boston Celtics, the Philadelphia Warriors, which, as you said, would go to be at the San Francisco Warriors.

David: First the San Francisco, then the Oakland Warriors, now back to San Francisco Warriors.

Ben: Yes. The Minneapolis Lakers, which is where the name Lake comes from. LA is not known for its lake. Minneapolis is or their thousand lakes. The Rochester Royals, who would then go on to become the Sacramento Royals, and then finally the Sacramento Kings. The Fort Wayne Pistons, which as you know became the Detroit Pistons. I always thought, oh, of course, Detroit is the Pistons because Detroit is where they make all the cars.

David: Totally. I found that in the research, too. Why the Pistons in Fort Wayne?

Ben: Fort Wayne Indiana, yeah. It must have been that there were also car factories there. Tri-Cities Blackhawks, who are now the Atlanta Hawks but the Tri-Cities were in Illinois. I think they were originally the Buffalo Bisons in Buffalo, New York and then went to Illinois where they are the Tri-Cities Blackhawks. Eventually after moving around the bunch of Milwaukee, Saint Louis are now the Atlanta Hawks. They had quite the travelling journey. Finally, the Syracuse Nationals, do you know who that is today?

David: Is that…, no, I don't know.

Ben: That is the Philadelphia 76ers.

David: No way, I should know that.

Ben: Yeah, I think they stayed the Nats.

David: When the Warriors left.

Ben: Yeah. When they moved to Philly but that eventually changed their name to the 76ers.

David: Nice. Interesting. It's so funny. These teams that we now think they're all billion-dollar–plus franchises. We think of them as so established. It was the Wild West back in these days.

Ben: Totally, and there were only eight of them. When you talk about the numerical—just to paint some order of magnitude stuff for people—even in the 80s—I think 1983—the salary cap for a team was something like $3.5 million.

David: $3.6 million, as determined.

Ben: We're still 25 years, 30 years before that. There are eight teams. You probably make more money cleaning your local gym than you do being the player.

David: Totally. This is a labor of love. Wilt and Russell are in the league. We're now in the 1960s. You brought up economics. There are these big personalities. They've had great college careers. People love watching them. The NBA does start to gain some in popularity. It's still very much the underdog, like American football and baseball way, way, way bigger than professional basketball at this point in time. But during the early-1960s they do land a landmark five-year $4 million TV rights deal with ABC. And who at ABC gets put in charge?

Ben: Wait, wait, wait, what year is this?

David: This is in the 1960s. Iger is probably still in high school at this point in time.

Ben: Who's the legendary Wide World of Sports producer that Iger ended up working for?

David: The legend Roone Arledge gets put in charge at ABC of, take this sport and do something interesting with it. Of course, Roone had the Wide World of Sports, Monday Night Football, the Olympics Coverage. He was a genius. The brand also, Nightline, I believe. Not just sports, but he innovated so much the evening magazine new shows that he brought to TV.

Ben: And we're still a decade before ESPN was even founded.

David: Yeah, not till 1979. This is great. Bill Simmons, in his basketball book, quotes David Halberstam and his basketball book. Simmons is like, I know you can't believe I'm quoting Halberstam here but I have to do it. This is Halberstam. He says, “What ABC has to prove to a disbelieving national public,” Arledge believed, “was that this was not simply a bunch of tall, awkward goons throwing a ball through a hoop, but a game of grace and power played at a fever of intensity. He was an artist enough to understand and catch the artistry of the game. He used replays endlessly to show the ballet and to catch the intensity of the matchups. The athletes themselves were self-evidently proud, and they liked nothing better than to beat their opponents, particularly on national television. They were in those days, obviously motivated more by pride than money,” obviously, “and the cameras readily caught their pride.”

Ben: Even with all the money floating around today, there are many, many NBA players that are still motivated much more by pride than money.

David: Especially because—as we'll get into—while they make astronomical sums in salary from playing more than any other sport in the world, the best of them make at least as much from all of their business outside of the court than they do on the court. All that is huge for the NBA, but still into the 1960s, it's still about 10X smaller than baseball, and ABC is only broadcasting the NBA once per week on Saturdays, I think.

Ben: Let me come in here and say just to catch folks up on the teams at this point, we were eight teams. The ninth team then came in 1961. That's the Washington Wizards but at the time was the Chicago Packers, which seems like it has an overlapping name with a city that is pretty close to there and a decent rival.

The history of that, that's got to be an interesting one. Then, of course, the Chicago Bulls come in. I think 1966–1968 is when they really went crazy and did like an expansion of five teams all at once. The Bulls, the SuperSonics, which are now the Oklahoma City Thunder. The San Diego Rockets who obviously became the Houston Rockets, the Milwaukee Bucks, and the Phoenix Suns. That's what the NBA is looking like at this point toward the end of the decade of the 1960s.

David: Yeah, and they were expanding rapidly to compete with the upstart ABA, which we'll get to in one sec. But before the ABA—actually like super, super seminal—an important event happens in the NBA in 1964, which I think really set the stage for so much of what comes later and the modern business and game today.

Like we said, ABC and Roone Arledge were starting to popularize the league, but the players were making nothing during those days, and baseball was still the national pastime. It was about 10X bigger than basketball at this point in terms of the reach to the professional leagues. In 1964 during the All-Star Game, the players led by Chamberlain and Russell were not super happy with how they're being treated. They really want a pension plan from the league for the players after they retire.

Ben: And tells you so much about the time. The top priority was we need a pension plan.

David: We need a pension because you can't play this that long. They're not making that much money and then what are they going to do? Literally, two hours before the broadcast of the All-Star Game is supposed to start—this is a big deal; early in this ABC contract, Roone Arledge was putting on this big national television event, the NBA All-Star Game—they threatened to walk out and not play the All-Star Game unless Commissioner Walter Kennedy (at the time) acquiesces to their demands and puts a pension agreement in place. It becomes this huge showdown literally two hours before the event, ABC and Roone get super pissed off, and they tell the NBA , if you leave us hanging here, we're done. This contract is over. Good luck ever being on national television again.

Under this pressure, the league buckles. They agree to the pension deal, the All-Star Game gets played, but this is the first example in any sport of players really the forerunner of what would become the Players' Union, unionizing, organizing, and making demands of owners. I think sets the stage for the now NBA Players Association, all the force that it would become today.

Ben: And really starting to be an early precursor to tilting the balance of power and the economics to that of a fair one, which is closer to where we are today, where the players are able to actually shine and benefit from being the ones that are actually attracting all the attention. Obviously, we can argue about whether that's true enough today, but to this point, it really hadn't been the players who were economically benefiting at all from this rising popular sport.

David: No, totally. We'll get much more into modern economics today, but after this—this is pretty incredible—the top players like Wilt and Russell start negotiating much harder for better contracts and more pay. In 1968, when Wilt signs with the Lakers, he signs a landmark five-year deal for $250,000 per year, which is a lot of money in 1968. I think inflation-adjusted, it's like $2 million or so, so nowhere near the deals today.

But here's the crazy part. The top paid Major League Baseball player at the time was Willie Mays, who made $125,000. Will is getting twice as much money as the top baseball player in the world, even though the NBA is still 10X smaller than Major League Baseball. Pretty incredible. It also just goes to show how much the baseball owners were screwing the players at the time.

Ben: How did that work out? Is it because the Lakers owners had a bunch of money or why were they willing to spend so much more on a player when their viewership was way smaller?

David: Well, probably it worked out economically. There was no salary cap, no revenue sharing, and Wilt was such a cultural icon. I'm sure that the Lakers—in terms of ad sales, ticket sales, local TV deals, I think we're starting at this point in time—were able to monetize that at probably equal if not more than what they were paying Wilt.

Ben: Yup. It makes sense.

David: The other part of the reason why the Lakers were willing to pay him so much and other people would start making so much was—as we alluded to in 1967—a new rival league gets formed to the NBA, the American Basketball Association, the ABA. This is pretty awesome. The NFL had merged a couple of years before with the AFL, I think it was.

Ben: I think that became effective in conferences, the AFC and the NFC.

David: The AFC, I think that's right. These plucky entrepreneurial guys who started the ABA go around to a bunch of people and a bunch of cities and say, hey, our business plan is we're going to start a rival league to the NBA. Do with the AFL did and forced them to buy us and merge with us, and we're just going to go into all these cities that they're not in.

Ben: I love that their pitch was an arbitrage. It was like, hey, they haven't expanded to all the cities where they should have. We're going to beat them to it and you're basically buying in for the pop when we get acquired.

David: The timing was totally right, because the 1967 draft—was it in 1967 or 1968, but I think it was 1967 when this was all starting—there was this incredible once-in-a-generation prospect coming out of UCLA.

Ben: The doctor.

David: Lew Alcindor.

Ben: Oh, Lew, okay. Correct me if I'm wrong but doesn't Dr. J play a huge role?

David: Dr. J ends up playing a huge role in this but this is, of course, Lew Alcindor, better known soon as Kareem Abdul-Jabbar. He ends up playing both leagues off of each other. He tells the ABA, I think the Nets in the ABA had the first draft pick in the ABA, and the Bucks had the first draft pick in the NBA. They both draft him first, and he tells each team, I'm going to take one offer from each of you.

It's got to be the best and final. That's it, I'm taking it. The Bucks come in with a $1.4 million deal. The Nets were lower, I think maybe like $1.2 or something. He signs with the Bucks, and then the Nets were like, wait, wait. You actually meant that? There was the best and final. How about they offer him $3.6 million for a longer-term contract? Remember, it was just like that same year that Wilt got a $250,000 a year deal, which was crazy.

Ben: Damn, this is like Uber fundraising. This is like six months later, like a 10X valuation increase.

David: I know, literally the same day and Kareem is like, no, I meant it. Only one offer. So, he signs with the Bucks. He goes to the NBA, still the largest contract at the time, but the ABA signs Dr. J.

Ben: We're in the middle of three chapters of modern basketball history undergoing great areas of transformation. We're deep in the first one right now in this NBA versus ABA battle. We're going to get to classifying the type of power that the NBA has later, but this incredible example of counter positioning is happening with the ABA. It's almost—I think about it—like the XFL, but they're not being like exhibitionist about it.

Their pitch really is that the NBA should be bigger. It's not and they're slow, so we're going to go eat their lunch first, so they have to buy us. They're willing to do a few things like the XFL and change a few rules so that they can get more popular more quickly. One of the counter-positioning things that they do is their rules let them sign college undergrads, which is actually how they get Dr. J or Julius Erving and get him in the ABA because they just go get him sooner than the NBA rules allow for.

David: It's not that their rules let them sign college undergrads, they just don't have any rules, so they actually start going after high school players, too. This is the origin of high school players going into the NBA or the ABA first. The other things the ABA does, remember, like you said, they're trying to get bought. They're also trying to be flashy, but they're also trying to really innovate in the game and do interesting things.

The NBA up until this point, it was like a big man center dominated game. Bill Russell, Wilt Chamberlain, Kareem in his own way, although he was part of a more modern era, that was like he was big, it was bruising, that's what the NBA was about.

Ben: But it wasn't fast. It's big and bruising today but it's fast. Think about it like the tree style of I'm going to stand, I'm going to move my arms around, and I'm going to block your shots, but I'm not driving the lane muscling through and knocking guys over.

David: Yup. The ABA is actually the league the first invents and implements the three-point line, perimeter shooting, and fast breaks. Well, fast breaks have always been part of the game but much more finesse and skill-oriented games. Of course, Dr. J is perfectly suited to this. The other thing that the ABA does, is they basically invent what would become All-Star Weekend, which is now such a huge thing for the NBA. They invent the Slam Dunk Contest, in which Dr. J wins the inaugural dunk contest with a dunk from the foul line that sends everybody. Roone Arledge is loving every minute of this.

Ben: Yeah. He wanted a television spectacle that he could put in slow-mo. There's nothing better than slam dunk footage for that.

David: Totally, and it wasn't until after the merger, I think that the three-point contest would be added in some of the other stuff around All-Star Weekend, but that was so innovative because it was the first sports entertainment content that wasn't a game. It was ancillary content to the game, but it was just as if not more exciting, hype building, and televisable.

Ben: Yeah, and you could build hype for weeks before and weeks after. There's just so much you can talk about leading up to the dunk competition. Flashing forward to today, the NBA has tried to replicate the success of the Slam Dunk Contest with a bunch of different other types.

David: There's the skills thing.

Ben: The skills challenge. There was two-ball with the WNBA, and they've even changed the way that the game itself works in the last couple of years, Just like nothing, they have never been able to replicate the success of that thing that the ABA invented way back when, which is just this amazing, perfect spectacle of a slam dunk competition.

David: It was amazing and so 1970s, too. Actually, before the dunk contest in 1971, the NBA waves the white flags and says, all right, we give up. Let's just merge and do this thing.

Ben: They both basically have been gunning for the same cities at this point. The ABA had taken some strange fringe towns, like they had the Virginia Squires which was actually a regional team, which is where Dr. J played, but then, the NBA saw this coming and went crazy. I think in 1970, they went and got Portland, Cleveland, and Buffalo Braves, which is another Buffalo team that moved that's now the LA Clippers.

David: We covered that on our Clips episode.

Ben: Yup. Oh, my gosh, listening to that early episode. This is really when there's a tremendous amount of franchises that were added really on both sides.

David: Yup. After four years, they declare a truce, they stop the war. But remember, the NBA Players Association, the power of the players, the union, in a surprise move, they sue to block the merger on antitrust grounds because as players they're making out great. They got the ABA and the NBA bidding against each other. Players are shifting back and forth between leagues getting these crazy contracts. They sued to block the merger. It ends up going to the US Supreme Court and eventually settles, but it takes five years to settle. That's when the ABA just starts going crazy with all these innovations, the dunk contest, and things that they did.

Ben: That lawsuit really makes you think like they were right. There was a competitive market for their talent, and it really makes you think today how the NBA has a monopoly on professional basketball in the United States and that's legal. It raises some interesting questions there as to what is the NBA? Is it a company in itself? I'll spoil it a little bit and say it's not really clear whether it is in itself, a single entity, a joint venture, or just a contract between a bunch of privately-owned organizations that has a constitution and a bunch of bylaws, but they have been a different thing in different legal contexts in different courts around the country over the years to fit into whatever they need to be for that particular scenario.

David: Of course, what are you talking about? They're in the association. It’s obvious. Not obvious. When they finally settle in 1976 and the merger goes through, what drives the players to settle is they get a major concession. The NBA agrees to abolish the reserve clause in contracts. The reserve clause said that any player whose contract was expiring—this was true across all professional sports in the US at the time—the team that the player was playing for kept that player's rights for an extra year after their contract expired. It basically prevented the free agency from happening. You'd get to the end of your contract and you couldn't go negotiate with other teams because your team held your rights for a year. If you wanted to go play for somebody else, you either had to demand a trade or sit out for a year.

There was actually during the interim when the merger was being disputed. There's player Rick Barry, who jumped leagues. He was one of the first players to jump from the NBA to the ABA, and he thought that he would be able to dispute this reserve clause and be able to start playing right away. It ended up being held up and he had to spend the first season as he played for Oakland as Oakland's TV announcer before he could actually start playing in the games.

When the NBA agrees as part of the settlement to get rid of this—this is huge—now free agency is opened up and this really begins the modern era in baseball. The reserve clause would end up being abolished by a lawsuit from Curt Flood. I think that would happen later. I think that was 1980 maybe I want to say. I could be wrong on that, but once again, the NBA is leading the way here.

Ben: It's effectively like a non-compete. You were a professional basketball player for me. You can't compete with me by being on another professional basketball team. We're separate organizations. This is like that thing where the NBA when they want the teams to be separate organizations they are, and when they want it to be one single entity that can sign a collective bargaining agreement they also do that.

David: Yup. The merger happens for ABA. Teams end up getting absorbed into the NBA.

Ben: This to me is the really fascinating thing where between when the NBA waves the white flag in 1971 and when they actually end up merging four years later, the leverage shifts entirely to the NBA. What the Players Association did by creating that lawsuit, it was like the ABA had so much momentum, so much cleverness, and so much creativity. It seems like they never really had a long-term plan and they started to fatigue.

There was deal fatigue that happened. By the end of it, there are ABA teams folding. There are ABA teams not making payroll. There are ABA teams realizing that the strategy of moving between three different cities in Virginia as a regional team is just a terrible strategy for a professional sports team and their costs are way too expensive. There are basically only four left with Denver, the Indiana Pacers, the New York Nets, and the San Antonio Spurs that are really able to make it through in this merger.

David: Yeah. Most of the other teams fold, including but except for St. Louis. Did you find out about this? This is amazing.

Ben: I don't know.

David: St. Louis had a team in the ABA. The owners strike this deal. They were in dire financial straits like some of these other ABA teams. Instead of having to pony up more money to keep the team afloat and join the NBA, they fold the franchise in exchange for the...

Ben: Oh, is this the draft?

David: No, even better. $2.2 million upfront payment from the NBA, and in perpetuity, a 1/7 share of the TV money from the other 4 ABA teams that get pulled into the NBA. In perpetuity. This is crazy. The ownership group of this St. Louis team gets $2.2 million upfront, and then they get a cut of the TV contracts. I think the local TV contracts of these other four teams forever.

Ben: They signed a perpetuity contract?

David: Yeah. Through 2009 they had been paid over $150 million from this settlement, which is just crazy.

Ben: Oh, my God. In 2009, finally, the NBA was like, okay, we have to renegotiate this and it doesn't matter how much. We could pay them all.

David: I think it's still ongoing. The only reason is Bill Simmons writes about this in his book and it was published in 2009.

Ben: That is so insane. Oh, my God. It's like the owner of St. Louis like saw the writing on the wall and was like, you know what? I'm going to cut and run, and sign a crazy deal for myself instead.

David: This is covered in the Clips episode. The Donald Sterling's estranged wife when Ballmer bought the Clippers, got something crazy like 20 courtside seats, 6 parking spots, and the right to have 2 championship rings if the Clippers ever win the championship, in perpetuity forever.

Ben: It's crazy. It's like I want all this stuff because my husband was a crazy racist. Steve Ballmer really wants to overpay for this team, so I can ask for basically anything I want.

David: Did he overpay? We'll get to that later.

Ben: Yeah, it's a good point. A couple of other points I want to make on this merger because it was crazy by the time it actually closed how much leverage the NBA had. The first biggest one was that it's not treated as a merger. These new teams arriving actually have to pay the NBA for permission to enter the league. They have to pay $3.2 million.

Pay us to enter now. This is not like we're recognizing the enterprise value that you have. Now you're just anyone with a team on the street who wants to join our league. This is just rude. This is not the way it happened in the NFL, but they decided at the NBA we are not going to recognize any ABA records. Any of the history that you guys created, sorry, those never happened.

David: It's not valid history and facts.

Ben: Yeah. Another crazy thing is the New York Nets, you might notice what's already the next.

David: I was wondering if you were going to say this.

Ben: The Nets have to pay the New York Knicks $4.8 million in indemnity as compensation for invading their territory. Like you guys as a whole have to pay $3.2 million but you specifically have to pay one of our teams almost $5 million (1976 dollars) for the privilege and compensate them for what you're about to do to them.

On top of all of this, the ABA team received no television money at all during their first three seasons. As we'll get to, that's an enormous NBA source of revenue. It's a huge component of it. Probably half, but we'll get there. Those four ABA teams also got no votes related to the distribution of basically ticket sales, or the alignment of those NBA divisions. They're just pulling all their control provisions and saying, yeah, we're going to vote on stuff as a league, you don't really get to vote.

They're instantly brought in as these crazy second-class citizens that I think the Nets owner had this quote that said something like, the merger agreement killed the Nets as an NBA franchise. The merger agreement got us into the NBA but it forced me to destroy the team by selling Irving to pay the bill. That's the crazy thing is they actually preyed on Dr. J for cash.

David: Dr. J was playing for the Nets. They sell him to the Sixers for cash to be able to pay off these debts that they owe.

Ben: It's just brutal. Everyone basically sold their soul for the privilege to play in the NBA.

David: It's kind of amazing if listeners like this want to do an episode on the Spurs someday. It's amazing that the Spurs overcome this. It takes decades to be able to build the dynasty that they have.

Ben: The Nets frankly never really recovered, and it's not like these other teams went on to become amazing dynasties. Indiana, of course, when Bird coached them and they had Reggie Miller. They had some great years there, but you're right. Other than the Spurs, it's not like we're looking at the Lakers or something like that.

David: Yeah, totally. At the end of all that, the dust settles right when the merge is officially happening just after 1979, which is a momentous year for two reasons: (1) because that's the year that Bird and Magic entered the league, and (2) of course, that's the year ESPN launches.

Ben: Yeah. This is all the cherry on top of this first incredible chapter of the NBA, where we finally have all the teams we know in love. We finally have the biggest rivalry, the biggest two superstar players coming in, and on top of the ESPN thing this is the first year they actually add the three-pointer.

David: That's right and these days took forever to implement any good idea. They finally add the three-pointer, Bird and Magic, and with the ESPN, that means two things: (1) there's more—just like real estate—for showing, televising more NBA games nationally, and (2) ESPN launches with SportsCenter. SportsCenter covers all sports, of course, and all sports have highlights and whatnot, but what sport is more tailor-made for two-minute highlights with enthusiastic anchors on SportsCenter than the NBA? It's just a perfect storm.

Ben: Totally. It's one of my favorite things from our ESPN episode. I don't think I realized that SportsCenter was the very first thing that aired on ESPN. Their most famous and perfect product is the thing that they started with from day one, and the NBA would produce the perfect components to be a part of that.

David: It's so interesting doing this now having done that ESPN episode a few years ago, because I don't think we had that context that it was only just within those few years before then that the NBA at least finally became a product that would do so well on this cable channel. I mean, they would have been fine with football, baseball, highlights, and everything else. But, especially during the winter—those months when there is no football and baseball—the NBA is really what carried SportsCenter and ESPN.

All that sets the stage for what is the second major chapter in the history of the modern NBA, and that is the year 1984. Great year, of course, because that's the year I was born. It makes sense that it would be a pivotal year.

Ben: You and the Macintosh.

David: That's right. Major year, but two things, really two people happened in 1984. I think you can argue. We'll try and make the argument here. You could argue, maybe it's hard, but I think they both have equal importance to the NBA, and both of these two people are maybe the most impactful individual people on sports and sports business ever.

Ben: It's a big claim.

David: It is a big claim. First, in February of 1984, the NBA finally—after almost 40 years at this point—gets its first more than not totally incompetent leader in David Stern, becomes commissioner of the NBA. We'll get into everything that Stern does—good and bad—but mostly incredibly good. He ends up becoming the longest-serving commissioner of any professional sports league ever.

He served for 30 years until 2014—which is just incredible—and presides over so much that happens in the NBA. But then, of course, this is going to be the hard argument to make, that he's as important, but we'll make it as the other person that joins the NBA in 1984. I had forgotten this even from The Last Dance until doing the research with the third pick of the 1984 draft. The third pick, like are you serious?

Ben: Jordan still miffed about that, right?

David: I think he's still pretty pissed. The Rockets had the first pick in the 1984 draft. They draft Olajuwon, which obviously was a bad decision, but they needed a center. Centers are still a big part of the game and all that. He's Hakeem Olajuwon like fine. With the second pick the Trail Blazers draft Sam Bowie. Like what? ESPN has labeled—

Ben: My shoes do not have that guy's outline on them.

David: Oh, my gosh. ESPN has labeled this literally the worst draft pick in sports history globally and for all time. It can also besides Jordan, of course, which is who we're talking about. Charles Barkley and John Stockton are also in this same draft, and the Blazers pick Sam Bowie. Okay. All right, so we're going to come back to MJ, which, of course, the Bulls drafted third in June of 1984.

First Stern. How did Stern become the commissioner of the NBA? Well, he had been a lawyer in New York, who originally did a lot of work with the NBA and a lot of work through the merger with the ABA in the 1970s. Then he went in-house and he was in the house counsel at the NBA. In March of 1983—

Ben: By the way, this story so far, his background is identical to the Major League Baseball Commissioner. He was outside counsel, worked at a law firm, eventually went in-house counsel with the MLB, and rose up.

David: No way. I didn't know that. I think this is actually a pretty standard path to commish. Silver (of course) was Stern's deputy, but I think he also started as a lawyer before joining the NBA.

Ben: Mostly need to do lawyer stuff, so it makes a lot of sense.

David: Makes sense. Stern's in-house, and then in March of 1983 while he's General Counsel, the league signs a new collective bargaining agreement with the Players Association. This is a totally landmark deal. Like we said, we're going to come back to the economics of the NBA that sets the stage for it today.

In this agreement, the NBA agrees to that in aggregate, it will pay the players in any given year 53% of the total gross revenue—revenue not profit—that the league makes in exchange for—finally, as you said earlier—the salary cap back. They're worried about competitive parity between the big market and the small market teams. They want a salary cap, they also want to keep expenses from ballooning out of control, and this deal is a major landmark because remember, the players have been getting so much influence.

Now they're still the players, they're still the labor in the league, but they're an actual partner. They are contractually going to get—in aggregate—over half of the revenue of the league. The owner still owns the teams and they take the profits of each individual team, but they're really partners. Players are essentially equity partners now in the league.

Ben: Yeah. This trade is fascinating, no matter which side you are. It's interesting because it's not an obvious deal that you should take for either side—which is how it's a good deal for both sides— because from the league's perspective, it's not that we can pay up to 53%. Our cogs now are 53%.

David: 53% just for the players?

Ben: Right, just for the players. Exactly. A minimum.

David: And that's before all the arenas, the staff, and everything.

Ben: We are now committing that we have the Spotify business model, rather than the Netflix business model, where no matter how many dollars we take in, we are paying out 53 cents on the dollar, for every single dollar.

David: Correction, the Spotify music business model, not the Spotify podcasting business model.

Ben: Right. That's scary because it caps the potential upside on your business or unless you, "make it up on volume." That's a foreshadow until today. But if you're on the player side, you're agreeing to this salary cap where, sure, it's going to bring parity and it'll make the game better, but if I'm the LeBron of the era, why would I want the salary cap?

David: If I'm MJ, yeah.

Ben: Right. I tried to stay away. I don't want to directly say, LeBron of the era equals MJ because I don't want to make that comparison or have us quoted—

David: We already said in our caveat that we're not talking about the game here. We're talking about the business. We won't wait into that debate.

Ben: It's just this fascinating deal. Like you said, even though they're not equity partners, it effectively—because the future cash flows are so intrinsically tied and scaled together—feels a lot like being true equity partners in the business.

David: Yup. It's based on revenue, not profits. The owners can't hide. It's not like they can make up a bunch of accounting stuff, costs, expenses, or whatnot.

Ben: Revenue is in fact profits and opinion.

David: Exactly. Let's get John Malone in here. This is incredible when you said this earlier in the episode. The salary cap is $3.6 million per team, and that's 53% of the average gross league revenues. If you do the math, that means that the average team in 1983 was making $6.8 million in revenue. There are 23 teams in the league at that point. That meant the league as a whole was making about $150 million in total revenue. Keep that in mind. Stern negotiates this deal, and then in February of 1984 he gets promoted. He becomes the commissioner of the league.

Ben: Let's just contextualize the $150 million in revenue against some startups. It's making basically what a pre-IPO startup is making in revenue except the NBA is actually profitable and not losing money.

David: Debatable. I think some teams are profitable and some teams are losing money, but, yeah.

Ben: Okay. They're likely better than a breakeven business on the whole, but call it a breakeven business that effectively revenue-wise looks like a late-stage startup.

David: Yup. Also in 1983, right before Stern took over, they negotiated a new TV deal with ABC that I believe was about $20 million a year in terms of payments for national broadcast rights to the NBA as a whole. Five years later—December 1989—after Stern takes over, he had MJ to market as a pretty good product to market.

That deal expires and he and the NBA negotiate two new 4-year TV deals with NBC and with Turner for $875 million. That's over $200 million a year, literally 10X the deal that had been negotiated the year before Stern took over. Not only 10X of the TV deal. If you just take that revenue, ignore all other revenue sources in the NBA—concessions, ticket sales, merchandise sales, everything else, and advertising—just the TV deal alone is 50% more annual revenue than the entire revenue of the league in 1983 when Stern took over.

Ben: Wow. Do you say $200 million a year in TV revenue?

David: Yup. I think it's like $220 million-ish in TV revenue.

Ben: Yes, players getting $120 million a year in revenue that they otherwise wouldn't have. Commissioner was a great thing for the players.

David: Totally. The great thing for the business, which ended up being a great thing for the players. That was the first thing Stern does. He just massively up-levels the business and the TV deals that the NBA is doing. The second thing—you could argue whether this is good for the players or not; ultimately, this is good for the players—the 1980s NBA, just like most of the rest of American society, had a huge drug problem. This has been cataloged in many other places in NBA history.

The saddest and the worst example of this was, of course, Len Bias, the hugely, hugely talented college basketball player drafted in the first pick of the 1986 draft, I believe by the Boston Celtics. Two weeks after being drafted, he dies of a cocaine overdose. As tragic and terrible but endemic of what was happening in the league at this time. Cocaine just totally infiltrated the league and many other sports, too.

Ben: [...] to talk so much about this in the documentary.

David: Yeah, in The Last Dance. When he showed up in 1984, in Chicago, he was like, what the hell? All these veterans, these drugged-out dudes who are loafing around the court. That is not MJ style as everyone knows. This is a big problem, so Stern puts in place a drug testing policy, and three strikes and you're out policy.

Literally, first offense, you get rehab and a warning. Second offense, you get a big fine. You get caught a third time with any drugs in your system, you are literally a lifetime ban from the NBA. A few players actually do get lifetime bans. Through a combination of this and Jordan, everything really revitalizes and turns this around for the NBA. The third, huge, huge thing that Stern does—by all accounts, this is really his vision—is he internationalizes the game.

Of course, remember the game had been international and huge in China from back in the Naismith days, but Stern internationalizes not just basketball but the NBA. Obviously, anybody who is alive at the time—and probably most people don't—are going to remember the 1992 Dream Team in the Olympics. That was Stern. I didn't realize this until doing the research.

It was a lot of people that made that happen, but Stern was the one who’s like, there's a big opportunity for the NBA to go global not just in terms of recruiting players and developing talent, but also for consumers of the product.

Ben: Had the Olympics before had just college players or second rate pros?

David: It was only amateur. FIBA, the international governing body for basketball, had only allowed amateur players to play in international competition. That, of course, barred all the NBA players.

Ben: So Stern had to lobby them? Hey, this is going to be really good for the sport, you should let us do this?

David: Totally. It was great for the sport and like that 1992 Dream Team, it was a big focus of The Last Dance, a big part of Michael's career, and everybody involved. That was huge. I remember watching that on TV. It was the biggest event of 1992—professional players finally being allowed to play in the Olympics—and this is the greatest team ever assembled.

That was all Stern. On the back of that, the NBA opened up offices in (I think) 14 countries around the world to start essentially two functions. Talent development and recruitment, and (of course) we would see that. We'll talk much more about that in a minute with the modern NBA, and international players, but also just selling the product, and that's when the NBA itself and not just basketball really start to become a global phenomenon.

The fourth thing that Stern does is after the next Olympics in 1996, the women had a big Olympics here led by Rebecca Lobo at the time. There had been talked around the NBA and plans on the back burner for launching a Women's League. After the 1996 Olympics, Stern really champions, you know we need to make this happen. He pushes through launching the WNBA in I believe it was 1997 (I think) when it launched. I didn't realize this either for the first eight years of the WNBA's life. It was wholly owned by the NBA.

Ben: Oh, so what? They weren't individual team owners?

David: Each team was owned either by the NBA as a collective organization or by its NBA counterpart in the city it was in if there was an NBA counterpart in the city.

Ben: Oh, interesting, so the owner of the Cavs would have owned the Cleveland WNBA team?

David: Yup. Like the Storm was owned by the Sonics. Then after eight years, they then spin it out and recruit independent owners for the teams, but that all happened in his tenure. Of course, he would also embrace technology and launch league pass and streaming in 1995.

Ben: Roughly after Amazon was founded.

David: Yeah, seriously. Anyone of those things would have been huge, but he did all of those things over his 30-year career, which was pretty amazing.

Ben: And that’s still 15 years before he retired. That was only in the first half of his career.

David: Yeah, almost 20 years before he retired. That's Stern.

Ben: On the flip side of that, though, he's also responsible for a lot of the very highly criticized…

David: Oh, yeah. The dress code.

Ben: Yeah. For listeners who don't know, at some point, it was a dress code. Am I spoiling the story?

David: Yeah. We're going to get to that in a minute. Definitely as Stern got older, he probably should have hung it up maybe 5–10 years before he did but we'll get into that. We're not planning to say too much about MJ here because…

Ben: Netflix did a pretty good documentary.

David: Yeah. Netflix and ESPN told the official story. What we will talk a little bit about, though, Ben, what you were saying at the top of the show, part of our initial inspiration for doing this was wanting to tell the Jordan Brand story and realizing that that's really totally tied up in the Nike story. There's a better time and place for that, but Jordan signs the Nike deal right after he's drafted. I don't think this was talked about too much in The Last Dance.

Ben: Which is not the deal he wanted. What was the sneaker company he wanted to sign with?

David: I think it was Adidas that he wanted to sign with.

Ben: Yeah, you're right. It was Adidas and this is directly from The Last Dance. They asked him, “Do you have a shoe company that you wanted to go with?” and he confirms that it was Adidas. Considering the billions of dollars that Jordan Brand has produced today at Nike is crazy.

David: This is crazy. We're going to get into it. It was his agent I believe who pushed him to say, before you make a decision, talk to these guys out in Oregon, these Nike guys.

Ben: They [...] they can fly out?

David: I don't remember.

Ben: I think they fly out and meet Phil.

David: That might have been. Well, we're definitely going to tell this whole story in another episode someday. This probably stands for consideration as maybe the best non-acquisition deal of all time. At some point, like we did our top 10 acquisitions episode, we should do a top 10 non-acquisition deals.

Ben: IP deals or licensing.

David: Yeah. The deal gets done in 1984. I believe it was $2.5 million upfront or something like that, and then a percentage of, I believe the profits from the Jordan Brand over time. This is incredible. Jordan as of today has made over $1.5 billion personally from the deal, and the Jordan Brand within Nike—obviously nobody could have seen at the time—is still going strong, and last year generated over $3 billion in revenue.

Ben: Thirty-five years after they signed the deal.

David: Unbelievable. As a result of that—I'm not 100% sure but I think this is true—last year, Jordan's earnings from the Nike deal were the single highest athlete endorsement deal in the world—last year—and the dude retired 16 years ago.

Ben: Oh, my God.

David: Isn't that incredible? At Nike, it's the parent brand plus the Jordan Brand. Their market share of the performance basketball market is 86%. Their market share of the lifestyle basketball market—most of the Air Jordan sales—is 96%, and 77% of NBA players this season are sponsored by and are wearing either Nike- or Jordan-branded shoes. Totally crazy. The legacy of this period in these two men—

Ben: We should mention he was a pretty good basketball player, too. It wasn't just shoes.

David: Just go watch The Last Dance. It's amazing. Enjoy every minute of it.

Ben: By the way, it wasn't Jordan. It was a team accomplishment is what I gleaned from the documentary. It was everybody in the team front office and players. I think that was the big takeaway.

David: Yeah, right. Well, it does take a village, that's for sure, but...

Ben: That village is named Michael Jordan.

David: The legacy these two dudes, Jordan and Stern, is that today—we're not done with the story yet—it really just comes from what these two people did. NBA players and alumni are: (1) the highest-paid athletes in the world as a group, which a lot of which stems from that 1983 collective bargaining agreement that Stern orchestrated with the Players' Union, (2) have the largest social media followings and influence among American sports players by like a laughable, laughable margin. Soccer and soccer players—football for all of our non-American friends—is actually bigger than basketball players in terms of social following, but within the US, it's not even close. We're going to talk a bunch more about that in a minute.

But then, probably most importantly, I think the last element of this is that the current and former NBA athletes have wealth at a level and have become entrepreneurs and business people. At a level that just completely eclipsed any other sport (period) in the world, both in their current playing careers and post-playing careers. At the top of the list is Jordan himself. As of today, he's worth $2.1 billion. He is the wealthiest former athlete in the world, the fourth richest black person in America. Astounding. Below him—it's a wide gap between Jordan and the next—they have a bunch of other people too. Kobe's estate. Sadly, Kobe, tragically—

Ben: Rest in peace.

David: Rest in peace. At the time of his death, his estate is worth $600 million, much of which came from all of his business activities after his playing career. Magic and Magic Johnson enterprises—also worth $600 million—nearly all of that came from after Magic's playing days through his business ventures and influence.

Interestingly after that, there's another $600 million net worth former basketball player, a guy named Junior Bridgeman. He played for the Bucks and the Clips in the 1970s and 1980s. He founded Bridgeman Foods after retiring, which is one of the largest (I think) Chili's and wine house franchises in America. He employs 11,000 people, it's incredible. He's worth $600 million.

LeBron is worth $480 million. Shaq is worth $400 million and is on the board of Papa John's, which is amazing. I had to put that in there. Then, another $400 million net worth former player, Vinnie Johnson who played for the Sonic, Spurs, and Pistons in the 1980s, after he left the pistons, he founded Piston Automotive Parts, which is one of the largest independent automotive parts manufacturers in America.

Ben: That's a big jump.

David: Yeah, incredible. These are all black-owned businesses, black entrepreneurs. All the legacy of the NBA and the amount of wealth that these people were able to: (a) generate during their playing days, but (b) also just have the influence and ability to—

Ben: Invest, take those assets, and build bigger empires with them.

David: Yeah. Literally, nobody else from any other major American sport even comes close. With the only exception is Roger Staubach, the Dallas Cowboys quarterback. He built a big real estate company after his playing days, so he's also worth about half a billion dollars. I don't know if anybody else is even worth $100 billion.

Ben: I think Tiger is a billionaire.

David: Individual sport?

Ben: Yeah.

David: No other team sports. Football, NFL. Nope? Except for Staubach? Major League Baseball, nope. Hockey? Nope. Basketball is the only team sport that has produced these incredibly wealthy alumni.

Ben: As one more measure of incredible wealth is owning a sports team. It's a line in billions where they say, owning an NFL franchise or an NBA franchise is the closest thing we have to royalty in America. I was doing an analysis of the whole list of NBA owners. I'll actually bust the stat out now because I think it's interesting; I open up my spreadsheet. The NBA owners today are basically dominated by tech private equity and venture capital. You have 16 of the 30 teams owned by tech PE or VC, and only five of them actually are family money of inherited wealth. A lot of the others are entrepreneurs of different strokes, but there exists one player who owns a team, and that's Michael Jordan. I think everyone else is a billionaire.

David: Obviously, well, anybody who owns a majority of an NBA team is a billionaire. Jordan, of course, (I think) owns about 80% of the Charlotte Hornets. The first former player in any league to become a majority owner, and as of this week, did you see the news?

Ben: No.

David: He is also now a NASCAR team owner.

Ben: Interesting.

David: Yeah. He bought the team that Bubba Wallace drives for.

Ben: Fascinating. He had a nice little return here on buying the Hornets because in 2010, he bought majority control of the club. I think it went for $175 million and he just sold 20% of it, the value of the company at $1.5 billion. He's gotten some nice appreciation over the last decade from his basketball investment. He has to use that cash somewhere.

David: Totally. Let's get into chapter three of building the modern-day NBA after Jordan and still during the Stern era but leading into the Silver era. When Jordan finally retired for the second or third time with the Wizards in 2003—I think when he finally retired for good—there was definitely a bit of a hangover after that, so ratings dropped.

While Jordan was in the league TV ratings for the NBA rose every single year he was in the league, which also I don't think any other professional athlete has had that happen in their career unless they were in the league for two years or concurrently with Jordan. Ratings dropped and scoring dropped. There was this narrative which a lot of people believed but frankly was really wrong, also crappy, and racist, that the league was just filled with thugs. This was the whole Allen Iverson thing and...

Ben: This was when they had the brawl?

David: Yeah, The Malice at the Palace. With Ron Artest, the fans that instigated it were drunk-depressed, off their rockers, saying terrible racist things. The whole Allen Iverson thing (I think) was actually my carve-out maybe like a year or so ago. He wrote this great piece for the Players' Tribune two years ago (I think) that we’ll link to, just about his experience, what it was like being AI and being labeled as a thug, and what we're talking about. He dressed like lots of hip-hop artists and rappers did, wore what he wanted to wear, and had his personality.

A lot of the media came down super hard on him about this. He was like, look, I love the game. Nobody played harder than me. Nobody worked harder than me, despite the practice line. I was just trying to be me. I just wanted to be me and it's amazing what that turned into. Fortunately, I think is what so many NBA players—exemplified best by LeBron—are today like they are them. They are their personalities and they are influencers, but during the time—we referred to Stern—maybe staying a little bit too long.

After The Malice at the Palace and dealing with Iverson and all of this stuff, before 2005–2006 NBA season, Stern institutes—he terms, these are his words—a liberal and easygoing dress code that mandates that players wear business casual attire when participating in team or league activities. The code also prohibits headgear of any kind, as well as chains, pendants, or medallions worn over the players’ clothes.

Ben: The fact that that's all specifically called out. It's just like...

David: Ridiculous.

Ben: For someone that benefited the players in so many ways, that is proof that you've now stayed too long, sir.

David: He just didn't get it.

Ben: It's veiled racism. The amount of distance between him and the players is just so evident by him making those comments and describing it. You live in a completely different world, dude.

David: Yeah. Iverson and his quote about it at the time (I think) actually says it best. What he doesn't say that other players did say it's like, yeah, this is racist, which is true. Iverson says, his quote is, "They're targeting my generation, the hip hop generation." This is like kids get off my lawn thing. This is just the world was changing and the NBA was (of course) at the forefront of it with these young, incredibly talented people that were playing.

Ben: How did the league recover from this to get where we are today, being frankly a leader in social justice?

David: Well, a bunch of things happened, but specifically on the dress code, I believe it's still in effect today. I'm not sure about that. Whether it is or isn't it doesn't matter because the players—in this brilliant move—completely co-opted. I think Dwyane Wade was really the first player to start doing this, and he was followed quickly by LeBron.

They embrace him. They're like, All right, great. You say we got to dress up. We're going to dress to the nines, and that's when it really transformed into this, every arrival at the arena for NBA games and post-game press conferences became this fashion show. They said all right, great. We're not going to wear golf shirts and khakis, hiked up to our navels. We're going to be—

Ben: Fashionable.

David: Yeah. Like you, David Stern. We're going to be fashionable and we're going to be on the cutting edge. Although this would happen later—but not that much later with the rise of social media and particularly the rise of Instagram—fashion, how they dressed, players clothes just played right into them being able to build these larger-than-life social media followings.

Ben: Bring us into Act Three, then.

David: Okay. Act Three, I think there are really three aspects to what has become now the modern NBA. Really all of them we have to give credit to. Like I said a minute ago to David Stern, laying the groundwork for the vision for these.

(1) I would say, I'm going to call this unique and compelling content within the NBA both on the court and off the court, (2) his international players, the international game, and fan base, and (3) is the wholesale embrace of technology in all of its forms. What are those three pillars of a playbook remind you of?

Ben: I feel like I've heard this somewhere before. Are you pitching me on the strategy for the NBA in the 2000s or are you trying to tell me that you are going to take Disney into the next 20 years?

David: Yeah, and right around the same time, too. This is the Bob Iger three-point plan for Disney when he becomes CEO in 2006, and it's right around the same time that all of these same things start happening in the NBA. First, on international. You started in the 1990s and early 2000s. Getting some of this happening with (of course) Toni Kukoc, D-Mac, and some of the other great...

Ben: [...]

David: Yup. Dirk Nowitzki for the Mavs becomes a huge superstar from Germany in the early-2000s. And then, Steve Nash from Canada. Debatable whether that's international but we'll give it to them. Then in 2002, you had literally the biggest international player.

Ben: From the most unlikely of places as a seven-foot. What is he?

David: Seven-foot-six. Although rewinding back to the beginning of the episode, not the most unlikely of places. Yao Ming was drafted the first pick by the Rockets in the 2002 NBA draft. The first international player ever selected with the number one pick without first playing US college basketball. This was just so huge. Unfortunately, Yao’s career was cut short by injuries. He only played eight seasons in the league, but he’s still in the hall of fame. An incredible player.

Ben: He’s already in the hall?

David: Yeah. He was like the first ballot, for sure. He’s already in the hall. He brought China to the NBA. But even more important, he brought the NBA to China. The Rockets, after they draft Yao become the most popular sports team in China. Think about that.

Ben: Across any sport?

David: Yeah. Basketball is already—at this point—the biggest sport in China. The Rockets become the most popular basketball team in China. On the back of this basketball becomes this—as we talked about—the second most popular sport in the entire world, after soccer. The Associated Press estimates that today, 300 million people in China alone play basketball and 600 million people watch it. Literally, there’s an America’s worth of people who play basketball in China and two America’s worth of people who watch it.

Ben: That’s insane.

David: It’s crazy.

Ben: Regular reminder to anybody to this show that China is always bigger than you think it is. Whenever we were doing the Tencent, Alibaba episodes, I would always feel like our numbers are off by an order of magnitude.

David: Yeah. I had to reread those numbers six times to make sure they were right. Of course, they’re estimates, but that’s how big this moment was. Today, 25% of the players on the NBA roster are international today. Even more important than that, probably half, maybe more than half of the next generation of stars are international.

Of course there’s Giannis, the MVP from the past two years. There’s Joel Embiid with the Sixers, there’s Jamal Murray—Canadian, maybe, maybe not—but there’s Jokić on the Nuggets. And then, of course, there’s Luka. We could be redoing another NBA episode in five years and talking about Luka’s MJ.

Ben: That’s a bold call.

David: A bold call for sure, but I can’t think of a more promising young player in the league right now than [...].

Ben: David, you said we weren’t going to make this about basketball. Don’t expose that I don’t know enough about players today to have an informed conversation with you here. This actually probably a good point to tell listeners. If we are talking about the Cavs from 2005–2008, I can have a very informed conversation with you about every little bit of minutia in the league. Outside of that, I am not going to have a player-by-player conversation with you.

I grew up 15 minutes from where Lebron went to high school. I got to watch him play. It was unbelievable when the Cavs got the first pick and then we get to the draft. Being in Cleveland at that time was just an absolutely unbelievable moment. When he came back from the Heat and we won a championship, for a Cleveland fan I get to say that we won a championship in any sport. It’s just a special thing. But I should come clean on my game play knowledge right now.

David: Fair enough. Good point. We’ll tone down the player talk and come back to the business. The net of all that, though, is Forbes estimated that during the 2017–2018 season, there were literally one billion people around the globe who watched the NBA that season. Obviously, the vast majority of those came from outside the US.

We’re going to talk about the NBA’s business and business model in a minute, but right now they still trail the NFL.

Ben: Just say it. They are the third highest revenue US league. That’s the crazy thing about this. You’re talking about this incredible global appeal, this explosion, and all this attention from every corner of the earth, and then don’t make as much as the MLB or the NFL in the US.

David: Totally. We’re just talking about international now. We’re going to talk about technology and unique and compelling content in a minute, but I don’t see any way that 5–10 years from now, the NBA isn’t significantly larger than any other sports league except some of the professional soccer leagues just by virtue of this. You could debate its popularity in the US, but it doesn’t even matter. There are so many more people around the world who watch it than do here. You look at baseball and football. Football especially, just has no appeal outside of the US. That’s going to be a challenging future for it.

Ben: And they’re trying. There was a Seahawks game in London a couple of years ago. I think they’re doing these one-offs. It’s very much a copycat game now of trying to figure out how to execute a global strategy as good as the NBA.

David, I think your call is right. If you want to be a part of the popular sport 5–10 years now, that the world is talking about, you should invest your time in caring about basketball.

David: Or non-American football. But that’s harder to do from the US at least. Okay, that’s international. Now, let’s talk about technology. Like we said, in 1995–1996, the NBA launched their League Pass offering, interestingly not in-house. They went a different route than baseball as we covered the BAMTech.

Ben: They partnered with Turner?

David: Yeah. The NBA partnered with Tuner. Turner still operates League Pass for the NBA, but this is super interesting. Once again the NFL is so screwed. The MLB has mlb.tv, which is its own streaming service. It’s powered by BAMTech. They’re kind of the whole nobody Disney. They’re in a good spot. Baseball as a whole is not in a good spot, but when it comes to technology, they’re in a good spot.

Ben: Did you know that the average age of a baseball fan is 59? The average. That’s not good.

David: No, that’s definitely not good. The average age of the NBA fan?

Ben: 43.

David: 43. And more importantly than that—you may have more detailed stats than me on this—I believe among the 13–17.

Ben: I do.

David: Oh okay, you want me to hold this?

Ben: No. Among 13–17 year olds, the NBA is 57% of their favorite sport. Compare that to the NFL, 13% of them say that’s their favorite sport. And in baseball, 4% of them say that’s their favorite sport.

David: Yet another reason why 5–10 years from now, the picture is going to look very different.

Ben: Yup.

David: Okay, back to technology. MLB may have [...] now, but I believe it’s just the games. Here’s what the NBA’s doing that’s interesting. They don’t own their own technology which is a bit of a liability for them, but it’s not just games that they have on League Pass and NBA TV, they have all sorts of other content, too. They’re basically recreating everything ESPN does in terms of content, highlights, features, behind the scenes, NBA insider, all of these things plus games that you can stream on any device, in any format, in any country in the world with a direct-to-customer over-the-top relationship.

Now again, mediated by Turner, but still that’s pretty powerful. The MLB (as we said) are in a pretty decent spot. I looked into it; I had no idea before doing this research. Do you know what the NFL’s streaming solution is?

Ben: I have no idea.

David: This is ridiculous.

Ben: NFL Sunday Ticket is a really expensive deal that they’ve cut with DIRECTV.

David: Only available on DIRECTV. If you have any other paid TV provider, you can’t get it.

Ben: Yeah. How do I get an NFL Sunday Ticket equivalent if I have cable?

David: Here’s what you do.

Ben: Or if I have nothing and I just have Netflix?

David: I believe it’s called NFL GameDay, I want to say. I may be butchering this, but who cares? You pay them. It’s pretty cheap. I think it’s $99 a year. You get access to streaming every NFL game. Sounds great, really compelling, right?

Ben: So far.

David: There’s one catch. You can only begin streaming the games after the games are over.

Ben: What?

David: Yeah. You can’t stream them live. You want to watch a game live, you got to watch it on broadcast television or on DIRECTV Sunday Ticket. Like, what? How consumer-hostile is that?

Ben: I can understand this in 2001 where the internet hasn’t become prevalent enough since the last time you negotiated a deal. But you didn’t carve out the right to stream your own games on the internet in the last deal that you cut with the networks?

David: Here’s what’s interesting, I actually don’t know, I’m speculating here. They may or may not have the rights. The NFL still is the highest revenue-grossing American Sports League.

Ben: Oh, they make just a truck load of money. They make 10-point-something.

David: I think it’s more like $13–$14 billion, something like that.

Ben: Oh, I’m thinking of their TV deal alone.

David: Yeah, the TV contract. It’s all the TV contract and all their money is coming from these TV contracts and that’s why they have this DIRECTV deal and the broadcast deals. This the thing, this isn’t going to matter going forward.

Ben: They make $13 billion a year compared to the NBA’s $8.8. But they make $6.8 million a year on TV contracts alone nationally compared to the $2.66 from the NBA.

David: Right. And the NFL (of course) still has the highest TV ratings. But this doesn’t matter because the future and younger generations don’t watch TV, aren’t going to consume sports on DIRECTV. They’re going to consume sports the way they consume the NBA, which is on any device at any time, in any location, in any format. The NBA and baseball are just so much better positioned to this. As this happens, all of that TV revenue over time is just going to start to erode, especially now that ESPN and Disney has started to say, hey, yup, streaming is the future.

Ben: We’re putting actually good content on streaming now.

David: Disney+, ESPN+, the writing’s on the wall here. It’s just hard not to see the NFL being dethroned here on the technology front.

The other interesting thing the NBA has done is in July 2019, they also announced a five-year $1.5 billion streaming deal with Tencent in China to stream NBA games in China. They also have a linear TV deal with China television. That’s super interesting; we’ll come back to that. And then, this is lesser in terms of revenue impact but video games and Esports. NBA2K is—I believe by a pretty significant margin—the most streamed sports video game on Twitch. Not the most streamed video game, period, but a video game adaptation of a real world sport. The NBA2K franchise is heads and shoulders (I think) above anybody else. FIFA is up there, but of American sports, certainly 2K is the biggest.

Ben: And the NBA has actually promoted the 2K League to be one of their four major brands. They have the NBA, they have what used to be called the NBA D League that is now the sponsored NBA G League by Gatorade. The WNBA and now the 2K League. Kind of crazy. You go to the NBA’s website, you see their four big brands along the top and one of them is the 2K League.

David: The last piece of this which ties into the unique and compelling content piece is social media. This is another one where. As far ahead the NBA is in these other dimensions versus the other leagues in America, it’s not even a contest.

Ben: David, to elaborate on what this is, I think you’re squinting a little bit to call this the unique and compelling content because you’re trying to put it in Iger’s language. I think if we didn’t have the Disney vision that we wanted to co-opt here—which actually fits pretty darn well—this one should be called empowering the players.

The thing that they’ve done that is a brilliant marketing strategy, that has been a 20-year bet, 30-year bet is to basically bet on the rise of influencers. I think they were 10 years early, but it is massively paying off now. That the other sports leagues do not invest in building the brands of the players. They’re always subordinate to the teams or maybe even the league.

David: It’s not only not invest, they actively discourage.

Ben: Right. What number did you find on the Lebron social media following?

David: I think the important thing to note here—this is really where Stern stayed too long—is this was part of his strategy of empowering the players, making them the stars. But then during the whole dress code and the thug era, he missed the boat. What was happening was this was just the next generation of even more empowerment of the players and with the coming of the social media. Despite the dress code, Lebron is the NBA player with (by far) the most social media followers. He has 119 million followers across Twitter and Instagram.

Ben: Instagram alone, something like 75 million, right?

David: I think it’s like 73 million on Instagram. Just to put that in perspective, that’s more followers than Donald Trump.

Ben: Wow. Holy crap.

David: Whenever you think of him, don’t slouch on the social media influencer department. Lebron literally has more influence than the president.

Ben: In some sense.

David: In some sense. With that it would be even more. That’s Lebron. The NBA accounts—social media accounts themselves, the official NBA accounts—have 80 million followers across Twitter and Instagram. Steph Curry has 45 million, Kobe’s accounts have 35 million, the Air Jordan account has 25 million, and a whole bunch of players have 20–40 million followers.

Ben: How does this compare to other celebrities? I just assume that all these people would have a lot, like high millions or something.

David: Yup. I would assume, too. I don’t actually have a good sense of Taylor Swift, Kanye, like how many followers they have.

Ben: Let’s just do this in the real time?

David: You do that in real time. I’m going to talk about the other leagues to just illustrate what a delta there is here. First, baseball. Baseball is just abysmal. It’s not even worth talking about. The top influencer in baseball is a pitcher for the Mets named Marcus Stroman, who has about 3.5 million followers. The only reason he’s the top influencer is because he’s apparently the only guy who actually posts anything. Bryce Harper has 3 million followers but has only 50 posts across Instagram and Twitter as of a year or so ago. Okay, whatever.

Football’s a little better. This is interesting. If you search the query on Google, top football players on social media, literally all 10 links on the first page of Google are about soccer players. The NFL isn’t anywhere to be found.

Ben: Because the NFL actively suppresses player voices instead of leaning into the idea of go build a brand.

David: 100%. Totally. The top follower account in the NFL, Odell Beckham Jr. has the most with 18 million. Tom Brady, who should be the Lebron of the NFL, has nine million. Cam Newton has five million. It’s just crazy.

Then this leads into, like you’re saying, the bigger piece of—

Ben: By the way, my homework here reveals if you’re thinking about Taylor Swift and Kim Kardashian, you’re past Lebron territory. It’s 140 million on Instagram alone and then 190 million on Instagram alone. What we’re really saying here is the NBA players are participating in the social media revolution and reach—that caliber of entertainment celebrity—and none of the other leagues are participating in the same way.

David: Yup. Nowhere is this better illustrated than the widely divergent reactions between the NFL and the NBA to the Black Lives Matter Movement. Colin Kaepernick’s treatment in the NFL and everything the NBA probably should have done more sooner. But what they’re doing now in the bubble with Black Lives Matter all over the courts—the players talking about it in every interview, all over their social media accounts—the league embracing that and amplifying it is just such a different strategy.

Ben: I don’t know how the call went down to put the Black Lives Matter on the court. I was pretty surprised to tune into a playoff game, doing research for this episode, and see that the only branding on that court other than (maybe) the NBA logo is a massive Black Lives Matter.  shouldn’t be saying they really have the courage of their convictions, but that really is what they’re doing. I think a lot of the times (the NBA in their leadership) it’s almost like they haven’t been the leader, but when their players are clearly reaching out for them to do something, they quickly follow suit.

An example is the protest game when the Milwaukee Bucks decided to go back to the locker room and hey, we’re not going to play this game. It was like 10 minutes or something before the NBA came out and said we’re cancelling this, we’re cancelling the other playoff game, we’re going to reschedule and we’re not going to fight this at all. This is what we’re doing.

I don’t know if that’s their explicit strategy, but the idea of letting the players lead and we will follow on this stuff. The fact that we will follow, we’re not going to fight on it, I just think it’s the right thing for the league to be doing. It feels like their place.

David: Totally. This one I think is really interesting from a business standpoint and is fun to talk about on Acquired. I agree and totally think it’s the right thing morally and in terms of being a leader or even just not a laggard to do. But it’s also good business. It's a really interesting strategy because what does this mean? You could be like, oh okay, social media. I guess that means something.

Just one small example. The NBA is the first US league to let a team sell advertising slots on player’s jerseys. Every time Lebron posts something on Instagram where he’s in his Lakers jerseys that Wish has sponsored, well guess what? That’s a new ad impression for Wish. Lebron has 120 million followers. Wish paid the Lakers $30 million for that ad sponsorship. That’s even pop-up level above that. Take a player like Luka. Potentially, the next great super superstar in the league or even Giannis who already is a two-time MVP in the league. How old is Giannis? I think he’s like 26?

Ben: Dude, I just wanted in on the whole diatribe about how. I don’t know.

David: Okay, fine. Ben doesn’t know. That’s the moral of the story. Anyway, they post something, kids in this 13–17 year old demographic follow him. Boom! What did the NBA just get? They just got a new fan for life, who they’re going to monetize for decades. This is a really good strategy to allow the players to have their own presence and amplify it like this.

Ben: Yup, completely agree. I also want to say on the Coronavirus shutdown, I mark my calendar by March 11th when the NBA cancelled the rest of their season. I don’t think they knew that they were playing this leadership role. But where we have a lack of leadership in our society right now, I definitely mark my calendar by March 11th. The shutdown started because in a lot of ways, the NBA gave the United States public permission to say, okay, this is serious enough right now. If the NBA is not playing, I’m changing my life.

David: Yeah. It was a wake-up call for sure.

Ben: There is definitely an amount of societal leadership that they didn’t ask for and they’re not necessarily the best stewards of. But they seem to be doing a bang-up job with the attention that they have. Not to mention they are the only sports team to responsibly implement a way to play their sport and run their business (I think) profitably during this era, in executing really well on the Disney bubble.

David: At least safely. Every other sports league professional and collegiate (I think) that has not taken a bubble approach has had Coronavirus cases, which duh. That pretty much brings us to the end of the modern day today. One last coda that we would be remiss if we didn’t talk about is really interesting drama that we’ll see how plays out in the coming years. That’s back to China and this tension between these two elements.

On the one hand, you’ve got these three plus technology bullets, technology aside for a minute. These two massive forces drive the NBA of internationalization and letting the players be the stars and have their own voices. China is right in the middle of this.

Ben: David, have your own voices does not sound like a platform that the Chinese Communist Party would like.

David: Right. Last fall, as most listeners probably know, Daryl Morey who’s the GM of the Rockets posted a tweet in support of the Hong Kong protest.

Ben: Fight for Freedom. Stand with Hong Kong.

David: Yeah. To say that that caused an issue would be an understatement. The season hadn’t yet started. The NBA was scheduled to play two pre-season games in China. The Chinese Government Communist Party postponed those games. China television dropped NBA programming. I don’t know what happened with the Tencent streaming deal, but I believed that might have been paused or at least delayed as well.

Ben: There was some hiccup there.

David: Hiccup there. Adam Silver—in the terms of economic impact—estimated that the league lost $400 million in revenue as a result of this.

Ben: It could have been tens of billions of future revenue. Or still maybe.

David: Right. It was still maybe. Even more importantly, though, it put Silver and the league in this unwinnable situation of they either could call out Morey and the Chinese Government wanted him to be fired for this tweet or they could support him. It’s like either way you’re going to win and you’re going to lose.

Ben: Their two strategies are directly at odds, like hey, we want to empower you to have your own voice, speak your mind, build your own brand, build your own following, and let the NBA trickle through your brand. Also, we want to be huge in China. What happens when you have this conflict of somebody who has some kind of disagreement with the Chinese government and they have their own voice? Your two guiding principles have just smashed up against each other.

David: Yeah. Ultimately, Silver and the NBA did side with Morey and the freedom of voices of NBA players, coaches, and participants.

Ben: Sort of.

David: Somewhat sort of.

Ben: Silver apologized twice and said he disagree with the sentiment twice, and Daryl Morey deleted the tweet. But I guess they sided with him in the fact that they didn’t fire him.

David: That happened initially. And then, after people were like, excuse me guys, Silver did issue a statement. Kind of trying to be the diplomat here, but siding with Morey. He says, “It is inevitable that people around the world—including from America and China—will have different viewpoints over different issues. It is not the role of the NBA to adjudicate those differences. However, the NBA will not put itself in a position of regulating what players, employees, and team owners say or will not say on these issues. We simply could not operate that way.” Which to me sounds like a pretty strong statement of like, no, priority number one is…

Ben: We’ll send a suggestion email to everyone tonight letting them know they should probably not do this again.

David: Please think hard before you do this.

Ben: All of us are at risk when you do that.

David: Totally. The super interesting coda at all of this, though, is guess who is currently the president of the Chinese Basketball Association? Now the Chinese Basketball Association is a very interesting organization. It’s the equivalent of both USA basketball and the NBA. It runs the international competition and the whole development of basketball—

Ben: It’s how China would do the NBA. It’s the government.

David: Exactly. And it’s a professional league with teams and competition. The current president of the CBA is Yao Ming. And Yao’s last two years with the Rockets who was the GM, Daryl Morey.

Ben: Wow. That’s amazing.

David: Isn’t that amazing? There’s a lot more and probably years worth of more events and things to happen and evolve on this front also going to be very impacted by US-China relations as a whole, what happens with TikTok and everything. But there is a lot of hope here. People believe if anybody can broker peace here, it’s Yao and the NBA. Not that Morey is involved at this level, but Yao has a very, very close relationship with Silver and with Stern before Stern passed away, and with the NBA as a whole.

Ben: Should we go into power and into exploring the business model of the NBA today?

David: Yeah. Let’s do it.

Ben: All right. Before we dive into that, we want to thank Bamboo, the official sponsor of the analysis of season seven. Bamboo is one of the top growth marketing firms in tech. They’ve supported world class growth programs for startups like AllTrails, Peloton, friends of the show, rover.com, and many more. Whether it’s paid search, paid social creative production, attribution, or product analytics, Bamboo services always have the same objectives in mind. Helping tech companies earn growth marketing budgets back faster and retain customers longer.

Trust me, they’re good people. I know them. We’ve been thinking more and more about sponsorship on the show and we’re super lucky to so often get to work with people that we know personally and trust, and that’s Bamboo for us. If you’re a startup with a multimillion-dollar growth target ahead or you’re already a big and successful company looking to just invest your growth budget smarter, our friends at Bamboo will make a great extension to your growth team. You can click the link in the show notes or go to growwithbamboo.com to learn more.

David: Thank you Bamboo. Great folks.

Ben: Indeed. For folks who are new to the show, if this wasn’t an acquisition episode, then we would be talking about an acquisition category here and trying to define why they bought the company. That’s not the case in this episode and we can look no further than our friend on the show, Hamilton Helmer and author of Seven Powers, to try and figure out what gives the NBA power as a business. To review, he’s got these seven—as you can guess from the book—counter-positioning, scale economies, switching cost, network economies, branding, process power, or cornered resource. We’re going to evaluate which of those the NBA has and in what ways it comes from those.

Before we can do that, we should probably talk about where the NBA’s revenue comes from and how much of it they do. We talked earlier about the fact that this is an enterprise—and enterprise might be the wrong word—the NBA as an association grosses $8.8 billion a year in revenue. David, just ludicrous, thinking about some of the numbers that we were talking about earlier, and now we’re in this billion-dollar category for the league.

It’s almost like looking at an Amazon stock chart where all the growth happened in the last few years and it’s like everything before that for the last decades didn’t matter.

David: It looks flat because you’re looking down from such a high mountain top.

Ben: A funny thing about exponential charts is it’s flat until it’s vertical.

David: Yeah.

Ben: But where does this money come from? David, I’ll kick it over to you before we assign numbers to it, to talk about the two unique structural things with the NBA in the collective bargaining agreement and in the salary cap.

David: We already touched on one of them, which is the revenue sharing with the players. Within the collective bargaining agreement, every 5–10 years, it gets renegotiated. But mostly since 1983, right around 50% of the revenue has been contractually going to players. Bill Simmons or somebody should do a whole episode on how the salary cap works.

Ben: But in principle, how does it work?

David: In principle, there are caps on the amount that a team can pay in total salary cost for all their players and that individual players can earn. It’s designed to both create some parity within the league, create not parity but some degree of parity within a team. It’s not like Lebron is making 90% of the payroll of the Lakers.

Ben: Right. Importantly to know, this salary cap, because it’s tied to that 50% the league figures out how much money we’re going to make and then they back in to what is 50% of that and then what is that if we distribute it, cut it by 30. This year, the cap is said at right around $109 million. Of course, as you’d expect, some people are going to want to go above that. How does that work? You can go above that, but then you pay a luxury tax back to the league if you do go above that. There’s somebody that’s up at $150 million in payroll. It’s a soft cap, that’s the takeaway here.

David: But that leads into the other interesting aspect of the NBA, is there’s a revenue sharing agreement amongst the teams. The luxury tax, the salary cap is related to this, but basically the way it works—with a lot of nuance—is that every team pays into the league pool, roughly 50% of their annual revenue.

Ben: Of their basketball revenue.

David: Of their basketball-related revenue.

Ben: Basketball-related income.

David: Basketball-related income, which basically covers all the major buckets that Ben and I are going into. For a big market team like the Lakers, Warriors, or the Nicks, that total revenue is obviously going to be much higher than the smaller market teams. But every team pays in 50% whatever their revenue is, and then it gets redistributed out to the rest of the teams equally.

Along with the salary cap, the second mechanism that ensures some semblance of parity within the league and allows teams like the Maverick—not the Dallas; it’s a small market—Spurs—Spurs are a great example—or the Bucks, or relatively smaller market teams to remain competitive with the Lakers and the Warriors. I’m not even going to say the Nicks because that’s ridiculous, but the Celtics.

Ben: Yeah, it’s interesting. Keep in mind, all these owners are running their own individual fiefdoms. They have no ownership in other people’s teams. They have no ownership in the league. It really is this sort of prisoner’s dilemma situation. Also, every owner is this fierce capitalist. All these people are private equity and tech billionaires.

David: Literally, [...] is one of the co-owners of the Warriors.

Ben: The situation is how do I maximize my own personal wealth? Over the years, they’ve decided that the way to do that is by creating the most competitive situation possible across the whole league and by doing this really unbelievably large revenue share. The fact that half of all of their basketball related income revenue goes to re-spread around to everyone else. Imagine any business where you did that with your direct competitors.

David: Yeah, Facebook and Twitter had to do that.

Ben: Yes, ludicrous.

David: It is the same analogy. Facebook and Twitter said, hey, it’d be better for both of us if the social media ecosystem had more parity. We’re going to share our revenue like this.

Ben: Yeah, it’s wild. Get cuts at this continued question of, what is the NBA? Are the teams competitors or not? And the answer is gray. It’s just a big [...] gray area, but the strategy for them of paying revenue into a big pool and redistributing around has worked tremendously well. How does that break down? Of this $8.8 billion that they make per year, the most widely publicized number that we know for sure is that the league, being an association and having contractual relationships with all the teams has negotiated a bulk deal—approximately half with the ESPN and half with TNT—to pull an about $2.6 billion a year to broadcast the games on ESPN and TNT.

David: That’s for the national TV rights?

Ben: Exactly. That leaves the local TV rights for any given team, which I think there are about a thousand games across all the teams that are not sold as part of the national package—82 games they all play each other. I think there is about $100–$200 million that each team makes on their own just from that—depending on what market they’re in—local TV contract.

Best estimates are that’s roughly equivalent, basically think about $5 billion of that $8.8 probably comes from these TV contracts, both the national collectively-negotiated level and the somewhat individual team level.

David: What’s really interesting that we don’t know is whether the League Pass revenue is part of that with the Turner deal or if it’s separate.

Ben: Yeah, it’s a great question. Well, let’s keep going and then we can know by process of elimination. Another thing that we know for sure is that a little over a billion dollars a year is made from licensing and merchandising. Again, much like the national TV deal, the league has contractual rights with all the teams. They enter into these licensing agreements on behalf of all the teams and they share equally among all the teams. Whether you’re the Lakers selling Lebron jerseys or you’re the Bucks selling your bench players’ jerseys, all of those get paid into the same pool, which I also found was fascinating.

David: That deal is with Nike.

Ben: Yes. The Nike deal alone is worth $125 million a year. But all the other licensing that they do in total sums to about a billion dollars a year.

David: Hats, whatever other merchandise.

Ben: Yeah. Fun fact on the Nike deal. When the NBA started the patch program—the patch sponsor, Wish, for the Lakers that everybody gets tab on there—in addition to that, the jersey sponsor gets to have a logo. You have the paid sponsor on one side and Nike on the other. For the Nike one, every team has the Nike Swoosh except for the Charlotte Hornets (formerly the Charlotte Bobcats) because Jordan is the owner so it has the Jordan logo on it.

David: The jump man.

Ben: I think that is just freaking perfect.

David: So on point.

Ben: Yup. It’s also worth knowing, this jersey patch program brings in anywhere from $10–$30 million per team per year. For anybody who’s got an ad budget and you’re thinking about CPMs, it’s just really fascinating for me to think about, would you pay $15 million, $20 million to have that real estate? I really wonder, how does the NBA message what that real estate is worth? I think individual teams sell that, not the NBA at large.

David: Yes, those are sold by individual teams.

Ben: Yeah. In the same way that the individual teams are allowed to sell the rights to their arena, or I guess whoever owns the arena is allowed to sell the rights to the arena. It’s negotiated that way. That of course leaves one more huge pillar which is tickets. Our best estimates are $1-$2 billion a year. Obviously got crushed this year from ending the season early and then playing the whole thing in a bubble with no fans. But that’s the three major pillars of NBA revenue.

There’s another additional $500 million a year that comes in from China, largely from streaming. That pillar will only grow in future years. The other one that will certainly grow very quickly is when the national TV deal that’s $2.6 billion a year expires in 2024 or 2025. Best estimates are that it will at least double. When we compare this to the NFL that generates $13 billion compared to the NBA’s $8.8, or major league baseball that generates about $10 billion a year, it is a little staggering how broad the reach of the NBA is but how behind they are in monetization. I think all of the teams that we’ve talked about up to this point put them in those really nice places to lean hard into the value capture here in the next several years.

David: Yeah, and also probably start increasing their monetization rates for media rate deals, both streaming and linear television outside the US. There’s obviously China, which is its whole thing, but there’s Europe, there’s Africa, there is the rest of Asia. The NBA is hugely popular in all of these places.

Ben: Actually, before now naming the powers, I want to talk about another spreadsheet that I made which was basically analyzing the names of all of the arenas. It always really bothered me that we switched from really great names like The Garden, The Palace, I don’t know if this is an NBA, The Coliseum, to now, I hesitate to even say the name out loud.

David: Oracle Arena.

Ben: That one is not that offensive for some reason to me. But you look at Pfizer Forum or the AT&T Center, or Talking Stick Resort Arena—that one always cracks me up.

David: Is that The Suns?

Ben: Yes. You know what the Talking Stick Resort is?

David: Is it a casino?

Ben: Yeah. Here is a funny thing. You look at all 30 of these arenas. Almost all of them can be categorized as a bank. You’ve got Berkeley’s Capital One, Chase, Pfizer, Golden One, Rocket Mortgage, Scotia Bank—I think I said that right—TV Garden, it goes on. An airline; you have American Airlines Arena. You have American Airline Center. American Airline shelled out twice for arena naming rights. Is that right? Miami and Dallas?

David: I think so.

Ben: I should have done my research before, but I’m clicking through this Wikipedia page now in real time to verify that. That is just insane that that is true. A bank, an airline, an insurance company, cable, or telecom. My last category here is sugar water. You got Pepsi Center and Smoothie King Center. The vast, vast majority of these arenas are named after pure commodities that have no way to compete in their business other than to differentiate on brand.

What they have to do is pour these brand dollars into making their actuarial tables in the case of insurance companies or interest rates appear somehow differentiated to consumers than their competitors. This seems to be the popular way to do it. I think the only NBA arenas that are not one of these pure commodities are pyramid schemes and casinos.

David: Amazing. In which category do you put Oracle? It depends if this TikTok deal goes through or not.

Ben: Yeah. I think Oracle Arena (I suppose) is one of the ones. It depends. Is cloud hosting a pure commodity? I think that probably stands out as a third exception, but we’ll have to see over time.

David: Great analysis.

Ben: That’s my analysis of why all of these arenas have such freaking uninspiring names.

All right, power. Why is the NBA a good business? Specifically, why is it so freaking profitable and why will it continue to get more profitable as time goes on? David, give me your stat here.

David: This is interesting. There are a few dimensions to look at this. One, this is actually outside of power itself and it’s more just like being a first or a best mover—execution wise—on a market with international expansion. A huge amount of the value creation in the NBA has been international expansion over the past decade plus. They’ve just executed on that way better than the other American sports leagues. But I don’t think that in and of itself is power in Hamilton sense.

If you think about power, you can think of it in two dimensions. The less interesting one is power versus other forms of basketball, of which there is the NCAA, the Chinese Basketball Association and plenty others. I think the power there is a cornered resource where they have the best players that play in the league. If you want to see the premiere marquee players, you got to watch the NBA.

Ben: That’s my number one, but I have it on a much more fundamental level. There exists an asset called professional basketball or called the game of basketball. It’s a product with product/market fit with fans because it’s a thing that’s fun to watch. They seem to have a monopoly on it. They have cornered that resource in America. They are the only people who can deliver that product at a professional level to consumers.

David: Yup. Now, there is the NCAA, which is a competitor to that, but it’s nuanced. It’s more of a coopetition. Right?

Ben: Right. Also, I’m going to go on the record. They are professionals. We should be paying them.

David: 100%. I cut this from the script because this episode is already too long.

Ben: This episode is longer than the NBA Playoffs.

David: Yes, it is. I found out the history of the NCAA. Teddy Roosevelt was actually the one. He didn’t create it, but in 1905—I’m dead serious here—Teddy Roosevelt pressured colleges to create the NCAA to regulate football because too many people were getting hurt and dying playing football. That’s the origins of it.

In my mind, it’s the most awful, corrupt, worst organization out there. It’s so ridiculous. These college athletes are professional athletes, full stop. They are being monetized, their labor is being exploited.

Ben: When do we get to find one of these things we disagree on? Because we’re just straight up in the same boat over and over and over again on these.

David: I love it.

Ben: Before we move on to other power, on corner resource. Why can’t something like the ABA happen today to threaten the NBA and force a buyout?

David: Oh, interesting. Certainly, one part of it is just cornered resource on real estate, with the exception of Seattle and maybe one or two others. What cities in North America—Vancouver probably; could also just be served by Seattle—could support and deserve a professional basketball team and don’t already have one that’s served by the NBA? As a competitor league, you’d have to be mostly going into cities that they’re already existing NBA teams in and that’s an uphill battle.

Ben: Right, and you’d have to fight them in a counter position way. You’d have to be like the XFL and be like, we’re providing this sport. The existing league would have to destroy themselves trying to match us and they wouldn’t do that to their massive revenue line.

David: That just makes me think. By the way, there is a massive counter-positioning opportunity for a new professional baseball league right now.

Ben: Baseball, but over in a half hour.

David: Yeah. There’s a model for this, which is Indian Premier League Cricket. You and probably many listeners have never watched an IPL game. Probably a lot of our listeners have. I have. It’s awesome. I love the IPL. It’s so compelling. They took Cricket which was deader than baseball, added insane fireworks, crazy crowds, and crazy rules. Actually, in terms of global viewership, IPL is on par with the NBA.

Ben: Woah.

David: That’s huge. Also streamed free on Twitch.

Ben: Ah, interesting.

David: Anyway, that’s a digression. I have another interesting lens to look at power though that I think this episode has brought out, which is what about relative to the other sports leagues? What's the NBA's real competition? It’s the NFL, Major League Baseball, Premier League Soccer, Indian Premier League.

Ben: Increasingly the MLS.

David: Yup. Increasingly the MLS. What—if any—power does the NBA have relative to that competition? I’m not sure it has a ton. Thinking about this strategy of making the players the stars, that could start to introduce—probably already has started to introduce—an element of a network economy power where if your players have much larger and much more engaged social media followings and are relatively happy and evangelizing the sport, then they’re going to be winning and converting fans (and especially younger fans) at a higher rate than leagues that don’t have that. As time goes by—I think you’re seeing this with the NBA—you end up in a situation where young people in America, would you say 57% their favorite league is the NBA?

Ben: Yup.

David: That’s insane. And what—4% for baseball? 13% for the NFL?

Ben: Let’s see if you nailed that. You nailed that exactly. Good memory.

David: Wow. That is the biggest thing. If I’m the NFL or the MLB, I am terrified right now. I’m basically looking at game over in 10–20 years.

Ben: What are they really competing for? Ultimately, things come down to dollars. Obviously, they’re competing for attention share. Are the NBA and call it NFL going after the same contract dollars for the broadcast rates? I think they actually are. Because if you look at it this way, there’s an arbitrage opportunity available for the network to go and buy the rights to broadcast something at some price because they feel that they can get more advertising dollars out of those rights than anybody else because of some way that they’re uniquely positioned. They have a certain amount of money to spend securing rights.

David: Yup. Which is a fixed pool.

Ben: Right. And that is the biggest source of revenue for any of these leagues.

David: Right. One way or another, all of these revenue streams are attention-based revenue streams. Either advertising or ticket sales. You’re monetizing the attention of consumers, both US and global. That’s a fixed pool. The amount of dollars that are willing to sponsor that attention is also a fixed pool.

Again, it’s very much a competition between the leagues.

Ben: The only other big one that I had was scale economies for a bunch of reasons. But you can’t compete with the NBA without first getting to scale. Between starting your business and getting to NBA scale in order to negotiate the types of contracts that they have, in order to attract the types of players they have, it’s just really hard to imagine what the laddering up strategy is there. The fact that they have scale enables them to do the collective bargaining and group negotiating that they do as a league. I just can’t imagine being an upstart fighting against that.

David: Totally. The only league that has a chance is the CBA (Chinese Basketball Association). Six hundred million basketball fans in China. Before last fall, I think probably the strategy of the CBA—set by both Yao and the party—was to partner with the NBA. Yao actually talked about. Yao and Adam Silver talked about; they’d love a future where the champion of the CBA is playing the winner of the NBA finals every year in a global championship. But now, is that what they want? Or do they actually want to try and build the CBA up into its own big competitor?

Ben: Yeah, it’s a good question. You want to go to playbook?

David: Yeah. Let’s move on to playbook.

Ben: The way I want to frame playbook—there’s a lot of directions we could go here—is let’s say I bought any given NBA franchise in 2010 and I now have had a 6X return in 10 years on my investment. What is it that the NBA did and what seeds did they plant in the last 30 that have led to this dramatic increase in value? What’s the playbook they executed to do that?

David: To me it’s the three things we kept harping on that are basically with some fudging on the first one—the Disney playbook of content—i.e., the players be the stars, internationalization, and technology.

Ben: Yup. I think that’s a good way to sum it up. I have some others that are little offshoots from that that we’ve discussed, but I think it’s worth tying a bow on them. I think they made very intentional decisions to attract young fans. That investment, like the extent that anything is valued as the discount of future cash flows, there’s just a lot more years in the future in the average age of the NBA fan versus the average age of the lifespan of a human who likes the MLB. Literally, the number of years of future cash flow that you can pull forward to today to do an evaluation, it’s an easy way to make the value go up, expand the number of years.

The other big one (I think)—I can’t figure out if this was intentional or not—the NBA franchises have managed to attract a younger and much more tech- and business-savvy group of owners. I mentioned before that 16 are tech VC or PE, people who made their money in those ways and lots of entrepreneurs.

David: That’s half the league.

Ben: Yeah. Very few inherited family money. I know this is going to sound old, but it’s relatively young compared to other leagues, the average age of an owner is 65 years old. It has people as young as Robert Pera who started Ubiquiti. He is only 42 years old now and was 35 when he bought the team.

David: We got to catch up, get the Acquired NBA franchise on.

Ben: Totally. You have this for whatever reason, when you compare it to the NFL ownership groups that seemingly get passed down from generation to generation, that are a lot of inherited wealth.

David: Like the Steinbrenners.

Ben: Yeah, exactly. And a much more old stodgy ownership group. There has sort of been the self-fulfilling prophecy in the NBA being willing to be more experimental because the commissioner has more leash from the board of the governors who is elected by the ownership group, and the ownership group themselves have been entrepreneurs and are younger.

I think there is just a lot to following the incentives and the people who ultimately have control over the owners. Even if they are not the most progressive group, when you compare them to other leagues, a lot of the things that the NBA has been able to do is because the owners are okay with it.

David: Totally.

Ben: That were the only two additional playbook items I want to call up.

David: Great.

Ben: All right. Now, before we go into our grading section, we’d like to thank Perkins Coie, the official legal sponsor of all of season seven of Acquired. Today we have a little Q&A with Stewart Landefeld, a partner and the past chair of the entire corporate practice at the firm. Stewart actually has some personal experience in sports law at the highest levels and he was part of the team in 1991 that saved the Mariners in Seattle as legal counsel. The team was inches away from moving to St. Petersburg, Florida and the ownership group that Stewart helped put together came in at the last minute to keep the team here. Stewart, what’s something that you have come to realize about the NBA as a business that most people wouldn’t realize?

Stewart: It’s more a way of thinking about the NBA and thinking about the sports leagues. For sports teams, they’re galvanizing in wonderful sources of pride or sometimes frustration. For players and everybody who worked for the league, it’s a fantastic and really exciting career. But as a business, it is a magic content creation machine. It just is amazing. Just every day, the NBA is creating content, action on the hardwood that the people just want to see, they want to be part of, it just is magical.

Just think of the amount of time that Netflix or another major studio put into creating content. I think, Ben, just the amount of effort that you put in creating content in your great podcast, the NBA, it has teams out there creating content every day—pre-season, regular season, post-season—that people really want. From a business perspective, that’s the way that I’ve come to look at the NBA and other major league sports teams, that they are magic content creation machines.

Ben: Love that lens. Thanks so much for joining us.

Stewart: Thank you. Thanks, Ben, for doing this.

Ben: To learn more, visit them at perkinscoie.com or click the link in the show notes. Thank you so much for being our sponsor this season. All right, David, take us into grading.

David: All right, grading. For this one, it’s interesting. You’d think when we’re starting, literally for 130 years in the past we could render it great on this one. But we talked about it before and I think the more interesting thing, are we going to grade the NBA over its existence? For sure. They went from the underdog to this incredible position. I think the more interesting question is, do what we do with companies that are looking at more real time of what are the scenarios where there’s an A, middle of the road C, C-, or an F over the next five years for execution for the NBA, because I think it really is at a major crossroads here. I can paint scenarios for all of them. That sounds good to you, Ben?

Ben: Yeah, let’s do it. Let’s start with the F. How could this not pay off?

David: I think the way that this really goes off the rails, which was hard to see before doing the episode, but could be a real scenario is China becomes a disaster scenario here. US-China relations continue to deteriorate, which is outside of the NBA’s hands. But both are so important to the NBA, all of those basketball fans there. Not just fans, but there hasn’t been a lot of Chinese talent coming into the NBA after Yao. There’s so much latent talent there, especially now that Yao is running the CBA is going to get developed within China.

Where is that talent got to go? Is it going to come to the NBA? Is it going to go to the CBA? If that talent goes to CBA and China continues to crack down on the NBA and other American businesses, that’s the only viable competitor scenario I see for the NBA being started and maybe overtaking the NBA overtime.

Ben: Yeah. Even if they don’t necessarily attract the US audience like they could attract other non-US countries who become huge fans, they may do a great job actually marketing to the US and figure out a TikTok-like situation for it to be an amazing US product developed and owned in China.

David: I think that’s what’s interesting about doing this episode. I’ve come to realize, yes, just like with Facebook and social networks and lots of other businesses we cover on this show, the US audience has the NBA monetizes at a much higher rate than the international audience right now. But that’s going to continue changing over the time.

Just purely in terms of numbers, the US doesn’t really matter. If a billion people watched the NBA last year, how many of those were Americans? 10%? 15%? Yeah, it would hurt if that went away. The vast majority is non-US. If China captures that, that’s terrible for the NBA.

Ben: It’s worth calling out that the value of these teams effectively comes from three things. The future growth from international, the future growth from youth spending at the level that you expect them to spend and continuing to be NBA fans. What we haven’t talked about is beachfront property, where owning an NBA team is incredibly scarce. It’s unlikely that they’d be competing for the same set of billionaires to buy the teams, but if you 30, 40, 50 new pieces of beachfront property when there really only have been 150 total available to US team purchasers.

David: Yeah, across all the sports leagues.

Ben: Right. The intrinsic value—whatever anyone is willing to pay for it—but you look at a team that’s worth $4–$5 billion. A lot of that comes from the fact that there is only one New York Nicks.

David: It’s like real estate. Look no further than Ballmer and the Clippers. Ballmer was hellbent determined to own an NBA team no matter what. He was going to pay whatever it took.

Ben: And him paying $2 billion ended up actually being a momentum trade and making every other team including his own more valuable after he set the new high watermark.

David: Yeah, totally.

Ben: So that’s the F, it’s international. To specifically call it out, it’s their strategy of letting anybody have their own voice being directly in conflict or at least proving to China that it could be in direct conflict in the future and they shouldn’t put too many eggs in the NBA basket.

David: That can coexist. And then, the next Giannis, Luka, Joel Embiid, they’re going to play in the CBA not in the NBA.

Ben: Yup. I think that’s a good way to flag. I don’t totally understand the profitability of each team. I know there are some handful of teams that aren’t profitable, the vast majority are, and there are some teams that are crazy profitable. I do wonder if there’s some situation where because you’re paying the players so much, the question is, is there rising costs on the team ownership side where it can cause some teams to crumble and owners to not be willing to continue floating the teams? The good news is the NBA is actually in a better position than any other for that with all the revenue sharing.

David: The revenue sharing and the collective bargaining agreement. I don’t know, I’m sure you can make arguments on both sides, but it feels to me like it’s pretty fair with the players. It’s based on revenue. As revenue grows, it gets shared between the owners and the players. The players get 50%. Great, it’s locked in. I guess there’s a risk in the next round of negotiations. The players have so much leverage, they end up demanding 70% or something.

Ben: Take all the Instagram followers, man.

David: Right. They have Instagram followers. That NBA account has 80 million. Clearly, the answer is the owners need to become influencers, too, just like you, Ben.

Ben: Yeah. Because the C scenario is boring, what’s the A+ scenario?

David: Okay, A+ scenario, they land the plane with China. Yao, Adam Silver, and Lebron have a love fest and at some brave date in the future, there is a world championship played between the CBA and the NBA. That $1.5 billion deal with Tencent for streaming in China and goes to a $15 billion deal for streaming in China. That’s one element.

The next element is, where we’re talking about Lebron, Steph, the NBA accounts and their influencer followings, the up-level again to Kim Kardashian, Kanye West, Taylor Swift territory, which you got to feel like that’s going to happen both for them and for the next generation. I don’t see that not happening.

Ben: I’ve been trying to figure out. I just listened to this great podcast episode from 2018 with Steph Curry on The Bill Simmons Podcast. Steph’s talking about just how incredibly demanding the NBA schedule is in playing 82 games and how hard it is on the body. People have talked about a 70 game season to lighten the load on the players a little bit and increase longevity. I do wonder if not that but something like that happens that enables the players to do more outside the game rather than solely being focused on the game so that they can be more personalities and less like players who have the opportunity to be personalities during the off season and then retirement. To truly get to Kanye level, you need to be able to have some spare cycles to be Kanye.

David: I actually think this is going to happen naturally. Lebron’s probably going to retire within the next five years, right?

Ben: Yeah. For sure.

David: No doubt. He’ll win another championship or two and hang it up. Lebron full time focused on Lebron and his businesses, watch out. Every successful generation we’ve seen this. Jordan did it best. But then Kobe, Shaq, these guys post retirement, Charles Barkley, they’re building their presence. But Lebron, Steph, these guys, when they retire, social media native, they’re going to take it up to a whole nother level.

Ben: I think that’s the right take. I think the last thing I would say is, based on valuations, a lot of this stuff has to go right in order to justify some of the prices that these owners have paid. If you look at the average MLB price of a team, it’s about 5½X their revenue. The NFL has a premium to that and it’s about 6⅓. The NBA ranges anywhere from 7–14 times their revenue for the price of a team. I would say the owners are as bullish as you are, David, on the future of the league and of owning these assets. A+ is a little baked in at this point.

David: Yeah. That’s interesting. In and of itself is the A+ already priced in. Man, you need a lot more than that to get a real A+.

Ben: It just doesn’t fit into the normal Acquired paradigm. There is no A+ situation (frankly) of going and buying a team for $4 billion now and figuring out what you could sell it for at some point. I know the team prices has 6X’ed in the last 10 years. They were way underpriced before. Now, they’re [...] market overpriced.

David: Say you buy a team for $4 billion. Are you going to get $40 billion for that at some point? That does seem like a stretch.

Ben: I don’t think the intrinsic value of these assets compounds like technology compounds.

David: Yeah, it’s more like real estate. You know what it’s like? This is like Seattle real estate. It was vastly under-appraised.

Ben: It was a tracer for Amazon stock for a while until everyone realized actually it’s real estate not a tech company.

David: Yup. But that appreciation happened because from 2009–2010 until 2016–2017, people are still valuing Seattle real estate like back when Amazon was 5000 people in one building.

Ben: It was way underpriced then. And then the market corrected and now it’s at a sane rate again. It seems like the NBA teams will probably be that. Let’s revisit this in five years and figure out if we’re going to eat those words.

David: Totally. Okay, that feels like a great place to wrap.

Ben: Yup. Carve outs?

David: Carve outs. Let’s do it. I have a very exciting one on today's show which is a new podcast called Just Raised that has been started by Acquired listener and friend of the show Joe Sweeny. So excited for it. It’s already great. He’s four episodes in. So proud of Joe for starting this. It’s a podcast with founders who literally just raised their seed or series A. They tell their stories about how their As, what the company is, what their needs are, what they’re hiring for, what their story is. And he’s had some amazing founders.

The most recent episode is with Phil Libin and his new company. But of course, Phil has a long history of the original Evernote founder and CEO, and just a wildly entertaining human. Go check it out.

Ben: I remember when there was a twinkle in Joe’s eye on an LP call that we had a few months back. There is nothing cooler for David and I than someone got an LP call or in the Slack or something, spitballing a project that they want to do and then seeing it come to life.

David: We need to start doing this again. We didn’t do it on the last one, but we had pitches that anybody could pitch an idea or ask for feedback at the end of an LP call. Joe piped up and said he had this idea for a podcast. So cool to see it out there in the wild.

Ben: I love it. Mine is something from a couple of years ago that may not be relevant to you now because I don’t think it’s open now in the Coronavirus era but hopefully will in the future. I was thinking I must have done this as a carve out at some point. When I realized I hadn’t I was like, I have to talk about this at the show. David, do you ever recall me telling you about Meow Wolf?

David: No. You told me about a lot of things, but I don’t recall this one.

Ben: This is an experience in Santa Fe. It is the craziest art exhibit, full immersive experience Disneyland, Chuck E. Cheese combination you could possibly imagine.

David: Is Nolan Bushnell involved?

Ben: Close. It is actually bankrolled by George R.R. Martin.

David: No way.

Ben: It started as a little artist collective of these crazy experimental people who kept making wilder, wilder art experiences in Santa Fe that you could wander around in. It wasn’t a business in any way. It’s just this crazy group of artists. It functioned leaderlessly, and then there’s one guy who rose up to become the leader, started structuring a little bit more, and they started being able to raise money for their projects they were doing. They made pirate ships and they did all sorts of stuff.

He came with this really crazy one for basically like an alien invasion experience that’s kind of a mystery. They said, we want to fill this whole empty space we found that’s an abandoned bowling alley. They pitched a bunch of people and they eventually got George R.R. Martin to fund it. It is just this nutty experience that you’d go and walk. You can spend eight hours here trying to figure out all the clues, to just explore the whole thing.

David: Is it like a horror experience? Or like a mystery or escape room type thing?

Ben: No, nothing really jumps out at you. Kind of escape roomy. There’s lots of people in it. There are weird things that happen. You’re in a house and it’s a dining room, but actually then you realize the ceiling is warped and then you realize that it seems like something might be falling through the ceiling. Then you realize every once in a while that TV flickers. Why is that TV flickering? You’re in the experience of a paranormal thing happening in this world. There’s no recognizable sign.

David: Sounds like Disney World Haunted Mansion or Twilight Tower.

Ben: Yeah. But self-directed.

David: Love it.

Ben: The cool thing that you can do now if this sounds interesting to you, is there’s a documentary that we’ll link in the show notes that they made called Origin Story of Meow Wolf tracing them all the way from a group of crazy indie artist colony to really what their ambitions are at this point is to become the next Disney. They’ve talked about this. They’re like, we want to be real business. We want to start a billion dollar thing. We want to create all these really interesting IP and experiences. I don’t know if they still are with the COVID, but they were building out experiences in Vegas and I think maybe Denver, second and third locations.

For anybody who has been there, you are definitely nodding your head right now and being oh my God, I forgot about that. That was so cool, crazy. It’s really frankly hard to describe. You could get a sense for it by going to their website because it’s trippy. I could go on for a long time about this, but check out their website. When they’re in person, you should do that. If you’re looking for a fun documentary to watch, get you excited to one day go, you should do that too.

David: Amazing.

Ben: I think that about wraps it up for our NBA episode.

David: Is that enough? Should we do more?

Ben: I don’t know if I could do more. It’s late.

David: This was such a blast to do. Listeners, I hope you enjoyed it.

Ben: We love feedback.

David: We love feedback and we love tech. We love doing techs, but all these media episodes, Disney episodes, ESPN is such a blast too. Fun to realize, too, just like the intersections of these worlds and how much media pioneered a lot of stuff that has shaped tech. Now, it’s going back the other way with social media and everything. Really fun.

Ben: Indeed. If you aren’t subscribed and you like what you hear, you totally should. If you like this episode and you have a friend who loves the NBA or sports in general, or you just think you know someone who would geek out on the business of sports, you should absolutely share this episode with said friend or co-worker, or just shout it from your local social media hilltop. You too can be like Lebron on Instagram and share the goodwill of Acquired.

As always, if you love Acquired and you want to hone your own craft of company building, you should join the community of Acquired Limited Partners. You’ll get access to the LP show where we dive deeper into company fundamentals and investing fundamentals, in addition to our monthly LP calls where you too could be like Joe Sweeny and talk about a project that you have in mind and one day bring it to life, and get to meet so many other members of the Acquired community directly. You’ll get access to our Book Club where we will interview great folks like Hamilton Helmer, Will Thorndike, or Emily Chang. If you join here in the next few weeks, you’ll get to hop on with Emily when we all have our Book Club review with her. If you aren’t already a Limited Partner, click the link in the show notes, super easy, or go to acquired.fm/lp and start your seven day free trial now.

Lastly, if you want to talk about all things tech news, strategy, or review this episode and correct us, you can do that in the Acquire Slack at acquired.fm/slack. With that, thanks to Tiny, Bamboo, and our legal sponsor Perkins Coie. Everyone, we will see you next time.

David: We’ll see you next time.

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