Any Given Algorithm

0:05Congratulations! You made the Varsity, the podcast. My name is Jon Aranda and I am Puck's sports correspondent and the host of this pod. And today, I'm happy to have my colleague Jon Kelly join us. Now, I'm not kidding when I say that Jon is a savant about the business. And in the year and a half that I've been at Puck, he has really helped me cover the business with a brand new perspective. And that perspective is based on his experience at Vanity Fair in the late aughts. And that's when the magazine was thick and awash in money just before print imploded. John draws on that experience when looking at the cable business.

0:43Well, when he looks at the whole TV business, for that matter, which also was awash with cash for quite a while before that business started imploding. Anyway, I always learn so much from John and I'm happy to have him on today's pod. But before we get to John Kelly, today is Wednesday, September 3rd, and here's what I'm watching. Bill Belichick's blowout loss on Monday was a worst possible scenario for ESPN, which carried the game. A 48-14 loss to TCU. North Carolina has a couple of winnable games coming up against Charlotte on ESPN Plus and Richmond, which will be on the ACC network. Then they travel to Orlando to play Central Florida before the ACC schedule starts.

1:24and we don't know which networks will carry those games, but it's clear that ESPN is hoping that there will still be buzz around Belichick and those games will land on ABC or ESPN. And that hasn't happened much over the years for North Carolina. Last year, in fact, ESPN only carried one Carolina football game, and that was the Wasabi Fenway Bowl game when they lost to UConn by a couple of touchdowns. Mind you, ESPN controls all of the rights to the ACC, so it can dictate which network carries all of the conference's games. Jimmy Pataro and Burke Magnus will not give a non-competitive Tar Heels team good windows, even if the greatest coach in NFL history is patrolling the sidelines.

2:06Now, there's no doubt that the hiring of Bill Belichick already has paid off for UNC. All of the team's home games are sold out, and that's even with a 25 % price hike in tickets. The school should set sponsorship records this season. Donations are through the roof. Merch sales and food and beverage sales are expected to hit all-time highs. Now, one loss isn't going to kill all that excitement, not even a loss like Monday nights. But it does show why the networks want to showcase these kind of games early in the season. It reminds me of two years ago. That's when Deion Sanders started coaching at Colorado.

2:42and Fox Sports, which had the rights of his first couple of games, developed a preseason marketing strategy around Deion. It put his first couple of games in the best time slots. And then when Colorado started off with a couple of wins, Fox and later ESPN benefited. Even this year, Colorado games are a hot commodity for TV networks. And Colorado, as we all know, historically has hardly been considered a college football powerhouse. The run-up to Belichick's first Chapel Hill game had the same feel. And it worked. The game had an unmistakable big-game feel to it. I was mesmerized by the shot of Michael Jordan, Lawrence Taylor, and Roy Williams, UNC royalty, watching from a sweep.

3:25The press box was packed to the gills. It felt like a celebration of football on a campus that has always seemed to prioritize basketball. Again, one game doesn't kill a season, but we won't have clarity on the storyline that most interests me for at least several more months. And that is whether Belichick will have enough momentum, whether he will give fans enough hope that Michael Jordan, Lawrence Taylor, and Roy Williams will want to watch a football game in person again next season. Okay, now let's get to John Kelly. John Kelly, I've been wanting to get you on this pod for a while because I've been at Puck now for a little more than a year and a half.

4:08And you have really informed my reporting in such an important way because of your background with magazines. And so I grew up with the cable business and I saw the rise of cable and I'm completely seduced by the size of the brands of Fox Sports and ESPN and even CBS Sports, It's the Tiffany Sports Network. And I wanted to get you to talk a little bit about your experience in magazines, just in terms of being part of a, I don't want to say it. Well, maybe I should just say a dying industry, you know, or something like that. And then I'm going to end up trying to spin that forward to the beat that we cover, which is, you know, the sports media beat.

4:54Oh, well, they're easy to connect. Thanks for having me on, John. um uh we you know we're we love i'm so proud of what you've done with uh the varsity in both varsities and honor to be here uh the the the gift of the early part of my career didn't seem that way at the time was i started my career at the very beginning of the golden age of the magazine business in the early 2000s and um i was young enough and probably frisky enough to to actually um uh be a little wide-eyed at it i i was still in college when uh napster and facebook were created. And so Google is already a public company. So I think I looked around there, I thought, whoa, this place makes$200 million a year, but not for long.

5:35And it was large in life too. I worked at Vanity Fairwood for Graydon Carter, a once in a lifetime talent. And that was early 2000s when those were like thick books. Oh yeah. Hundreds of millions of dollars a year just for a magazine, right? Like Like for one single magazine, Conde Nast owned 23 of them. The, you know, the rumor was that the new houses put a billion in their pockets every year. I don't know. I have no idea if that's true. It sounds great lore. But it's sort of like growing up, sort of like being the child of divorce, right? When you see something that has extraordinary cultural cachet and value decline, you gain a pattern recognition for seeing it in other industries.

6:21And you can sound like a carnival barker or kind of almost like a, you know, one of those hysterics who says the tornado is coming through town. And I think at moments I've probably been a little early in my career, I was guilty of that. But seeing the demise of the magazine industry, particularly from 2008 to 2010, when it was clear that there wasn't going to be a recovery, that the 2008 financial crisis actually just laid bare what was already happening. You know, it took money out of the system. It was an excuse for a lot of commercial advertisers to say, we don't want to participate anymore.

7:01We want to advertise on Facebook or Google or be more targeted in our marketing approach. And people were already writing on the internet. I mean, you know how this story goes. But this made me very sort of adept and conscientious about what was going on in particularly the cable business, which seemed to me like the next one up, right? the music business was the first one to get clobbered then book publishing then magazines you know then cable and i think that the the version that we're seeing now is traditional entertainment behemoths which are you know are being humbled before us you know one of the interesting hallmarks of the era is going to be to see which successor to bob eiger the walt disney company picks will they you know years ago would have seemed like a no-brainer that they picked Dana Walden, who's this sort of TV genius, rather than Josh DeMauro, who's the guy who runs the parks.

7:54But the truth is, Wall Street would so prefer that Disney was a parks business and a real estate business than an entertainment business. And that's the way it's going to go. So when you and I hooked up - Which is, by the way, what a change from 10 years ago when ESPN, like the checks, it's been, what was the number one for how long? for it was the profit center of of disney i mean it was um it allowed disney to it allowed disney to create disney plus you know um it it was it was extraordinary and it seemed you know i'm trying to think of that line from goodfellas john where you know it sort of seemed too good to be true and then all of a sudden you realize it wasn't i mean the turn in espn when eiger had that famous comment about uh subscribers dipping which you know if you talked about in a recent episode that was right after they built an entirely new, you know, studio in Bristol, right?

8:46Like this was when, you know, every hour of SportsCenter was being helmed by A-list talent. Like they were caught off guard by how soon and how irreversible it happened. And I think that in, you know, in some of your work, I'm always really interested to see how the legacy players interact with the newbies. One of the differences between some of these other industries and yours is that the contracts are longer in sports media. The relationships matter a lot and it's disintermediated, right? Because you need the players to play for the leagues and then the leagues make the decisions about which networks they're or companies or streamers they're going to work with, but you can't put the toothpaste back in the tube.

9:33And the trend lines are drawn. It's just a matter of the sort of pace of acceleration at this point. So let me go back to Vanity Fair real quick. 2008 to 10, you said, is when you really started to notice. I was gone by the end of that, but yeah, that's right. What did you notice? You referenced advertising. Was it just advertising or were there other aspects of the business? And some of the observations were within Vanity Fair and others were broadly within Conde Nast. Here's what you saw very, very clearly. It was a hybrid business model, subscriptions. and advertising. And the advertising was based in part on the size of the rate base and the newsstand sales.

10:20In the digital era, it was very clear that we did not have the data on our end user that the digital counterparts did, right? Magazines were sending zillions of copies to to, uh, scrolls of addresses, you know, you know, the joke dentist offices in Missouri, or, you know, uh, people who had been dead for five years. Um, some of the stuff kind of did happen. Um, and so, uh, we were just going to, that was a losing game, right? If you were, uh, Mercedes or Carolina Herrera or a CPG company, you know, your, your first question of the meeting now is going to be, who is your audience? And we couldn't answer that the way that our digital competitors could, right?

11:07We just couldn't. And then there were a number of other things that were downstream of that. If we didn't, we had an idea of our audience that we sold, and I think it was true to some degree, but we couldn't necessarily prove it. So that allowed companies that didn't, that advertised in these magazines to begin to pull out in categories. The most famous example actually was glamour magazine which i'm sure you used to read cover to cover john but but my wife and mother actually worked at glamour so it was very near and dear to my heart glamour was not number one in any category i'm trying to think of a good um uh example from another walk of of the sort of entertainment or media industry but it was um but it covered enough sort of um it was like Olympic rings intertwining, you know, fashion, pop culture, you know, arts and et cetera, that it was able to be like the fifth most important book in a number of different of sales categories.

12:05And then after 2008, all those advertisers basically pulled back and only advertised in their top three books, right? So Glamour was pulled off of all of them. That's why it went digital only so quickly. So, you know, there's that Warren Buffett line about, you know, you hope everyone's wearing a bathing suit when the wave pulls out. And what happened during that 08 to 10 period was not everyone was. And you had a lot of advertisers who've been looking to leave or spend a lot less for a long period of time. And this was the excuse they needed. And at that point, it becomes a real vicious cycle where the, um, as the revenue goes down, the budgets that are allotted to invest in these brands goes down, which means, yes, the things you mentioned are true.

12:52The, the, there are fewer pages in the book. There are fewer, uh, brand building events that are, you know, probably, uh, allow you to take a couple of chances to start a new line of business. And in the simplest of terms to put it in the, the lingua franca of the varsity, like you go from playing offense to defense. And then you go to playing four corners defense. And when you're doing that, you're really bleeding out the game. And that's okay. That's business, right? We see a lot of like successful companies in our realm that are doing that and are looking for profitability. What we didn't see then and what I couldn't really articulate at the time until I spent a couple of my years of my career at TPG was the new houses spoke.

13:32They said all the right things at the time, but they spoke with their capital allocation, right? They weren't going to put much more money in Condé Nast outside of a blip investment of about$50 million in a video business that didn't really take off in 2015. They were going to start investing in other parts of their family portfolio, like Reddit and a bunch of data mining companies. And I think that we see that in your world a lot. Yeah, and if you put that forward, it's not 2008 to 2010, which was really a formative time back then. It's 2020, basically. And the cord cutting had been happening, as Iger said, back in, I think that was 2015, he said it maybe?

14:14Yeah, I think that's right. Yeah. So cord cutting had been happening. It had been something that we'd been keeping an eye on, but then all of a sudden the pandemic hit and the streaming came and prices kept going up. And what you have now, you lost subscribers, which cost money. Then you started losing advertisers. And then you started losing rights as Netflix is coming in and Amazon is coming in and YouTube is coming in. And the eyeballs change. I mean, that was the thing that was hardest for the leadership teams of that era to understand was that people would go elsewhere for their information.

14:54If you said to an executive at a magazine company that people would be reading long pieces on Facebook in 2005, they would have slapped you on the side of the head. And then obviously that happened and took over the world. One other thing that's interesting too about the antecedents of this, and I see this a lot in your world, John, is the creative people were in control of that business. And then it slipped out of their fingers in a lot of ways. And they were, in many cases, replaced with sort of bean counter types who couldn't separate their inside voice from their outside voice, you know? And Jason Kylar is a good example when he was the head of Warner Brothers before Zazz made the deal with AT &T.

15:41And I think that he actually, he had a lot of brilliant ideas about how consumption was going to change. But no one wanted to hear it at the time. And he wasn't able to work through the conversation with the creative people that he needed to persuade to come on the journey with him, which is actually one of the interesting things about the sports media business to me is that you have like, I don't think Adam Silver or Roger Goodell think that a lot of people are gonna be watching their leagues on linear TV for a whole lot longer, but they need those guys now. And they've really found ways to say the right things to the Ellisons and the shells of the world.

16:22and obviously Ryan Roberts has made a huge commitment. I'm so eagerly awaiting what happens with this NFL YouTube game because I got to think that if this thing is a massive hit, it just changes the paradigm all of a sudden. People say, what are we doing with everything else here? All right, we spent so much time looking 10 years back. Let's take a quick break. I want to start looking 10 years forward.

16:55this is where your experience really informs me because like i said earlier like the whole idea of brands to me like the the idea that mtv which when i graduated from college was the coolest of cool brands and it remains a cable channel it never really went it never adopted to streaming It could be a really big brand in streaming, I think, but it just remained a cable channel. Do you have an example of a brand that went from one platform, be it a magazine brand or a TV brand, that went from one platform to a brand new platform and was successful? Let me try an even kind of grander thought experiment here.

17:42And funny thing, you yanked my chain. I actually consulted at MTV in the mid 2010s when they were trying to figure out if they had. Was that when they had real world world rules like back to back to back? It was after that. It was before it was all ridiculousness. But they saw Vice. They saw BuzzFeed. And they thought, how did we lose youth culture? What can we do there? And it was obvious within 10 minutes to me that actually the corporate infrastructure of Viacom at the time made any kind of innovation completely impossible for thousands and bajillions of reasons. So as much as what you're saying is true, it's unsurprising to me.

18:26Can you think of any major corporate turnarounds in the tech space? because when I, or tech media, et cetera, space, because when I play this game with myself, the only ones I can think of are Priceline for a time, but that's a pretty small, measly example. And then Apple when Steve Jobs came back, right? Yahoo, maybe, no? Nah, I mean, I think it's done well under Apollo rule. I'll give you that one, okay? That's a good, that's a solid putt, I think. But otherwise, it's really hard. And of course, this is the game that Ellison and Shell are playing right now? Can they turn this thing around? It's really hard.

19:05You have to, if you look at the sort of paradigms, you've got to establish like native platform dominance at some point. And so to your point about who's the glamour or who's the MTV, a couple of thoughts come to my mind. And I know that your audience is very plugged into this. I want to be sensitive here because I know that these are difficult conversations, But, you know, TNT sports is a big one, right? When you think about what that meant in the culture for years and years and years, you know, licensing round one CFP games between SMU and Penn State and, you know, Savannah Banana Ball. TNT back in the day had March Madness.

19:53It had baseball playoffs up into the championship series, had basketball, the NBA up into the championship series. It had big time sports. It had NASCAR. And now it's at that point where we talked about in print where the investment's going to be lower. They got to be smarter. It's hard to build. You're managing to climb when you're in that stage. I mean, one of the other examples, and I'm going to get a nasty note about this. and we've talked about this offline a little bit, but I really worry as someone who loves baseball, but I really worry about Major League Baseball

20:31as what its future looks like as an organization. When you think about the media businesses, and I consider post-sports leagues to be media businesses, when you think about how they made their money in the past, it was based on certain sales packages that work for certain media properties, right? And like baseball was the sport that was built for radio. It was perfect for that era. Football was made for the boob tube, you know, and all these sports were built on the assumption that the networks needed recurring games to fill their slates. It's not how people consume anymore, as you and I both know.

21:10So baseball's huge value, this extraordinary tonnage, this extraordinary overhead that goes into it, it's kind of, it's just never going to be as valuable in streaming. It doesn't mean that there's no home for it. I'm not saying this is binary. It's not. But if Manfred rolls up all these rights in 2028, then what's the dollar figure for that? Is it bigger than the individual sort of, you know, TAM would have been for all these markets five years ago or 10 years ago in the peak of the RS, not even close, not even close, no chance. And I worry too. It's funny, I've been watching, did you watch the Jerry Jones Netflix show?

21:53I started it. It seemed like too much PR to me. I just, I turned it off after a little bit. Yeah, it's a little loopy. I talk to Don Van Notta often enough that I feel like I got a good grasp on Jerry Jones. Yeah, that's fine. Yeah, you get the full Jerry experience. But one of the things that you do appreciate that, what a trailblazing owner he was. And you realize that it's a business, you know, and one of the things that he gets knocked for in the last 85 % of his career was that he was more concerned about the bottom line possibility of the Cowboys than about winning those Super Bowls, even if he wanted to win them.

22:28The ownership group in Major League Baseball is not as sophisticated or competitive, I think, as a whole as some of the other sports. And that's a challenge, right? That's Manfred's board of directors. He can't oust these owners, right? He can't tell them that they've got to leave. They're there. They're in charge. They own the franchises. And I think that for baseball to turn around, there's got to be owner level innovation before they're in concert with some of the other changes. So it's funny because you and I go back and forth on this because I think they're fine for 2028. But I think what you're talking about is beyond it.

23:04And you can take this and extrapolate it to all of the major sports. It's like linear television is still here. They still have money. Sports is the only thing that allows them to survive. So for the next rights round, all these leagues are going to be fine. It's the one after that because court cutting isn't stopping. It's the one after that, that everybody's sort of a little bit, you know, wakey over. And they should be. There won't be as many bidders. The playing field will be set. But the way I look at it is even take like F1, John, like that ESPN deal. The first one was like$25 million. And then it was like$100 million.

23:43Actually, can I interrupt you for a second? The first one went to ESPN. I know this because I just had a beer in Dewey Beach, Delaware with Burke Magnus. He did this deal. It was for no money. It was like, we need to get on and we need for three years and just allow us on ABC and ESPN. So it built from zero, basically. So think about that return, right? That growth curve looks crazy. Frankly, the WWE, the sort of Mark Shapiro, Aria Manuel businesses, UFC, WWE, they have a similar looking trajectory when you look at the, there's a great bit of feedback in the varsity last week about what their deal curve looks like.

24:31the baseball deal curve just looks a lot more flat and um so even if you you know think one or two deals out there there are just there are other ways that i think that they've got to focus on on making money um one of the again and like you know this is not investment advice right why would anyone else take it but the one one advantage baseball does really have is it's a long season with a lot of games and um i don't to your point about um the fear of a couple right cycles out which is one of the reasons that like the NFL may be getting into this thing early so they can kind of you know get a couple bites of the apple I don't know if these leagues will make the same portion of their overall revenue from media deals I think they'll make a little bit less over time but they'll but the chance to expand the overall pie hangs a lot on downstream businesses like real estate and legalized gambling and and baseball offers that in spades right like you want to, you know, you're some dumb 20 something without a lot to do sitting in Toledo somewhere.

25:32All right. Met to play in the Phillies tonight. And, um, you know, uh, they, they just pulled some kid up, uh, to pitch and it's, you know, minus one 45, whatever like that, like that's, um, and that's a big part of how engagement works now. And so I imagine that there's a, there's a lot of, um, innovation that can take place there. Yeah. And the big question mark is look, Amazon, they have their sports deals. Netflix is dabbling. YouTube is dabbling. Does anybody really think they're going to go in for any of them for a full season and take all the games like ESPN did? And ESPN warehoused a lot of those games, but it was going to pay for them.

26:11I don't know if it's going to happen or not with the big streamers, but it's an open question right now. It's an open question. You're so right. And you just made the point, which is they're warehousing them, but that's not inexpensive to, you know, that's not an inexpensive proposition. And I watch baseball on all these platforms, right? Like I'm the most easy in the tent viewer they'll ever find, but you gotta, you know, there are studio shows, there's pregame and postgame. I know that the FanDuel network is sort of experimenting with a fair amount of this right now. There are costs associated with all the games.

26:45And I think a lot, and the streamers, you know, I think there was an assumption across all sports, the streamers, they had more money than God, and they will pay. But John, you know, as many ultra wealthy people as I do, the richest, they're the cheapest. And so, and they know what they need. And I think that this is in your work all the time. It's eventized, right? And one of the undercurrents of this rise in sort of, let's call them sort of secondary leagues like the WWE. And you know, I don't mean that pejoratively, but it's not one of the big four sport or banana ball is that they're scheduled events.

27:22And in the case of WWE and UFC, like there's no rain out, you know? It's every week. Every week, your sponsor knows exactly what they're getting. Your fans are buying into the drama of it. There's no, I mean, you know, there's no load management challenge, right? What the NBA deals with, where you've got a national game and all of a sudden you find out that Kawhi Leonard's not playing. Like it's, they found a way to make themselves valuable or more valuable by eliminating some of the uncertainties that you just can't eliminate in pro sports. John, one more quick break, come back. And I just want to talk about some of the companies that are in the business right now.

28:12John Kelly, who is set up to last in sports media? Are there any ESPN-ish type brands that you think will last in sports media? Well, you know, it's funny. When you look at a market, right, the first question you're going to ask yourself, is it a winner takes all, a couple winners, or a lot of winners? And I think that what we are seeing now is that actually, it's definitely not winner takes all. We knew that, but we thought that there were going to be kind of a few winners. And that's the case of the streaming industry, right? There'll probably be three or four that really make it, and everything else is just going to get sucked up.