Gerry World

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1:05Congratulations! You made the Varsity, the podcast. My name is John Aranda and I am Puck's sports correspondent and the host of this pod. And today, the Varsity podcast features another interview from last week's In the Arena event that Puck put on with our friends over at Moffitt Nathanson. And this one features Jerry Cardinal, the founder, managing partner, and chief investment officer of Redbird Capital Partners. That's the group that's invested in some of the biggest sports brands that are out there. You know, like Yes Network, AC Milan, Fenway Sports Group, the UFL Spring Football League.

1:44And of course, and one of the main reasons why I wanted to talk to Jerry Cardinal is his investment in Skydance Media, which just bought Paramount Global. So I conducted this on-stage interview alongside my friend Michael Nathanson, and this is a good one. I'm sure you're going to like it. But before we get to Jerry Cardinal, today is Wednesday, October 22nd, and here's what I'm watching. The NBA opened its season last night with a pair of games on NBC and Peacock. And there's really been a lot of questions about NBC's deal, where it's committed$2.5 billion per year, that's billion with a B, to carry NBA games.

2:22Ever since NBC signed this deal last summer, the network has been criticized for overpaying on a package that has just six conference finals and no NBA finals over 11 years. In fact, just yesterday, the Wall Street Journal cited anonymous sources who projected that NBC is going to lose between$500 million and$1.4 billion per year in the early years of this deal. So the key for NBC is to draw subscribers to its Peacock streaming service. That's the main storyline to follow over the next couple of years. But a couple of things on this NBC deal. I learned long ago not to pass judgment on the size of any sports rights deal.

3:06Almost always, they seem absurdly high in the moment. And almost always, by the end of the deals, they seem really network friendly. Okay, so I'm going to try not to get into a history lesson here, but remember back in 1993, Fox was lampooned for agreeing to pay the NFL$400 million per year for NFL games. Well, it only took a year or two for that to seem like a bargain. Or there's a story back in 2008, which is when ESPN outbid Fox by$100 million for the rights to the BCS, which is what we all call the college football playoff back in the day. Or even just look at the$110 billion worth of deals that the NFL signed in 2021.

3:48At the time, that seemed like a high watermark for media rights deals. I mean, how could prices ever exceed$100 billion? Well, it only took a couple of years for that deal to look undervalued. And now today, both the NFL and the networks are agitating to open those deals up early. Investors like certainty, even if it means that networks are going to spend a whole lot more on the rights. And that, to me, is going to be the legacy of these NBA deals. Did NBC overspend? Right now, I don't know. Nobody does, but we will know in a decade. But what I do know is that there's a cause and effect with NBC's deal and Amazon's NBA deal and ESPN's NBA deal.

4:34Consider this. NBC is paying the NBA$2.5 billion per year. Compare that to the$2 billion per year that is paying the NFL for TV's most popular primetime show 14 years running. That's Sunday Night Football. It's a similar story with Amazon, which is paying the NFL a billion dollars per year and the NBA 1.8 billion dollars per year. Or ESPN, which is paying the NBA 2.6 and the NFL 2.7. So again, we don't know yet if NBC overpaid for the NBA, but we do know that these NBA prices are going to lead to much bigger prices for the NFL. And yes, the biggest sport is about to get a lot bigger. Okay, now let's get to the onstage interview that Michael Nathanson and I conducted with Redbird Capital's Jerry Cardinow.

5:28I want to start off with the Paramount, being involved in Paramount. And just the idea of wanting to get involved with, you know, like a broadcast network. We all see where broadcast TV is headed. It seems like you're investing in something that's a declining asset to a certain extent, at least that part of it. Yeah, you know. Why is that a good business? All right. Well, you know, it's interesting. That's bullet point number one. Look, and again, I'm not going to speak specifically about Paramount because we just can't right now. But the high level question, you know, everybody wants to make these binary pronouncements.

6:08And yeah, I mean, linear cable is declining. Broadcast, actually, the reach of broadcast is still incredibly powerful. And so, you know, on any given night, you know, CBS could reach more people than Netflix. Right. So that tale, you know, what I do for a living is I monetize intellectual property. One of the arbitrages that's embedded in the way we invest is taking these legacy assets, not looking at all of them in the same way in terms of binary decline and finding ways to re-underwrite them. So, you know, the story on what you're asking about is more about bringing a technology orientation to the monetization of content, leveraging the flywheel of distribution and IP monetization, having a phenomenal portfolio of sports rights and setting yourself up so that, you know, you don't need the guys up north in Silicon Valley to come to Hollywood and do their job for them.

7:03We can do that. Right. And so it's really more around that than it is. You know, I mean, the thing that's so fascinating about, you know, this subject is that, you know, you've got you've got a family that is buying in with a technological expertise that is buying into one of the majors. First time since Walt Disney that you've had a creative family own a majority of one of the majors. It's an owner operated model. That's what you need going forward. This this sort of, you know, agent driven culture. You know, Hollywood's fascinating. Hollywood's the only place, the only industry I've seen where there's no pay for performance model.

7:38People get paid fees regardless of performance. And sports, by the way, is a similar phenomenon. Sports is a commercial licensing business. And everything we're going to talk about today is going to be about that transition. I look at that. I look at technological disintermediation. I look at transitioning from an agent culture to a principal culture as the intrinsic part of my investment thesis. So I'm not scared of that stuff. But a lot of people will look at it in the opening question being, what are you thinking? You're buying into declining assets. I look at it differently. The way you describe sports and the way you described Hollywood, how would you describe Paramount?

8:13It's less about Paramount. It's more about Skydance. The answer to that question is I would look at what we did. You got to remember, this is not a private equity guy partnering with a family to go buy something. I mean, everybody, our world today is incredibly transactional. This thing started 15 years ago. You know, when Ellison started dedicating his life to building Skydance, that's where it started. And, you know, if you look at Skydance, I mean, I'd focus on that. The revenue flywheel of IP monetization around theatrical, SVOD, sports, gaming, animation, that's it right there. And, you know, at Skydance, you know, we have our sports business at Skydance, which we created, is based on an exclusive partnership with the NFL.

8:56Well, you know, so you're seeing this sort of Venn diagram of sports in Hollywood, content creation. It's all the same thing. So that's the answer. At the end of the day, everyone for years in my career, I've been doing this 35 years. And, you know, one of the things I did in the late 90s was work with Paul Allen to go buy cable. And, you know, back then, investing in media was distribution. You know this, right? It was radio, TV, billboards, cable. And Paul Allen was the first time I ever heard this notion that content is king. And I would say that for the first time in my career, content actually finally has a chance to be king.

9:30It's not quite there yet. You know, we always talk about this thing about sports is now an asset class. You know, we'll debate that. It's the same paradigm, right? And so that's what it always comes back to that. And that's the answer to the question on whether it's Paramount or Skydance. Hey, this is John back in the studio. We're going to take a quick break, but when we come back, Michael is going to ask Jerry about the history of M &A Media, which really hasn't worked out so great for a lot of companies that have bought other companies.

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11:06This guy has three pages of questions. No, no, no. Before John gets to his second bullet point, and I know you keep talking about this because it's clearly something that's too sensitive. But in theory, when you look at the history of M &A media, it hasn't worked out great for a lot of companies who have been the acquirer. So can you just talk thematically, you know, the need for scale? Like, you know, you look at the size of Netflix and Amazon and YouTube. what's your philosophy in terms of scale in media, or can you compete at levels that you are today? Look, I think there is a virtue to scale in this case, although I never lead with that.

11:44I think if you look at those historical examples that you're referencing, you either had the wrong buyers buying it, but there's never implicit the underwriting of a business plan. And, you know, you can't just show up and write a business plan. You have to have relevant domain expertise to be able to go do that. And you got to be able to, and that domain expertise coupled with longevity of investing in and out of cycles over a long period of time enables you to do what needs to be done. What needs to be done here? Skate to where the puck's going. So, you know, this is, this is the, this is the seminal moment where you're going to have the convergence of technology, content creation.

12:19You got to be talent friendly. It's not just about, see the problem with the question. And it's my world. I mean, I come from this world and I'm kind of evolving away from it. The private equity, scaled capital, investing world is very binary. They just want to buy things. And frankly, the metric for success for guys like me is getting through my next fund. So the KPI, if you actually look at what I do for a living, it's actually misaligned with investing in IP-based businesses. The KPI for a guy like me coming into a situation like this is to write as big a check as possible, buy stuff, and then get through it as quickly as possible.

12:57I can go raise my next fund. And I don't think that way at all. I don't care about raising my next fund. What I care about is if you gave me a choice between writing a$500 million check to your point on scale, I'd much rather write 10,$50 million checks because I want to feed the business plan that we've underwritten. And it's a lot easier and you have a better ability to do that if you're putting capital to work on a success basis. It's very hard to put $500 million to work on a success basis. So that's the problem. And that's the reason why you've had those historical examples. So it's less of, yes, there is definitely a virtue to scale, partly driven by Netflix, partly driven by the disintermediation of distribution where direct-to-consumer now and a la carte is really the value proposition.

13:42And rights, media rights, sports rights, they're all going through the roof. And by definition, you need to amortize that across as many people as possible. It's that simple. But it's not the tip of the spear in the investment thesis. Your point is 15 years ago, you made a bet on Ellison, and that bet's paid off so far as well. Yeah. Look, how long ago was it? 25 years ago, we created the S network. We launched, basically with Fox, the RSN model. And now, you know, 25 years later, you know, we're going to defease that model that we built. And we're going to, those rights are still so valuable, but, but, you know, now they're going to probably have to centralize those rights and figure out a new model.

14:23Right. So that's the benefit of investing over long periods of time through cycles. And it's also the benefit of the orientation is not just the, it's everybody, when you get to a level of this kind of scaled capital investing, it's always about the deal. And I would suggest, and particularly for someone like you, I would suggests, it's about the investment thesis, it's about the business plan, it's about skating to where the puck's going, it's about having a legitimacy in terms of where these things are going. And you can't do that if you're not partnering, if you're not passionate about content creation, right?

14:51And that's everything that we've assembled on our side of the equation. By the way, it's a reason why I got more people from industry in these industries, I call them the IP-based industries that want to come to Redbird than I do private equity guys. And that's a weird thing, right? Because usually in the private equity world, when you have operators coming to private equity so I can put them in my pitch deck and on my website so I can go raise my next fund. I can't attract guys like Jeff Schell and Jeff Zucker if that's what I'm doing, right? So somewhere in there is a very obvious in front of everybody's face value proposition, which really goes to the heart of the way we try to invest.

15:26So when you say skating to where the puck's going, because the question I always ask is, like, you know, what's next? And nobody really knows. But when you say that, what are you envisioning? In what ecosystem? In the media ecosystem. Skating where the puck's going. It's very simple. And also, do you have a timeline? I'm just kind of trying to get a sense of how you view the market. Yeah, look, there's an element of false precision that I could give you in that that I'm not going to do. I mean, at the end of the day, it's very simple. I said this at one press event where I was allowed to speak on this in LA.

16:03And it's, you know, that ecosystem needs to stop playing with other people's money. That ecosystem needs to start using words like cash flow, right? And there needs to be a Venn. I'm a Venn diagram guy. And there needs to be a Venn diagram between technology and content production, right? And so if you look at all those ingredients I just referenced, that is really not what permeates this very agent-driven culture. And again, that's OK. I mean, these are all incredibly smart people. It's an incredibly smart group of practitioners in that ecosystem. It's just that the world's changing. The way people want to consume content is changing.

16:40The money being attracted to it is even changing. And so what are you going to do with it? I still firmly believe at the end of the day, the value proposition in this ecosystem on the media side is content. And the problem with the dynamics that we walk into is that to invest scaled capital in an ecosystem like this, typically the methodology is to just go buy something and sit on it. Right. And in this case, you got you can't do that. You got to you got to love disruption. You got to love being disintermediated. And you got to in order to do that, you got to write a business plan. And you can't do that if you don't bring legitimate technology expertise and operating expertise and content production.

17:19experience. That's really what it is. So what's the future? I really believe the future is going to be this kind of owner-operated model where you're driving cash flow around content production and you're leveling the playing field between the guys who think they've got the balance of power in their favor, which is really more on the distribution side versus the guys on the content side. But can I ask you, on the content side, the balance of power in sports is with the leagues mostly, right? So how do you navigate that world where sports rights are inflationary, right? So does that come to an end?

17:50So how do you think about sports in that world you're describing? Look, sports is a different paradigm. The paradigm I think in sports is increasing professionalization. When you get to these levels of valuations, these are companies, these are live event entertainment companies. They're not teams or leagues, right? Now that's not semantics. I've been saying this for a while, but you know, if you asked anybody what investing in sports is, they would tell you it's buying minority stakes in teams. Now, I don't, that's not, and look, there's a liquidity function that that delivers, which is fine, but that's not what gets me up in the morning.

18:28What gets me up in the morning is the same thing that gets me up in the morning on the media side. Can I partner with the rights holder and create a terminal value business in partnership with them that enables them to monetize that intellectual property without selling the minority stake in the team or the league? Sports rights, you know, have gone up dramatically. What's interesting about sports rights, you know, growing up dramatically, is the escalation in those valuations that come with that. Now, what's fascinating is that you've seen an escalation in these sports valuations. By the way, I'm long sports, so I'm wholly in favor of this.

19:01I just want to make that clear. I'm talking more about the slope of the trajectory than I am about the absolute, you know, increase. But you've had these meteorites speak to the majority of valuation right now. And you've had them locked in in these long-term deals. And yet you've seen an unbelievable escalation. You've seen 20 % compounded growth rates over the last five years alone in these valuations. The average NFL team trades for 12 times multiple. The average NBA team trades for 12 times multiple. The average MLB team trades for seven times multiple. and you've got to ask yourself, well, that can't just be scarcity value, right?

19:39And so, I think I'm very pro sports rights team ownership. For years, all I did was partner with teams and leagues to go create terminal value businesses. And then during COVID, I jumped in and said, you know, I can vertically integrate and do this myself. And we've done it in a bunch of areas. I'm hugely bullish on sports and sports valuations. I just think that there's been a decoupling a little bit of asset valuation and financial fundamentals. And my job as a participant in CEOs is to close that gap. And that's what I'm focused on. You own an Italian soccer team, Italian football team. How do you like being a sports owner, sports team owner?

20:19Yeah. You got to ask what you got to start with what jurisdiction are you a sports team owner, right? It's it's probably the toughest thing I've done. We're on the record, but my Italian subscriberships. It's not big. Go ahead. Look, it's the most challenging thing I've done because, once again, why is it challenging? It's challenging because the ecosystem that I'm doing it in is really resistant to change. But that's the investment thesis. So it's a really chicken and egg thing. And I'm trying to, in the Italian context, in the three years that we've owned AC Milan, we've been cash flow, meaningfully cash flow positive for the first time in 17 years.

21:04Now, you know, what do I do with that money? I don't pocket that money. I take it and I put it back into the team. We spent more this transfer market summer than any other team in Syria. We're building a new stadium. Why are we building a new stadium? Once again, it's not to put the money in my pocket. It's to, if we, that stadium should enable us to transform the financial profile of AC Milan to that of a Premier League team. So the competition here isn't the other 19 teams in Syria. The competition here is the Premier League. That is the sucking force of all time in terms of economics away from the continent.

21:40And that has almost four times the media revenue that any of the continental leagues have. That is a problem. And you're going to see this more and more in all of sports, which is there's an there's an increasing divergence between the haves and the have-nots in Europe. It's between the Premier League and the continent. And yet, you know, what's so interesting is that on any given Sunday, Team 20 in Syria can beat Team 1. You can't say that about the Premier League, right? So it's the most competitive league. And yet, here's the thing that's crazy. We don't get paid for that. As AC Milan, at the top of that roster, we don't get paid for that.

22:17We can't get an international media rights deal. Do you know why? Because these things are costing so much now that the distributors only want the best stuff, hence the Super League phenomenon, right? And that is a problem because in America, which drives international media rights, nobody cares about Cagliari playing Lecce, right? But that's a problem because, you know, League One, I mean, you know, PSG's done a phenomenal job and I admire what they've done in terms of dominating that league every year. They've done their job. Problem is everybody else, is lagging behind. So every year, PSG wins, and that's making getting media rights for League One that much more challenging.

22:57And so competition, the whole point of sports is that human dynamic of competition, right? So my attitude with Serie A and AC Milan, we're building a new stadium. I finally got Tim Romaney, who I think is the best owner's rep in all of sports stadiums, to finally come over, work full-time for us to get this done. Once we get this done, I'd like to take this team that we're building to build this stadium and then go around all the other 19 teams in Syria and say, here, go have it. Because you're not really my competition. My eye is on the Premier League. And so that's the answer to your question.

23:29If you approach it that way, it's really complicated being a sports team owner. Because I don't really look, everybody wants me to be, I made the mistake of saying Berlusconi 2.0. What I was trying to say when I said Berlusconi 2.0 in terms of my aspiration for this thing. Your PR staff must have come to In what way? I'm ahead of the dynamic. Because what I was trying to say, it's the same thing as George Steinbrenner. I cut my teeth in sports on the back of George Steinbrenner, who really gave me my first break and taught me. And what George did in his day and what Berlusconi did in his day, you can't do today.

24:03It's just too expensive. It's price to precision. You've got sovereigns in there. You've got all sorts of high net worth constructs that you're competing against. And so you've got to find a way to do it differently. So my whole point on that was I want to innovate. And for this period of time that we live in and the way those guys innovated back then, you just can't do it that way. But the thing that's crazy is in sports today, there's this there's just this implicit inertia and notion that if you spend more, you will win. Right. I mean, I mean, I remember when when when I when Steve was buying the Mets and I was and, you know, it was an interesting thing because, you know, I was wondering to myself, you know, as someone who grew up as a Mets fan, is he going to think that, you know, it's, what's the goal?

24:48Is the goal to win a World Series? Or is the goal to increase the value of the Mets? Now, when I asked that question, and I talked to people about this, most people say, well, those are the one in the same. I don't think they're one in the same. The thing I've learned in sports is that if you win a World Series, I don't think your terminal value goes up. You know what makes your terminal value go up? You lower the amplitude and the volatility of performance so that every year you're in the NLDS and the NLCS. If you do that, your terminal value will go up. If you win episodically a World Series, it's not really good.