Not Conventional...Not Unconventional

Maximizing value by being dynamically boring

Watching the Sixers-Celtics series play out the last two weeks, I’m having lots of flashbacks to my time in Boston. I imagine it’s particularly weird for Celtics ownership to see Doc Rivers suit up and coach in a historic playoff series, at the Garden, and against the franchise he helped to revitalize, coaching the ‘Big 3’ to a title. Polite handshakes, back pats, and the rekindling of old inside jokes probably doesn’t fully erase the shared acrimony from the end of Rivers’ time in Boston (nor the disappointment at the underperformance during that time). For me, it brings up memories of two things that inform my outlook on the state of my industry: 1) the global financial crisis that took place while I lived in Boston during that Rivers/Celtics’ run and 2) the highly unusual but quietly brilliant “trade” that ended Doc’s time in Boston. 

It’s not worth spending much time on #1, as a lot of the learnings may be obvious (and the lack of learnings may be about to largely bite us in the ass). #2, however, is really fascinating to me, both for the fact that it happened AND the fact that it doesn’t happen more often. NBA coaches do not have a union, nor a collective bargaining agreement with the league that designates their services as an asset and their contracts as tradeable. They are effectively team employees, like the (substantially less well paid) trainers and ticket rippers. That has historically meant that teams live in a potentially negative-sum relationship with their coaches: if a team wants a new coach at any point during the existing coach’s contract, they have to fire that coach. That means paying out any guarantees to effectively compensate that coach to NOT WORK. 

For a wildly underperforming coach, maybe that’s the price of doing business. But what about coaches with a good track record who have just “lost the team?” Or coaches who can’t get a high talent (ie cost) team to the title, but who is great at developing talent? Coaches who, in effect, are attractive candidates to coach a different team — and often immediately go on to do just that? Shouldn’t the firing team have the chance to more directly get value in return for that coach, whose employment they control by nature of the existing employment contract?

Well, that’s exactly what the Celtics did. In 2013, after an injury plagued season and despite his coaching the team to a championship in 2008, the Celtics were debating moving on from the Doc Rivers era. With the Clippers very interested in hiring Rivers, the two franchises executed a “trade.” I use the double quotes because Rivers was not actually traded in the technical sense. Instead, the teams did something that was not conventional, setting in motion a series of events that ended with Rivers as the coach of the Clippers and the Celtics acquiring a high draft pick. This was all within the letter and the spirit of the rules and was a positive sum outcome for everyone involved. So how come I can find very few examples of that happening before…or since? And why is this opening anecdote still going?

Conventional wisdom is incredibly powerful. It’s generally easy enough to understand, at least to the extent that one does not have to really know the detailed drivers of success/failure to participate in shaping it. It’s sanded down enough to apply to almost anyone, glossing over the intricacies that define each individual stakeholder. It’s not just that it becomes ingrained in the way people approach challenges and opportunities (ie strategy); entire industries get built up around it. In the NBA, agents, advisors, executives, and commentariat all have a vested interest in pushing things in the direction they are already going (ie toward existing incentives) or being “unconventional” by blowing things up (or suggesting as much). 

If I could try to sum things up:

Conventional Wisdom: fire Doc and blow up the roster…rebuilding time!

Unconventional Wisdom: Rivers has earned the right to keep coaching and see what he can do with a healthy roster

Not Conventional Move: “trade” Doc Rivers to a team that highly values his coaching skills, yielding compensation in return

Competitive strategy and corporate transactions are often executed through a similar prism. A battle between end and capital market forces – both of which can be highly transient – drives companies toward more “reactive” decisions like follow the leader. It’s a path that is easier to explain (“You said do x and I’m doing it”), can be perceived as leading (“See I’m doing the thing that people say is the right thing”), and is less risky than charting your own course. Someone out there already has the playbook and all you need to do as a CEO is to follow it – even if that playbook is written by management consultants for an entirely different company (or industry!). The implication is that if a great coach designs the plays, you just need players to execute it. Ironically (maybe), the Doc Rivers trade showcases the benefit of examining specific circumstances, challenging a zero-sum mindset, and crafting a purpose built solution. In corporate development, this means considering non-cash or non-security elements that bring value to both sides and fostering collaborations that require leaders and operators in different parts of an organization to contribute. Said another way, strategy often gets boiled down to:

Conventional Wisdom: do what the market leader is doing!

Unconventional Wisdom: do anything other than what you are currently doing!

Not Conventional Move: identify what challenges and opportunities are specific to your situation before deciding on doing anything

Let's examine the potential transaction between Disney and Comcast involving hulu. Coming off of nearly a decade of “every company must be a streaming company” mania, Disney is kind of like an American tourist driving across Europe — unsure of how to successfully exit the traffic roundabout they’ve been circling for the last few years. It seemed so much more efficient than a stop light! Unable to invest fully in hulu for fear of driving up the value of the minority stub, they instead bet their strategic, financial, technological, and creative future on Disney+ and left hulu with a deeply muddled path forward. That means Disney+, which is primarily a down the middle, on-demand video player (originally built to stream baseball games), must bear the burden of Disney’s entire streaming future. Now, with the pre-negotiated put/call arrangement coming due, they’ve run into the widely held view that the only options are “buy” hulu or sell it. Unfortunately, this means highly reactive decision making (e.g. moving hulu content into Disney+) that is segmented (e.g. what about media networks business and ESPN?) and backward looking (i.e. “How do we solve our current streaming issues”).

The markets won’t be thrilled with any traditional corporate transaction — it’s lose-lose as investors will punish the buyer for overpaying and the seller for giving up much-needed scale (the market is already punishing Disney as investors conclude they are the only buyer following the company’s most recent earnings call). But what if instead of a straightforward acquisition, what if Disney and Comcast's leadership engaged in a series of large-scale, business-to-business agreements? These agreements could aim to deliver the face value or even more of the seller's outstanding hulu stake, while also considering ancillary platform value and strategic synergies. They would require a substantial dialogue (and work) from senior leaders at both companies and could not be easily outlined or negotiated by outside advisors.

What types of agreements do I mean/would get the job done?

• Non-exclusive, cross-licensing of library content. Disney licenses a large chunk of content to Peacock, USA, etc for “free.” Concurrently, Disney agrees to license a bunch of NBCU/Sky content for hulu, Disney+, and STAR

• Disney makes guaranteed ad buys on NBCU Channels/Peacock for the next 5 years at top-of-market CPMs

• Hulu pays above market affiliate rate increases for CMCSA cable networks and NBC

  • I’m assuming ~$10/sub•m across all the NBCU channels, 5MM “hulu live” subs, and a 10% across the board increase in fees across a 5yr deal

  • Should this trigger of MFNs for NBCU with other MVPDs, this could mean uplift in the billions

• No increases in next ESPN/Disney Media Networks/ABC carriage deals with Comcast – Disney accepts flat rather than growth 

  • I’m assuming ~$20/sub•m across all Disney Media Networks, 18MM Comcast video subs, and a foregone 5-10% increase

  • Potential for favorable carriage terms with Sky in UK, Germany, and Italy

• Open the “Disney Bundle” to Peacock

  • hulu historically bundled and sold HBO, Showtime, and Starz add-ons

• ESPN bundles NBC Sports Network/Sky/Spectrum Sports Network as part of a series of new sports packages (more on this later)

• Combine company theme park lobbying efforts in FL, CA, and TX. Controls over the efforts would be split 50/50, but Disney would fund 70% of the costs for a period of time

• Explore potential asset “sales” to NBCU. This would primarily come from the 20th Century Fox library, but there may be situations where NBCU values the asset higher than the market 

  • Similar to Disney’s reclamation of Oswald from NBCU a few years back

• Technology cooperation/sub-licensing agreement

With some combination of these (or other) agreements, Disney will “buy” Comcast’s stake in hulu the same way the Celtics “traded” Doc Rivers: via a positive sum transaction. Comcast, by the way, is no stranger to these types of deals. In 2019, with Starz facing a carriage apocalypse (strategically, financially, and investor relations-y), they were able to negotiate a multi-part business agreement to provide an orderly transition to a new distribution model that saw value exchanged in multiple areas (including leveraging Lionsgate’s content). 

Conventional Wisdom: Disney’s only option is to buy hulu for $9B

Unconventional Wisdom: Disney should swap ESPN to Comcast in exchange for hulu and some cash

Not Conventional Move: a series of B2B arrangements can provide Comcast with at least $9B in consideration, while preserving Disney’s balance sheet and advancing the strategic interests of both companies

While the exposure here is larger and the complexity is higher, so too are the mutual rewards for the execution of a deal. For many, this might be a good place to end this article (ok, maybe most would have ended 500+ words ago). In my view, stopping the work here would be a very conventional move: treating these challenges and strategic questions as if they are mutually exclusive. To that end: what to make of ESPN’s future (inside of Disney) without hulu? With nearly 5MM subscribers going to another home, Disney loses a vital hedge on PayTV disruption and a key bundling asset for sports fans. Sure, ESPN could extract ever more economics from a shrinking pie while trying to “pivot” to direct-to-consumer. This is the strategy foisted upon them by seemingly every analyst. But is that a viable option? By that, I just don’t mean the economics, which surely will never replicate anything close to the legacy cable network model. Is this a good customer/fan experience? Is a subscription to a standalone ESPN+ (combined with all of the other services a subscriber needs to get their sports fill from the bundle) going to be “worth it?” There’s no more mismatched duration than signing 5-8 year sports rights deals and then managing standalone subscriber churn month-to-month. Rather than stay committed to this path, I would argue ESPN should go the other way: leverage distribution and bundling to make itself the de-facto brand and hub for customers to access sports content.

This approach would involve bundling "competitor" networks and services and more tightly integrating the branded offerings from their suppliers. This may seem “crazy” for ESPN, but it’s a fairly traditional strategy for TV. By consolidating everything on a single platform, ESPN would improve its competitive position when negotiating for exclusive rights, leverage fixed technology and marketing costs, and expand internationally without hefty upfront rights purchases. In the case of the potential transaction between Disney and Comcast, bundling and marketing NBC Sports Net, Comcast Sports Net, and Peacock on ESPN's existing subscriber base via hulu’s technology could be a significant win for both parties, even if they are considered competitors. This strategy opens up the potential to expand the brand beyond televised rights, catering to a broader range of sports enthusiasts. 

Moreover, ESPN could explore much deeper, positive-sum partnerships with the sports rights owners. For instance, bundling and co-marketing the NBA League Pass as part of their next rights deal would provide ESPN with a unique advantage. Unlike competitors like Turner, ESPN has the capability and alignment with the league to offer such a bundled service, giving them an edge in the market. This goes for emerging sports (or critical regional ones…hello cricket!) too: bundle the Pickleball Network and if it is America’s next great sport, then aggressively bid for the rights next time they come up (or just buy the Pickleball Network). To execute such strategic transformations, ESPN would need to undertake a technological shift. The departure of Russell Wolf (ESPN+ GM) and Michael Paull could be an opportunity to move away from the current technology stack and adopt the advanced capabilities of hulu. Unlike MLBAM, hulu's technology is already highly capable at delivering live broadcast, ad insertion, and monetization. It also possesses the capability and history of bundling third-party services and content, making it an ideal platform for ESPN's expansion.

Conventional Wisdom: ESPN should ride Pay TV to the grave while trying incrementally to grow its DTC business

Unconventional Wisdom: ESPN should make an aggressive pivot to DTC, using every bit of leverage to put additional content on ESPN+

Not Conventional Move: Make ESPN to new sports bundle, leveraging existing cable and emerging digital distribution footprint to bundle “competitive” services that actually create a fulsome offering

It wasn’t so long ago that bundling, collaboration between competitors, and cross-subsidy were the standard operating procedure in the media business. In fact, they were dominant during the richest era in TV history from 2000 to 2015. During that time, competitors bundled each other's offerings, subsidizing and cross-subsidizing content to provide value to customers. This practice was disrupted during the streaming craze of the last decade, but the lessons learned from that period should not be forgotten. By revisiting the concept of collaboration and cross-subsidy, companies can unlock synergies and create new opportunities for growth and success. Born out of a weird collaboration among legacy media giants — surviving and advancing like a March Madness Cinderella — it should not be surprising that hulu has the potential to be central to Disney’s streaming future:

• Live TV and Sports? Check. AVOD? Check. 

• FAST Channels? Check. 

• Bundling and selling third party channels? Check. 

• Relationships and credibility with existing branded ad buyers? Check. 

• Consumer friendly UI/UX that merchandises original and licensed content? Check. 

Taken together, I believe that hulu has the potential to be the (and I hate catchy terms like this) Streaming OS of the future. While Bob Iger has made some less than enthralled comments about the future for Disney in general entertainment, the company’s relationship with its fans is intrinsically linked to it. In hulu, Disney already has the platform to combine its existing direct-to-consumer offerings, position the company for the return of entertainment bundles, and open up the aperture for ESPN’s business. These non-traditional approaches challenge the notion that corporate transactions must revolve solely around financial considerations, but remain well within the norm of standard business practices. They just aren’t common.

Conventional Wisdom: hulu is a standalone service as part of the Disney bundle

Unconventional Wisdom: hulu is just another tile on Disney+

Not Conventional Move: hulu is the foundation of Disney’s streaming future (even if it needs a different name)

The hot-take-industrial complex has exploded (one might say “has taken over”) in the last decade and has overrun everything from sports, to politics, to corporate strategy (cue Jim Cramer). The hot take runs on a combustible mixture of ego, volume, and being “unconventional.” While taking over the broader culture and melting our collective brains, it seems to have flattened the universe of possibilities to either “status quo” or “blow it up.” This comes at a time of legacy business model decline (some self inflicted), higher interest rates, labor strife, and a dearth of young/capable leadership – not exactly the conditions that foster proactive strategic thinking, creative deal-making, patient execution, successful coopetition, and positive-sum outcomes. Unfortunately, those are likely critical to realizing that one man’s trash is another man’s Senior Vice President of Basketball Operations and Head Coach.