Category: Opinion

Opinion – Should the Pac 12 Sell a 10% Equity Stake? Why the Pac 12 CEOs Need a Second Opinion

(This article is Part 3 of my series on the Pac 12, including whether they should have brought on a strategic partner in 2012:

Did the Pac 12 Need a Strategic Partner in 2012? Part I at Athletic Director U
Did the Pac 12 Need a Strategic Partner in 2012? Part II at Athletic Director U
Did the Pac 12 Need a Strategic Partner – Director’s Commentary)

If you found out you had a serious medical issue, a life threatening condition, you would get a second opinion, wouldn’t you? I mean, this is your life we’re talking about.

However, say you have a toilet running in your house. You call a plumber and he says he can fix it. Do you call a second? It’s one toilet and the guy can fix it for probably a hundred bucks or so. No second opinion needed.

Really, it’s a cost-benefit analysis, even if we don’t think of things in these stark of terms. A life is valued—no really, governments around the world calculate this—between a few hundred thousand to millions. A toilet getting fixed costs a couple hundred dollars…maybe.

When Larry Scott proposes to the Pac 12 leadership that they sell 10% of their future media rights, are they contemplating a small repair or major surgery?

This is major surgery, and the Pac 12 patient needs a second opinion.

That’s the message I’m here to deliver today, along with how to do it right. Hopefully all my readers have read my two articles analyzing the Pac 12 decision not to use a strategic partner in 2012. (And my follow up yesterday.) If you have, you know the Pac 12 likely made a big strategic mistake in 2012, and this decision could exacerbate it further. But let’s focus on the “how” of making the right decisions, not the past, with some other thoughts for the Pac 12 CEOs.

Thought 1: Hire a Devil’s Advocate

I’m a big believer in using a “Devil’s Advocate” when making tough decisions. Essentially, you need to pick someone who will make the strongest case possible for the opposite case of what you are pursuing. (The key is—in a corporate environment—that you don’t judge them for zealously doing this, if they do it respectfully.) There is a reason why we have an adversarial justice system; having two dueling cases helps uncover more information and discourages confirmation bias.

Confirmation bias is really what the Pac 12’s strategy screams to me. You have a charismatic leader in Larry Scott who believes in his vision. Which is great. And you need that. But if he has made serious strategic missteps in the past, he could be making them again. By the time all these bills come due, it may be too late. 

Now is a crucial time in the life of the Pac 12. My read of the news coverage is that the Pac 12 is very serious about selling some portion of ownership of their media rights. Whether it gets $750 million for 10% remains to be seen, but it seems likely they will try. (My gut is that they get $750 million, but for a lower valuation. Say for 20-30%.) That decision absolutely needs someone to come in, look at it, and tell you if you’re making the right decision over the long term. Here’s why and how to do it:

Why to get a second opinion

Two reasons. First, despite what they may tell you, this decision is likely irreversible. If the Pac 12 appreciates in value, then the partners who bought in at $750 million may ask for $1 billion to get your equity back. Where are the universities ever going to find that type of cash? So basically, once this deal happens, you never get that equity (of your media rights) back. You’ve permanently sold your ownership.

Second, do you really think you are getting a great deal here? That’s a huge judgement call. Do the universities really think they can outsmart the investment bankers (or ex-investment bankers at giant tech companies)? They have teams working on this. They do it all the time. And they usually win. You hired an investment bank which may have compromised judgement. (I’ll explain that next.) So why not just keep your ownership unless the offer really is too big to pass up?

Why to hire an outside advocate: Combat personal economic self interest

One of my eventual themes will be “understand economic self-interest”. In short, a lot of behavior can be explained by profit maximization. I mean, that’s economics 101, isn’t it?

Unfortunately, in the business press, individual economic self-interest is usually ignored. Here’s an example of what I mean. Say a biz dev guy sees a huge potential deal with a partner, but his firm has no ability to deliver on it. Still, he pushes and pushes, gets the deal through, collects a big bonus. Six months later, he bounces to a new company. That’s a decision that was bad for the company—when they fail to deliver—but good for him personally because he got a big bonus and resume bullet. Individual and firm incentives are often not aligned.

The Pac 12 likely has quite a few potential “individual versus collective” conflicts in this deal. Start with your lead adviser in The Raine Group. They are an investment bank. They don’t collect pay checks on deals that aren’t done. So they have an incentive to find a deal and, more importantly, to sell it really hard. If you know that, you can see why you need devil’s advocate, or you’ll only hear the positive case from the bank. Again, it’s not their ownership, and they get paid more based on a successful deal. Do you see that conflict of interest? (And if they get paid either way? Well, I mean that’s money straight from the university’s pockets.)

Second, I think there is a good chance that Larry Scott has a bonus structure tied to the distributions to schools. If that is true—and I don’t know for sure—then if he sells an equity stake and gives that to the schools, and calls it an increased distribution, he could collect a bigger bonus. That’s surely a conflict of interest, isn’t it? We can’t want the head of the Pac 12 to have a financial incentive in selling a portion of the equity because he would personally benefit in the short term do we?

How to Do it Part 1: Insist on the skeptical approach

Insist that the consultant you hire gives you the bad news. The skeptical approach. The takedown of your current strategy. At best, you’ll decide not to pursue an unwise course of action. At worst, she’ll identify flaws in the plan that can be corrected in time. So the key is an approach that interrogates the numbers harshly. That identifies all weaknesses and flaws in reasoning up front.

This person will need all the Pac 12 financials, ideally. They need the Excels and data too, not just power point summaries. Then they can build alternative models.

How to do it Part 2: Don’t hire anyone else who can profit from the Pac 12

Category one of this group is the Wasserman Media Group or IMG or any other sports media related entities. The bummer is they have tons of great knowledge to apply to this problem. The reason I still recommend avoiding them, though, is because their advice will likely come back to, “You should hire us instead!”, which is still conflicted. So only consider hiring them as a consultant if they sign something like a no-work clause for 20 years. (Or let them do a free analysis, and still have another Devil’s advocate.)

Category two is non-sports consultants, who are better but not perfect. The challenge with every consultancy is they also just want more business. Most of the recommendations will conveniently include “hire us for more analysis”. So you have to be careful. They are also plenty expensive and the Pac 12 is already spending some unknown fortune on consultants.

The problem with this recommendation—no matter how important it is—is that I’ve sort of eliminated the entire universe of potential partners. So consider getting creative with it, Pac 12 leadership. You have how many business schools in the Pac 12? Everyone or nearly all? Why not hire one of them to do this analysis? UCLA’s business school handles consulting projects all the time and even has a Sports Management club. They’d leap overthemselves to answer this question. In a dream scenario, have each club come up to an undisclosed location for a week, and make it a case competition. (And you know what? I’d take that work over a lot of consultancies…)

(Oh, I’m available too. And I guarantee my day rate is much less than all the people the Pac 12 is currently paying. If you are an athletic director and reach out to me, I’ll answer your questions. Seriously, my email is on the contact me page.)

Thought 2: Don’t Pay Bonuses Tied to This Deal

The key to “creating value” is to increase the willingness to pay for customers (in this case, distributors) or lowering the costs of producing your product. This is how smart strategists think about their customers and how to deliver products to them.

Selling ownership is neither!

Really, I can’t emphasize this enough. If you sell a part of yourself, you aren’t generating revenue, you’re giving part of you away. I’ll try to explain this in two ways. First, the traditional finance explanation. When you sell equity as a publicly traded company, you don’t report that on the “income statement”, which is about revenues that flow down to profits or losses, but on the “statement of cash flows” under “cash flows from financing activities”. This is because it is about generating cash, but not from business activities.

Here’s the common sense case for that. Take your house. If you take out a home equity loan, did you “generate” additional revenue? No, you got cash in your bank account, but you have to pay it back. In an equity sale, you do that by paying out a proportion of future earnings. If a company sells more stock, they don’t say they boosted revenue.

If the Pac 12 increases its distributions to schools based off this equity sale, then claims that this increased distributions to schools and hence bonuses tied to distributions should be paid out, then yell, “STOP!”. That’s using an accounting gimmick to boost salary. That would be crazy. (And if it happened, the UC Board of Regents should investigate or consider litigating, if their own universities won’t.)

Thought 3: Demand Accountability in All Consulting Payments

Just casually looking at the books of the Pac 12—via the Form 990s and Jon Wilner’s reporting—a lot of people get paid millions from the Pac 12. This is one of those situations that has me scratching my head. You pay your CEO the most of any conference, he has more higher paid lieutenants than other conferences and yet he still pays millions to other people to advise him what to do. (Right now another consultancy is reviewing officiating, but I definitely agree with that hire.)

If the Pac 12 wants to increase distributions, insist that the Pac 12 find the cash savings in consulting fees. I bet the Pac 12 could find $1 million per year, easy. You could likely do this immediately. (And if he or his lieutenants won’t, find someone who will.) I’m also not the first to suggest this, as both Pac 12 Jon/John have suggested it. 


(But seriously, keep the independent review of officiating. That’s needed.)

Most Important Story of the Week and Other Good Reads – 8 March 2019: Youtube (And all Social Platforms) Deal with Child Predators

I wouldn’t call this a “what a week in entertainment!” media week, but at least one outlet ran an “special emergency” newsletter, so clearly we had news. Instead of that big story–or the continued musical chairs at Warner Media–I’ve had my eye on a few stories that add up to a bigger one.

Most Important Story of the Week – Youtube Battles Child Pornography/Predators

This was a contender for the most important story last week, but got bumped since it isn’t really a “one-time’ story. It’s slightly evergreen. Since we invented video on the internet, we’ve had these problems. Slate had an article on Periscope and child predators back in 2017. So I’m not just picking on Youtube even though I put them in the headline; any social media platform (with video/images) eventually has to deal with predators targeting teenagers and children.

Let’s stick on that for one quick moment.




I just paused to think, “Is that too strong?” It really isn’t. It just describes what is happening. If you doubt this, read the excellent article that set off the furor on Wired. Clearly, this is a problem. (Again, pair it with the Slate article above and doubtless this problem happens on multiple social platforms.)

The best defense of Youtube (and others) has been something along the lines of, “Well, you know they do have to handle billions of videos and trillions of interactions. This is fair, yet I feel like I need a Matt Levine-esque analogy to explain why this isn’t really a defense.

Let’s say you owned a park. For some reason, you were able to monetize parks and turn the parks into private places. And since this is the tech age, say I turned one park into 10,000 parks. All sorts of kids started playing there, mostly with their parents, but sometimes you convinced parents the kids were safe in the parks without them. Then all of a sudden a bunch of creepy dudes in the forties started hanging out at the park without kids. And then they talked to the kids and eventually asked the young girls to expose themselves. If I was making money off that enterprise, is saying, “Well, I own 10,000 parks, I can’t keep child predators out of all of them!” The answer would be, “Well you better damn well try.”

See running safe parks is part of the requirement to run parks. And with video, running a service where people can’t target children should be part of the requirement.

The problem with Youtube, Periscope and others (who likely have the same problems) is that my 10,000 parks doesn’t even capture the scale. I’d need 1,000,000,000 parks! This is the challenge of social video, in that content is no longer curated by executives in Hollywood offices working by the dozens, but by engineers optimizing equations on computers anywhere around the globe.

Like I said above, what makes it work is also what creates this shady underbellies, as Slate called them. This is where I concede the very eloquent defense of the tech companies. Tyler Cowen (who I saw linked to by Kevin Drum) makes the case that when it comes to social media, we have a trade-off of three forces: the scale we want to achieve, the costs to review all the content, and the consistency to treat only get rid of bad content. Cowen and Drum argue you can only have two of the three. That’s hard to disagree with.

This view was echoed recently in Dylan Byer’s newsletter too, who linked to Wired writer, Antonia Garcia Martinez. To summarize the challenge facing Youtube and others, “All detractors have to do is point to one bad piece of content, whereas Youtube is hosting billions of videos.” That’s a hard point to disagree with. If you want Youtube to exist–meaning you think it is valuable–you have to accept it is huge, so hard to police perfectly. Further, it isn’t like Youtube is doing nothing to combat these issues.

Ultimately, while I understand the scale of the problem, I don’t think those defenses get it quite right. And I have a few counters for today. Basically, regulators should demand Youtube (and other social platforms with video or images) do better when it comes to children, and not just reactively to bad press:

First, this isn’t about all content, but clearly illegal/evil content.

The counter is summarized in this Chris Mim’s tweet, which doesn’t mention the child pornography issue, but is in the same family.

My “synthesis” is that we can’t control all content, but can try to control content that is clearly evil, for lack of a better word. Promoting genocide? Yep. Interfering with democracy? Yep. And content that hurts children. (Vaccines are a tougher call, but given that kids can die when they contract illnesses, it merits solutions too.) The fact is, as compelling as the “This isn’t a huge problem” argument is, if a social platform helped cause a genocide or creepy young men flock to teen videos, that’s a problem. And illegal. Even more so if you’re monetizing that interaction. One of the costs of running a video platform is finding this content and banning it.

Second, these companies are WILDLY profitable.

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The Most Popular Oscars Ever? Nope. (Why The Academy STILL Needs Fixes to Make the Oscars More Representative)

Records have nearly been smashed! After decades in the doldrums, in this year’s Oscar’s telecast—for achievement in the year 2018—popular movies made a comeback. Here’s Todd VanDerWerff explaining for Vox:

For the first time since 2012, the total domestic box office of the eight films nominated for Best Picture topped $1 billion — and that’s without box office receipts for the 10-times-nominated Roma…Indeed, the $1,260,625,731 pulled in by the seven films we have data for is the biggest total for a Best Picture lineup since 2010, when the 10 films nominated (led by Toy Story 3) made $1,357,489,702…the average box office haul of the nominated films we have data for, the number becomes even more impressive: $180,089,390. Though their combined take falls slightly behind those of 2011 and 2010, the average is well ahead of those years ($135,748,970 for 2010; $170,512,813 for 2009), since 10 films were nominated in both those years.

(I changed Vox’s years to the year prior to match the rest of this article.)

This would seem to refute my thesis from last August; I predicted—based on the data—that the Oscars are nominating fewer and fewer popular films. 

So let’s check back in on those metrics I developed now that we have a new year to add to our dataset. But I’ll go above that simple mandate: I want to make an argument for popular films. I think the Academy has a chance to get higher ratings with more popular films and more importantly, I think this would better represent the state of film each year. Let’s start with defining the problem. Before one can solve a problem, one must understand it. Otherwise the solution probably won’t work.

The Problem: The Academy is Nominating Fewer Popular Films

Collecting the Data

This is true. But it’s complicated. My “rule of thumb” when you have a complicated issue that can be measured in multiple ways—like Oscar voting—is to just measure it as many ways as possible, to see where the trends lead you. If most or all the measurements roughly align directionally—meaning one or two measures could be an outlier—then you can generally trust the trend.

(This process is my refutation to the worst quote every about lies and damned lies. Mark Twain did more to set back statistics than anything._

Some definitions before I use the metrics. First, I’m calling critically acclaimed/awards-focused films “prestige” going forward. In olden times, we called these films “independent” but most independent films now have major studio distribution, so that doesn’t make sense. I’m defining “popular” films as films grossing over $100 million dollars in ticket-price adjusted terms. I’m defining “blockbusters” as films grossing over $250 million. That makes that category very, very small—usually fewer than 10 films per year—but that’s the point of the blockbuster category. Finally, I’m adjusting all ticket prices to 2018 box office, since that’s what my data set used in August. 

With that out of the way, to the charts and tables. Before we start, know that the Academy nominates a different number of films each year for Best Picture depending on the voting totals. This year it was 8 films, where 2017 and 2016 featured 9 films. 2014 and 2015 featured 8 films. And 2009 and 2010 filled out ten slots each year. We need to account for that.

(Oh and I’m assuming “box office” is correlated with “popularity”. But feel free to disagree with that, somehow.)

Let’s start with “average box office” per film. This is the metric VanDerWerff quoted above. Crucially, Vox used the the mean (or arithmetic) average. With mean averages, you run the risk of one huge outlier skewing the results. (In finance, see the “Bill Gates walks into the bar, everyone is richer, on average” scenario.). Avatar did this in 2009; Black Panther is doing it now. (Also, Black Panther box office haul is divided by fewer films (7) compared to Avatar’s fellow ten films.) 

One outlier should not mean the films as a body are more popular. To account for this, I calculated both the mean and median average. I wish I had thought of this back in August, but I’m updating it now. Check it out:

box office unadjusted

So by mean average, yes we’ve done it! The most popular Oscars of all time!

But the “median average” shows a huge split. This is evidence that overall, these films aren’t that popular compared to years past, with one tremendous outlier. As I said though, we could look at this in both adjusted and unadjusted terms. Adjusted box office is the equivalent to accounting for inflation in economics: it’s something you should ALWAYS do. Time value of money, and what not. This won’t lower this year’s average, to be clear, but raise past years. So I included both below, with again both the mean and median averages:

box office adjusted v02

The trend lines are the same, but a little even more decline in popularity. However, one of the purposes of nominating the films is to have multiple popular films. Even one blockbuster isn’t enough to get lots of people interested. That’s why I liked counting the number of popular and blockbuster films. (Last time, I included these in both percentage terms and adjusting for inflation, but I think the story is roughly the same without those views.)


This looks a little bit better, though arguably we have been flat at 3 popular films per year. (If you use percentages, it may even look a bit better.)

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Don’t Kill Mickey Mouse! A Simple Solution to Copyright Law EVERYONE Will Love

Let me paint a nightmare scenario:

“Evil corporations realize they have extremely valuable intellectual property. Famous characters like Superman, Batman, and most of all, Mickey Mouse. These corporations employ armies of lawyers and lobbyists and they get to work on Congress. They extend the copyright on all works indefinitely. This means potentially millions or tens of millions of works that could enter the public domain…never do.

Creativity dies.”

Now imagine the other side:

“Mickey Mouse enters the public domain. There is a flood of Disney merchandise on the market. Evil companies have him start doing pornography. Disney loses billions in market capitalization.

Mickey Mouse dies.”

Scary stuff, right? It’s a classic dilemma. Either we radically improve copyright law and free creativity and Mickey does pornography—what the Electronic Frontier Foundation wants—or we keep the status quo forever and creativity is permanently stifled—what The Walt Disney Company wants.

If I haven’t written it before, I hate dilemmas. Not the idea of having to choose between two bad options, but the concept of dilemmas. Usually “either or” ethical scenarios are the stuff of lazy polemicists. They force someone’s opinion on you by making it seem inevitable.

The above two scenarios do that perfectly. Nightmare scenario one is corporations run amok, ruining creativity for the rest of us. Nightmare scenario two feels better to me, but is still pretty yucky. I don’t want Mickey Mouse in pornography either.

Neither side will win. Again, the “free the content” folks—who I’ve mostly heard on On The Media or read in blogs—have great points about creativity. But being an absolutist on this issue will just drive them into the brick wall of giant corporations with billions on the line. They will NOT give up without a fight. As a result, the corporations have taken the hardest of hard lines. As a result…

Copyright protection dates back to 1923.

To quote TV pitch men, there has to be a better way.

Think about that, for 150 years of American history, copyright extended for a creators live, then it absolutely froze at an arbitrary date that happens to protect Mickey Mouse and Winnie the Pooh. As long as that is the case, we can’t push the copyright law forward in time. Disney won’t let us.

The key to break through the logjam is to understand the true losers. One of my themes of this website will be “understand the economic incentives.” Most problems are clarified, if not solved, when you do this. So while there could be lots of winners by improving copyright, there are some clear losers who will fight this tooth and nail. The studios like Disney, Warner Bros. and others could hemorrhage billions in market capitalization.

So what we need a compromise. We need to realize that the two positions staked out currently in the debate are NOT the only two positions we could have. We could craft a proposal that will free millions of creative works from copyright jail, while allowing Disney and the studios to keep control of their IP, and we can do it for free. In fact, we’ll make some money on it. So here it, trying to get it to fit onto a post card to make Paul Ryan happy:

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