What ABC’s 30-Year-Old ESPN Purchase Teaches Us About Twitch


NEW YORK (TheStreet) -- What does the 30-year-old purchase of ESPN by ABC teach us about the Twitch and Amazon.com (AMZN) deal earlier this week?

It might show us Amazon CEO Jeff Bezos is even smarter than we already knew and bought a major asset for a song.

We all know that ESPN is the crown jewel of not just ABC today but its parent company Walt Disney (DIS) .  Disney's entire market capitalization today is $154 billion.  Some believe that ESPN would be worth a third of that -- or $50.8 billion -- if it was to be spun out.

What most have forgotten is the deal that brought ESPN into the ABC fold 30 years ago, on May 1, 1984.  I would have forgotten, too, had I not seen this New York Times article.

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There are many interesting aspects of how people viewed ESPN back then, only five years after its founding.  Although the company showed a lot of promise back then, it certainly wasn't viewed as a sure thing.

Cable TV was relatively new. Back then there were two primary models for delivering content over television: Broadcast TV supported by advertising revenue and Pay TV (e.g., HBO) which cable subscribers had to pay extra for to get things like boxing fights and movies.

In the early 1980s, you also had the initial specialty cable channels like CNN, which had just started, and  ESPN.  Back then, of course, few people could imagine a channel dedicated 24 hours a day to news or sports.  In fact, back then ESPN wasn't even 24 hours a day of sports. It was on only 22 hours plus an extra 2 hours of business news.  

ESPN financed itself back then through selling ads and also collecting fees from cable companies rather than from subscribers.  It helped pioneer this format of making the cable companies pay.  Over time, it became the most popular of all the cable channels as measured by the fees that cable companies were willing to hand over.  These extra costs of course eventually got passed on to their subscribers.

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But back in 1984 it was not a sure thing that ESPN would grow to be so popular. At that moment, ESPN had incurred cumulative losses of $100 million since its inception.  Ad revenue in 1983 had been $40 million and was expected to reach $55 million in 1984. It had 30.2 million subscribers.

Because of these signs of growth, ABC -- which already owned 15% of ESPN, which ABC bought for $30 million at the start of 1984, giving ESPN a total valuation of $200 million -- decided it wanted to purchase the remaining 85% stake. ABC came to terms with Texaco (now owned by Chevron (CVX) ) for $202 million, which included $14 million for the network's sports broadcasting facilities.  That gave a total valuation for ESPN back then of $237 million, or $481 million in today's dollars.

This means that ABC (and now Disney) have made over 105x their money on that investment in the three decades since -- a phenomenal return.

More importantly, they picked off the most valuable cable TV property during a period in which no one really knew just how big the entire space was going to be.

Even more interesting in the article is how Ted Turner wanted to buy ESPN and place it alongside his growing stable of channels, which included CNN, Headline News, and the SuperStation WTBS.  He even suggests he would have been willing to pay Texaco much more than ABC did.  Yet, he was boxed out.

As part of the initial tranche purchase ABC had made earlier in 1984, it negotiated a right of first refusal on the remaining stake.  It also had, in Texaco, a seller who didn't really understand the value of the property it had.  Texaco got the stake when it bought the assets of Getty Oil.  Even back then in the conglomerate-driven 1980s Texaco decided it should be a seller of any "non-core" holdings.

So what does this have to do with Twitch and Amazon?

In Twitch -- as well as Maker Studios sold earlier this year to Disney -- you have a new kind of "channel" where users get their content.  But it doesn't fit into any box we're used to.  It's not a cable channel.  It's a Web channel or something even more nebulous than that. It's a YouTube channel, or an Apple TV channel or a mobile channel.  What is that and how should it be valued?

We know it has 55 million subscribers or unique visitors (as opposed to the 30 million ESPN had when ABC bought it).  That sounds like a lot.  But will they go up or go down?

We know Twitch is dedicated to gamers but isn't a channel dedicated to gaming so hyper-niche that it doesn't make sense -- just as a 24 hour network dedicated to sports sounded crazy, too.

ESPN had lots of losses at the time of its purchase but it was generating money through ads and it was increasing.  The company believed it could also make money from selling to cable TV operators, but that was far from obvious.

Twitch sounds like a lot of money. Amazon is paying almost $1 billion.  But it's double the price that ESPN paid (in today's dollars) but Amazon is getting almost twice the audience.  In some ways, it is a more loyal and dedicated audience than those initial ESPN viewers were.

But the revenue model for Twitch is less clear today than it was back then.  Certainly ad revenue is always an option for any media company with an audience, but we have yet to see the digital dollars for ads go on a parallel level to TV.  

Will there be an opportunity for some kind of subscription revenue or can this be used to propel other Amazon content in ways that make money?  It's not clear, just as it wasn't back then for ABC.  But that uncertainty creates opportunity.

As the YouTube acquisition showed eight years ago, big audiences that get aggregated tend to get bigger.  It's never guaranteed but it's more uncommon for them to just peter out to nothing a la MySpace.

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For those willing to jump in first and pay up for the biggest brands in a burgeoning space, there's an opportunity (although not a certainty) they will be able to continue to ride a wave of growth.

Several years on, we might look back on this Twitch deal -- just as we do for ESPN and YouTube -- as something Jeff Bezos got for a steal.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @ericjackson

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates AMAZON.COM INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate AMAZON.COM INC (AMZN) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, weak operating cash flow and feeble growth in the company's earnings per share."

You can view the full analysis from the report here: AMZN Ratings Report

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. 

Jackson completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson. 

You can contact Eric by emailing him at Dr.eric.jackson@me.com.

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