“We would get criticized that [AOL was] too simple and it was too easy to use. But we got America online.”
On a recent episode of Recode Decode, hosted by Kara Swisher, former senior AOL executive Ted Leonsis talked about the beginnings of the internet era and the future of media, sports and entertainment live as well as on screen.
You can read some of the highlights from Kara’s interview with Ted at that link, or listen to it in the audio player above. Below, we’ve posted a lightly edited complete transcript of their conversation.
If you like this, be sure to subscribe to Recode Decode on iTunes, Google Play Music, TuneIn and Stitcher.
Transcript by Celia Fogel.
Kara Swisher: Today I am so happy to have in the red chair Ted Leonsis, who I've known since the dawn of time. He is co-founder of Revolution Growth. He's also a majority owner of several Washington, D.C., sports teams and CEO of Monumental Sports and Entertainment. Most importantly, he spent 13 years as a senior executive at America Online — AOL — which is where I met him. He's one of my favorite characters of the internet, he's one of the most innovative and pioneering ones and also one of the more creative ones. Ted, welcome to the show.
Ted Leonsis: Proud of you. You made a nice little career at AOL [KS laughs], writing all those books.
I know, all on your backs, yours and Steve’s. I have to thank you and Steve for my career. We all did well.
It was a good run.
We all did well. You guys did a little better than me financially, but I've done okay. But it did all start with you and Steve in that small office in Vienna, Virginia.
People know who you are. You're really well known in Washington and you and Mark Cuban are the famous sports owners. Talk a little bit about your background so that people know. Just a really quick version, where you started and how you got into the digital space.
Georgetown University.
Me too.
I was a junior at Georgetown, Hoya Saxa, and I had to write a thesis and was really lazy and I went to the library to find the smallest book in the library that I could find [KS laughs] and it was “Old Man and the Sea.”
Ah yes.
“It was a good day, the sun was hot, the water blue.” First chapter. I said, “This is my kinda book,” and I read it and went to Father Durkin who was my adviser and said I’m going to do something on Hemingway.
I started reading all of his work and realized how “Old Man and the Sea” — which was written in the '50s — really resembled his journalistic work back in the '30s. So Father Durkin, this Jesuit priest, connected me with the one computer scientist on campus. We had one computer on the entire campus at Georgetown, at the registrar’s office and a linguistics major. And we probably wrote the first algorithm applied in a commercial application. I input the first 5000 words of works from the '30s, the '40s and the '50s and “Old Man and the Sea” as a control.
Wow. Why would I know this? Go ahead, keep going.
We asked the computer, “When did Hemingway write ‘Old Man and the Sea?’” And it said, “1935,” not 1950.
Oh wow.
And I’ll honestly never forget Father Durkin saying, “This is the first time that liberal arts and technology have come together.”
Right, and the proof that you were making was ...?
Well, basically, we were able to say that Hemingway was not as successful later in his career and he needed some money and he basically wrote “Old Man and the Sea” as kind of a work of fiction for Esquire magazine and turned it into a book. He won the Pulitzer prize and about a year later he took his life. But it introduced me to computers, and when I graduated I went to a computer company in Lowell, Massachusetts.
Which is where action was happening then.
It was. Wang Laboratories. And Wang was the first populist computing company. Dr. Wang was attacking IBM and making computer technology accessible to office workers and to women.
Right.
And I just fell in love early on. This was 1976-1977, and it was really the first generation of a liberal arts major who was being introduced to computing. In 1980 I went to the West Coast Computer Fair, I met Steve Jobs, I bought an Apple II. Back then it wasn't really a computer, you bought a keyboard and you bought a ...
Keyboard in pieces and you put it together.
I remember buying the instructions for the personal computer from a guy who had them in baggies. He would Xerox it like a drug deal, I think I paid $5. I just got into the personal computing industry really, really early and I ended up quitting my job and starting a publishing company.
Which was on paper.
Which was on paper. Although it was a database. We basically became the repository for every piece of software and peripheral for every platform. And IBM was just introducing the IBM PC. I moved to Florida.
That was where the skunkworks was.
Yeah, it was in Fort Lauderdale. And I literally watched the PC business be birthed. And then in 1983, Guy Kawasaki and the people at Apple asked me to get involved, and we worked on the launch of the Macintosh. So from a very, very early age in entrepreneurial settings, I got access to East Coast/West Coast personal computing. And I started this company called Redgate Communications.
Right, that was after a gate you saw at a rich person's house.
Yeah, I said, “Oh, if only one day…” And I’m very proud of that early work, because when I bought this Apple II, I had the CPM operating system inside it and two pieces of software. And I’d just come back from the West Coast Computer Fair and Dr. Bob Metcalfe was talking about networks and ethernet networks.
Connected computers.
And honestly, I looked at this Apple II and these programs and I said, “This looks like a television to me. It’s this piece of glass and there’s these programs on the side. I bet you [that] soon, computers, televisions [and] telephones will be indistinguishable and that there’ll be this new media and, because everything gets cheaper and faster, the new media will be much more efficient, much more productive, much more friendly.”
And I wanted to jump in on that. So I started this company, and we merged with Steve Case and America Online.
When it was called America Online, not AOL.
Yup, we had less than a million people online. I think there were about 2.5 million people online in America. It’s amazing, I just saw some stats the other day: Seven billion people in the world, 4.5 billion people now connected and the U.S. has really fallen behind.
Although the saturation is almost complete, isn’t it?
Yeah, we have 300 million or so internet connections out of 330 million people. But we represent now less than 10 percent of the world online.
I forget, I think I saw 700 million people on WeChat.
Yeah, so I hope this podcast is going outside of the U.S.
Well, we’ll talk about that.
So we sound old, right, when you kinda go through that.
No we don’t, because I think one of the things that I’ve liked about you is you really did see around corners a lot. Not always at the right time. I was thinking of some of your city stuff, your early …
Digital Cities.
Digital Cities.
Digital Cities. Groupon.
Groupon. Yup.
When we did Groupon I said, “Oh, this is like Digital Cities. This is local and social and mobile.”
Super early. And you also had a shopping portal, if you remember. What was it called?
It was called To Market.
To Market, that’s right. I still have that software.
It was a joint venture with my little company and Apple and it really was the first interactive shopping.
It looked like a shopping mall, because I covered retail, that’s why I remember it.
Yeah, that was 1990.
Yeah exactly. And then you did a deal with ...
Sold the first ad. First ad in cyberspace. We were doing podcasts.
You did a lot of stuff.
We were pioneers there.
Yeah, you had music online at AOL, if you remember, and concerts.
We invented instant messaging. And it’s interesting. We’re doing podcasts now, and I mentioned this to someone when we were walking inside that Adam Curry, who’s a very very talented guy, was one of the first VJs at MTV. I remember him coming to see us at AOL early on and talking about podcasts. And we eventually bought Spinner, and Spinner’s mission in life was: Everyone can be a radio disc jockey, everyone should be able to self-publish on the internet in an audio fashion.
Right, and then you did, with Brandon Tartikoff, you did a deal with the idea of ... Right now they’re doing livestreaming of the NFL, you were talking about that. I remember talking to you about it. And people were a little bit making fun of you. “What do you mean, television on the internet?” kind of thing.
Yeah, well, Brandon was a true genius. He was president of NBC and Paramount and just the man with the golden gut. He came to AOL, I think in 1994, just to visit, and said it just reminded him of television in the ’50s. That the stuff was not very sophisticated but just the promise of the social adoption of the technology.
Television is, I think, 90 years old. I think TV was created in 1928, and now with your phone really a television in your pocket, it’s the greatest age for TV. And I looked at that Apple II, I mean, that’s really what this is. But the interactivity around it is really what has been the big differentiator.
So talk a little bit more about AOL, what that was like. Because that was a real rocket ship and then a crash, obviously. And you were there several different times, you left and you came and you left and you came, and you came after it crashed and you were there before it crashed. If you look back on it, what were some of the attributes and some of the things that you all did wrong there? Being early is not a mistake, it’s just — you were early.
Well, I think for 12 years we didn’t do much wrong at all.
Right. “So easy to use, no wonder it’s No. 1,” do you remember that?
The company went public, I think, with a $400 million market cap and less than 10 years later had $150 billion market cap. We were the first internet company to go public and our belief — which proved correct — was that we would make this a social medium.
I used to always talk about, “Can Steve Case's mom use this?” We had to make it accessible to everybody. That’s why we would get criticized that we were too simple and it was too easy to use. But we got America online.
You did.
And I first got online at 300 baud, but when we got 9,600 baud you would start to paint the screen and download a picture, right? Now I’m watching livestream games in HD on my iPhone. I mean, it’s amazing what’s happened.
So I think what happened to our company, we were an access provider. We got America online, we had the perfect business model, we charged people by the hour and then unlimited to get online. And then we were packaging on top of it, not unlike a cable company, content and services.
Content and services, right.
As I look back, I think a couple of the big strategic errors that we made — I mean, the first one was that people loved the AOL interface, the content, how easy it was to maneuver around. I remember us being criticized because we were a “walled garden,” I think we were called. Not that Apple today isn’t a walled garden or Facebook isn’t a walled garden.
Facebook is absolutely a walled garden.
There was this whole argument about the walled garden versus ...
The internet.
Let a thousand flowers bloom. And we just believed that a bespoke common vernacular, common UI, integrating email with messaging, with chat —
And people being part of a community.
Very much so.
Where you could get signals from them almost continually. Then data started to come in. I’ll never forget, we were walking through the NOC at AOL — the network operation center — and you looked up on the board and you said, “Boy, that ‘ER's’ going to be a hit.” [TL laughs] And it was because [when it was on], people weren’t using AOL.
Yeah, we could tell, we mapped simultaneous usage. I remember at our peak we would have 15 million simultaneous users. It’s ironic, I just saw a stat the other day that more people were watching e-gaming in the month of August on Twitch — they were getting 25 million people simultaneously to watch — than were watching the summer Olympics on all of the NBC channels. To think that that audience of multi-user [gamers] watching other people play multi-user gaming could be bigger than network television around the summer Olympics is just mind blowing.
But that was the premise back then. Steve talked about it, you talked about it. You guys bragged a lot before it was so. You talked about the concept of it and the idea of it, and brought in Bob Pittman, who was in entertainment. What do you think AOL’s legacy is to people? Because it was like Facebook, it is like Twitter in a lot of ways. It was like a lot of these pieces.
I don’t think the history of the internet, now that I own sports teams ...
Which we’re going to get to in the next section.
We talk with reverence about former players who led the league in scoring or changed the game because of their style of play. In business it’s not like that. The memories are very very short. What I have found personally is while you can glean lessons from the past, the present is — especially because the people that you’re serving are so different. The kids coming out of college today and the circumstances that they’re entering, it’s just so different.
And so sometimes I find myself now as an investor almost wanting to lecture somebody about, “Well, this is how we did it.” [KS laughs]. And I realize I would sound like someone on “The Ed Sullivan Show” talking about Elvis Presley.
That was still pretty good.
It’s just such a different era. And honestly, the biggest thing that we did wrong was we had everyone’s credit card, we built a platform, and we had two strategic roads to go down. And one was to roll up and consolidate the internet. Buy Amazon, buy eBay.
Yahoo. You tried a bunch. Google.
Buy Google. We owned along with Yahoo I think 8 percent of Google at the time. Or become a next-generation media company, and that was the path that was chosen. We bought Time Warner. There was friction in the system even though the base idea, convergence, that everything on paper, everything on plastic, would become X’s and O’s and would be delivered on a platform. And if you had everyone’s credit card and you could stream things — because AOL frankly was a private internet, right? We were the original cloud based service, right?
But it was just such a big merger and it became so distracting. And then I give credit to Google. I did the deal with Sergey and we went on the press tour together and he’s such a great guy and I remember him saying, “We know our place and we’re just going to license you some search technology and we’re so appreciative.” And then I wake up one day and basically they took everything we did on AOL. Mail. Messaging. Maps. Streaming video. You just go down the list and they did it better, faster, cheaper. And it was free. They didn’t have to be dependent on access.
As the world moved to broadband, we couldn’t make that transition, so we bought Time Warner. And you’ve worked at big companies. You worked at Dow Jones. We owned the company. It was called AOL Time Warner.
Much to Time Warner’s chagrin, but go ahead.
And all we wanted to do was have AOL as the interface atop of the cable platform.
Cable thing, they couldn’t do it.
And we couldn’t get the division to do it. And when I look back now, you just have to laugh to say we owned the company and we couldn’t get our own employees [laughs].
They were tough guys, they were tough guys [laughs].
[laughing] That’s how tough they were.
Years later when they finally combined it, I said, “Oh, you finally did what AOL wanted you to do, like way way too late.” Everything was gone by then, which was really interesting.
We’re going to take a break for a second, and then we’re going to talk about sports and your investment, because after AOL you were there back and forth a number of times, but you eventually left after it was sold off to Time Warner — it was sold off, made much smaller, you moved on. So we’re going to talk about how moved on because you really reinvented yourself yet again.
Talk a little bit about what happened after AOL. You became very wealthy, obviously, but it was considered a failure, that merger, at the end. Like it’s always put up as the disastrous merger of all time, even though in concept it was correct. Sort of like Google Glass: Conceptually it’s right, device-wise it’s wrong.
Yeah, when the merger was announced I retired. I didn’t move to New York and I bought the sports team here in Washington, D.C.
Why?
I just love Washington, D.C., I went to college here, it feels like home to me. And I thought that local was going to be where all of the growth was. I believed then, still believe now, that you spend 80 cents of every dollar 20 miles from your house, and being situated well in a super city, which D.C. was becoming, was important.
And two, to be honest, I didn’t like the idea of the merger simply because I had spent the first 15 years of my career battling against and playing offense against what I considered big old dumb companies. And now we owned one and it really hurt us.
They sure were dumb, yeah.
We had a young man who invented file sharing for music. It was called Newtella.
I remember.
And we launched it, I turned my back, I didn’t show up at the office — oop, it went out.
Which is how these things go.
And then board members and very senior people at Time Warner said, “We own the biggest music company in the world, bring it back, stop it!” I said, “You can’t stop it, it’s out.” We were building instant messaging, we invented instant messaging, we bought ICQ, we had this huge footprint, and we were building telephony into it and you could have VOIP services and call services right there.
Skype.
And the cable company had its triple play going. And so, well, “You can’t do that.” All of a sudden we went from being young, nimble, playing offense, to really being a defender. And I didn’t like that. I bought the teams and I bought the building here in D.C. — and you say “peering around the corner,” I didn’t think I was buying a hockey team or a basketball team or a building, I really looked at it as a SaaS software and local commerce company.
Huh.
You look at a sports team ...
I like how you worked SaaS in there, but go ahead. Software as a service, everybody.
The key attribute as a business model of SaaS is what’s called recurrent contracted revenues. And so you look at a sports team — that’s why Steve Ballmer, by the way, paid $2 billion and thinks he got a steal for the LA Clippers.
We have a naming rights deal for 20 years. We have a local TV deal with our cable company where you get ownership, equity in it, and you get paid fees and there’s escalators every year and that’s for 15 years. You sell sweets in your building and those contracts are for five years. You do sponsorship deals, they’re annual, sometimes five-year contracts. Even your season tickets, we have good teams, we sell out every game, we renew our season tickets and we raise the prices annually at 90 to 95 percent. So from a business model, I said, “I think these teams are undervalued.” So I invested, and to be honest, it’s ended up being one of my best financial investments. I’m pleased with it.
How do you like the moves — we’ll talk about your other investments — but in these sports investments, so much of it is digital now. Twitter just put the NFL on Twitter. Obviously there’s broadcast rights, which are escalating in price, and a lot of them have to do with the digital rights of those. Talk a little bit about that as a sports team owner, and the different sports, how they’re different.
I was chairman of the NBA media committee and we did the deal with Turner and with ESPN. It’s a $24 billion deal, and what that deal really cemented was the power of realtime live sports programming. In fact, what’s been proven now is that the only thing that a consumer really values as part of the cable video package is sports. Again, I remember “Seinfeld” was on Thursday at 9 o’clock. Appointment TV, must-see TV. Today nobody does appointment television.
Just watch in bulk.
But you gotta watch the baseball game or the basketball game or the hockey game. They drop the puck at 7:07 and consumers will pay for that. So the sports programming has become very very valuable. And it’ll continue to grow in value because of what’s happening around the data services in sports. We track, we metric, everything. And so there’s gamification happening. We just made a big investment in DraftKings. I think just that whole area of not only being able to play a game in a community and make money, the engagement level of what it does to the media, because now you’re not just watching the game, you have a rooting interest.
And so ratings and viewership and engagement is enhanced. We also made a big investment in a fantastic company called Sport Radar. Sport Radar does all of the tracking now for the NHL, for Nascar, for tennis. And outside of the U.S. — they’re a company that’s headquartered in Switzerland — they’re key players in the gaming and gambling industry. And you just have to look at, you know, jobs are important, education is important, generating taxes are important. And here we have in the United States 100 billion dollars that’s being bet in the dark web and not being taxed, not being regulated. And we have about 10 billion dollars that’s being bet through casinos and the like. And my feeling, my belief is that all of the states, all of the governors, all of the AGs, will say, “This makes no sense.”
They certainly love to sue.
Here in Washington, D.C. — you can grow marijuana plants in Washington, D.C., you can smoke marijuana in Washington, D.C., but you can’t play fantasy gaming. You can go three miles into Maryland, where they celebrate casinos. You can go drink all you want in that casino, you can gamble all you want, but you can’t play fantasy games. So there’s going to be ...
Where are we in that, in the regulatory [battle]?
New York, which was the bellwether of the AG efforts, really had some issues with fantasy gaming. Gratefully, thankfully, that’s all been worked out. It just came down to the regulating and the taxing: Being able to know who’s playing, how much money they’re putting up and how much will the states be able to get.
It reminds me a little bit of the whole conversation 20, 30 years ago on lotteries. Lotteries have gotten a bad name, but I have to remind people, the United States government was founded on a lottery system. The reason that Harvard University has the largest endowment of any university in the United States is they held the lottery. That’s how they built their dorms and then they had excess dollars and they put that into their scholarship fund. And it’s been earning interest since the 1600s.
We love to gamble here in this country.
Yeah, but again, outside of the United States ...
It’s very vibrant, in Britain, everywhere.
Every Starbucks, if you will. You go throughout Britain and every other storefront you can go in and watch soccer games and bet on them and have coffee. It’s a very communal setting and it’s not stigmatized.
So do you feel as if that’s almost over? Because you look at Uber, which was being pushed back and now of course is not.
Yeah, I think we’re going to see sports and data and gaming and gambling and e-gaming just being the biggest industries around, and they all converge around these buildings. At our building here in Washington, D.C., we get 2.5 million people through the turnstiles. It uplifted a whole community. That’s the other great thing about owning a sports team. The business is important and we’ll do great, but if you can win a championship, you’re now out in the valley. And you saw firsthand the last two years with the Golden State Warriors.
The Golden State Warriors, absolutely. Although I met one and didn’t know who that was. They were like, “I’m this person.” I’m like, “Hmm, what do you do? You’re very tall.”
But what Joe Lacob and Peter Guber have been able to do out there was remarkable. And they made for a generation of lifelong memories. Thirty years from now, 40 years from now, fathers, sons, grandchildren, mothers, daughters, friends — that will be a touchpoint and an indelible memory. They were there, they were a part of something bigger than themselves. There was a historic moment that was achieved. That’s what I want to do.
So what do you think about Twitter’s recent thing, the NFL games. Or Yahoo’s efforts to do that. Where do you see that going?
I think Twitter needs to be reimagined. I know a little bit about the business. If you looked at the original architecture of AIM, we had a feature called status away messaging, which was 150 characters. You’d leave a message saying, “I’m studying, don’t send me an instant message right now.”
I thought they did a good job initially in turning that platform around and making a publishing platform. I do not think they have done a good job in innovating, monitoring the system. It does not have a sense of community.
It doesn’t. What do you think about the sports stuff on it? Would you put your games on that?
No. Because they don’t have a subscription business. And because they don’t have a subscription business, they can’t arbitrage the rights.
If you look at what a cable company does, ESPN buys the rights to the NBA and the NFL and Major League Baseball. And then they resell those rights at a big markup to the cable companies as part of a bundle and then the cable companies build that into your fee. But it all starts with what will a consumer pay, what share of their wallet.
So ESPN gets $6 a month, I think, and they're in a 100 million homes, and that’s become the most valuable property in media. ESPN — until the last two years — was really the most profitable business. And when you own sports team, you’re in the league, you go, “How did we let that happen? How did we let them arbitrage and be the middleman?” Right?
And so I think what you’re seeing now is something like Twitter. They’re trying to stream a game and it will be an ad model, an ad business. And there’s not enough content — it’s not like they have every game and other leagues, it’s the NFL. So I view it as a good experiment.
But there’s something about the magic of watching the game on a big screen and then using your device or your iPad or your laptop and interacting. I’ll watch a game and I’m on my iPhone twittering. I don’t know how it’s going to work, watching it on [the phone]. Rather than looking up and then typing, now I’m looking down and watching the game.
So you don’t see an experience where you would sell your games into Twitter, or to a Google or a Facebook or an Amazon.
Well, Amazon is getting into the business. It's a very interesting model. They’re a virtual MSO already. They have Prime and they’re charging you a monthly fee and now they’re adding more services and they’ll raise the price. What they’ve decided to do in sports is rather than make a bundle and have to be good programmers, they’re going to offer lots of OTT channels and content on an a la carte basis.
Right, and you can buy them.
Yeah, so you’ll go to a page. I don’t think that’s going to work or it’s going to get scale. You look at Netflix — which really is probably a once-in-a-generation happening that you would pay $8 or $12 a month for schmuck insurance. [KS laughs]
I never thought of Netflix like that. “I saw ‘House of Cards,’ yes I did.” Right? Is that what you’re saying?
No, think about the basic offer. For the price of one movie ticket you can get every movie ...
That you don’t want to see.
And you won’t watch. And will occasionally come out with some episodic cool, original content. Like we were doing at Greenhouse back in the day at AOL to differentiate. And so I’ve been paying $8 or $12 a month for Netflix for 10 years.
Yeah, you don’t know why.
I can’t remember the last time I watched a movie but it’s schmuck insurance and it’s hard to cancel and it’s just become a utility. I want it and I need it. Now at some point you would think a Netflix or an Apple would become a natural partner for sports.
And why haven’t they?
I think one, it’s going pretty good right now, and if you get into sports you gotta compete with the big incumbents.
Right, the Rupert Murdochs of the world.
Yeah, ESPN just gave us a $24 billion deal. You’ve got NBC, they write really really big checks. You’ve got the regional sports programmers.
But you’ve got to be thinking of your future customers. Don’t you want to be where they want to be?
Yeah, and that’s probably the biggest thing that keeps me up at night and I don’t know why it’s not keeping every other owner up at night, right? We’ve grown up together, you know I have two kids, I have two children, they’re not children anymore, and I saw something remarkable happen. My son who’s 27 now, he went to University of Pennsylvania. And my wife and I drove him his freshman year and UPenn was wired for cable and we went to the Best Buy and bought a big-screen TV and we put the big-screen TV up and he was Big Man On Campus. And he got to watch the games in D.C. over Slingbox. He had his Xbox and he developed muscle memory and when he graduated he moved back to D.C. in a condo and he’s got the big-screen TV and he's got cable and he subscribes.
My daughter three years later went to Georgetown. They don’t have cable, they have wireless. I said, “Sweetie, we’re going to buy you a TV just like we did your brother.” She said, “I have zero interest in a television, I have my iPad.” We walked around when we moved her in, there were no TVs in any of the dorms. And so she graduates from Georgetown, she moves to London, she’s going to film school, she gets a furnished apartment, there’s a TV built into the wall, she doesn’t use it. The cable company in London doesn’t know that she’s there. So you hear all these terms like cord cutters ...
So what are you scared about as a sports owner?
I’m sold out of all our games and D.C. has become the No. 1 millennial per capita city in the country. Kids come to Georgetown ...
So you like to come to the games, but what about getting more customers?
They can’t afford tickets because I’m sold out and the only way they can get tickets is on StubHub and pay two or three times.
Yes, I know, Ted.
And then they replicate their dorm experience, three, four, five kids live in an apartment and they don’t get cable. So they can’t come to a game, they can’t watch the game. The other day I read this article from the New York Times about Vice. I think Vice and Viceland is the biggest con ever.
[laughs] There’s a nice house though in LA.
It’s genius, right? I’m going to make a millennial network for people who can’t watch it because they can’t get cable [laughs].
[laughs] Yeah, they’re on HBO.
So I mean, he’ll have to stream and make Viceland available as you said to where the customers are. So OTT is starting to happen.
So you’ll have a Ted sports team thing or you’ll all band together?
I think what will happen is there will be this emergence one day of virtual MSO. Someone’s going to package it up. Because as a consumer you’re not going to pay $8.95 for Netflix and $5.95 for a lacrosse network and $6.95 for a women’s basketball network. Someone will emerge as the virtual packager.
Who?
Some entrepreneur who’s smart and knows how to do marketing.
What about you, Ted? You had the idea right now.
But I do think that young people and their viewing habits have really really turned the media industry totally upside down. The next generation, the centennials, who knows what’s going to happen. I said, we’ll be paying them to watch [laughs].
Yeah, they’re going to be reading newspapers, I don’t know if you know that. But let’s talk about what you’re investing in, you’re also investing in food, in all kinds of different things. You have to eat.
You have to eat every day and so we’ve made big investments in a company that started here, four students from Georgetown called Sweetgreen.
A salad company.
It’s more a lifestyle, it’s more healthy living. It’s a community and they’re booming. And that’ll be a great investment and you know, who would’ve thought that kale could be more differentiated and valuable than social media in some cases. [KS laughs] We’ve invested in a company called Kava, which is like ...
Oh, Kava?
Yeah, Kava is ...
It’s in Fiji.
No, Kava is a mediterranean healthy.
Oh all right, a mediterranean healthy.
And then one of our favorite investments is Revolution Foods, headquartered in Oakland, which is healthy school lunches and healthy school snacks founded by these incredibly focused female entrepreneurs who are moms, who were mad as hell, not going to take it anymore. Why are we feeding our kids and making them fat and sleepy in school and giving them tater tots and peanut butter and jelly sandwiches? And they’ve really created kind of a next-generation Sodexo or Aramark. They have a lot of traction, they’ll grow really really fast.
What are you looking for when you look at investments? Because food hacking is a big thing, Impossible Burger, Soylent, all kinds of things.
We’re big, big investors in the company called Shinola.
In Detroit. They’re making real watches, real technology, actually. Watches are technology.
So there’s something about this connection between doing good and doing well. You know, Shinola’s founding vision was to bring high-paying manufacturing jobs back to America. They started in Detroit and have hired more than 500 people who were laid off by the auto company, but they knew how to work with glass and leather and mechanical things, and they had to be trained, and now they have high-paying jobs with great benefits and stock options.
In Detroit.
And they’re helping to turn Detroit around. Dan Gilbert, who owns the Cleveland Cavaliers, is probably the hero of our generation for what he’s invested and doing in Detroit.
He tried to buy Yahoo. What did you think of that when he was doing that? Why weren’t you in there, Ted?! I would have liked to have you back on my ...
How do you know I wasn’t? How do you know I wasn’t?!
Were you?!
Yeah, I was going to work with Dan on that.
Oh, were you?
Yeah, we’re good friends.
And what happened? Why didn’t you get it? AOL did more! Irony, irony, irony.
You reported this once before but we bought at AOL in 1993 the first search company.
You did.
It was called the Web Crawler. There’s a great, great entrepreneur named Brian Pinkerton and we paid $1 million for it. And about nine months later David [Filo] and Jerry [Yang] came to see me and Steve, they were being kicked off the campus.
This is at Yahoo.
… at Stanford and they needed to commercialize Yahoo.
Yeah, over using the servers there.
They asked could they rent or be co-hosted, because we had the biggest network in the world, and would we invest in the company. And we said, “Well, why don’t we just buy you?” And they said, “How much?” And we said, “Well, Brian Pinkerton, he was one guy, one million, you’re two guys, we’ll offer you two million.” I’ve remained very, very friendly with Jerry and every time I see him I go, “You know, you did such a bad move, you could have had two million bucks!” [laughs]
And then when Terry Semel ran it, when Tim Kugel ran it — my thesis at the time was he who gets to one billion first will win. And that the U.S. would become a shrinking part of this overall pie. When I first joined AOL when AOL acquired my company, we were on a march to a million.
March to a million, I remember that.
We had banners. And I said, “Throw that out, now we’ve got to be on a march to a billion.” And Yahoo really got its traction when people would cancel AOL and we wouldn’t let them take the AOL front end and mail with them. And so we allowed Yahoo and Hotmail at the time, because they ...
To get people.
To get users. And so I just always thought, if you’re going to be in the media business, that having one platform, and we had credit cards so we could get Yahoo near channels into the subscription business and that you should have one ad salesforce and you could manage multiple brands. That’s what big media companies do.
And it’s interesting that it took all this time and effort and AOL got spun out of Time Warner and went public and it got acquired by Verizon. And you know, it still has a reasonable footprint.
Both of them together do, certainly.
And Tim Armstrong, who I admire, I really respect.
Ex-Google executive.
I really think Tim is the most ad tech and marketing savvy of all of the executives in the industry. And you know, Marissa wasn't. She was a product person, if you will. So I do think the merger makes a lot of sense.
What would you guys have done with it? What was going to be your involvement? Thank you for telling me.
What we would have looked at is a front end and having to have subscription services that over-the-top networks, as I said ...
Sports.
Well, sports, and Yahoo Sports is one of the great franchises imaginable. A lot of their financial services, you know, that Yahoo didn't do: Mint or Betterment, or some of these services.
Quicken loans.
Just being able to turn that global footprint into something meaningful on a local basis. I still believe that local and social and mobile is still untapped.
So you had tried that. Let’s talk about investments that didn’t work. Groupon. Still struggling.
Groupons worked.
Worked ish.
Well ...
It wasn’t what it promised.
I mean, the story’s not over.
Okay.
And it’s a public company.
You’re still on the board, is that right?
I’ve been vice chairman, chairman, lead director, co-CEO, whatever they need to do it. It’s a big idea which was basically group discounting. But now it’s really become a local e-commerce company. And it has a $5 billion run rate. The stock is behind the reality of the company’s business model. It has scale. And it went public too early. I mean if you just look back at history.
Yeah, there were a lot of people who wanted the money.
Although I wish it was that simple. At the time, if you had more than 500 employees, you were kind of a public company. I think our first year the company did, it was a stub year of $30-35 million. It’s first full year it did $350 million, and the next year it did a billion two. That’s why it was on the cover of Forbes as the Fastest Growing Company Ever. And so we really had no choice.
And LinkedIn and Facebook and Groupon were all going public around that same time. And we grew globally too fast. When I came in to help and was co-CEO for nine months or so, we were in 70 countries, Amazon was in 9. I just remember being with the senior management team going, “Okay, let’s name all of the countries that we do business in,” and they couldn’t [laughs].
And badly.
We were in 700 cities, and no one can manage and get all 70 countries humming with the same playbook and the same business model and the like. And so the company — Rich Williams, who’s the new CEO, has done really, really great work.
And slowing down and making it work.
Exactly. And having happy customers.
So now what is it? A discounting company?
No, I’d say it’s a local e-commerce company and it has this overlay of being able ... If you’re getting haircuts and getting massages and going to your local restaurant, people buy a lot of travel tickets. People buy lots of concert tickets.
That’s what it started as, really.
Exactly.
At the heart of it, at the heart. So let me finish up by talking about two more things. I’m going to do a lightning round of companies now and I’d love to know your thoughts. That’s the last thing I’m going to do, but if you were an entrepreneur, what is a mistake that you’ve made, that you think you learned from or didn’t learn from or that you would do differently. And what is something you think you do really well? There’s young entrepreneurs listening, men and women, what would you say where you learned something or, you don’t even have to learn, just did that wrong, or ...
I would say that the present class of entrepreneurs — and I don’t want to paint with such a big brush — but the Silicon Valley unicorns speak with so much conviction and the celebration of grand entrances, you say, “What are you celebrating your entrance for?” You have to make great products, you have to have happy customers, and then you can have an exit and that’s when you celebrate.
I don’t know what happened, this cabal, if you will, of some media, some bloggers, some venture capitalists and the keiretsu, mostly in Silicon Valley. And because I am a little bit old I feel like I lived through the dot-com crash. We walked away from a lot of deals as investors because it was ... If you think your company’s worth $500 million and we want to make three to five times our money, at some point you’ll have to be profitable to go public and be valued at that. And you don’t even have a sniff of what the business model will be to get there.
So it’s offensive in some ways.
And so many people were collecting logos so that they could raise their next fund. What we did is we said, “We’re going to pursue this ‘rise of the rest’ strategy.” AOL was in northern Virginia and Groupon was in Chicago and Zipcar was in Boston and some of our best investments, Sweetgreen, Optoro, they’re here in D.C. Kleiner Perkins from Silicon Valley invested with us in Optoro here in Washington, D.C. And our theory is that maybe there’s going to be 10 great companies in Silicon Valley, but that more and more because the infrastructure, the technology, the lifestyle.
You know better than anyone, trying to get an apartment, trying to deal with the traffic, and the quality of life is not great in Silicon Valley.
Not great, it hasn’t been.
And the productivity of the second-tier companies as you recruit a VP of engineering, he recruits three people that he worked with, they come to your company, they get settled in, they get recruited 90 days later. The turnover is bedlam, and all we want to do is try to find that one great company in Illinois. We’ve made a couple of investments in Austin, Texas.
It used to be a hub. Up and down.
Yeah, we look at great academic environments. Environments that have nascent angel networks.
All right, but I want you to do a mistake. What did you do, Ted, that you ...
My biggest mistake, and I tell entrepreneurs, is, it’s a great sports phrase, that no one knows nothing. And when people were cancelling AOL, I said, “We need to let them as a parting gift take the AOL client with them for free.” And some of the world’s best consulting firms and data scientists said, “You can’t do that. Look at these top box scores. It will drive cannibalization, blah blah blah.” And instinctively, it just made sense to say we spent all this money getting people as customers, they love AOL, they hate dial-up access. So let them take AOL with them and we would have been the front end, if you will, for a lot of people.
You can’t know ...
And so there it was many times, the experts, the media, the consultants ...
You never listened to a word I said, Tim, not once.
You have to thine own self be true, and most of the great companies, great entrepreneurs, have been told a hundred times, “You can’t do that.” I was there at the birth of Amazon. Jeff drove his Volkswagen, came to AOL, and we did a deal early on. And when Amazon was struggling, we gave them $140 million to keep the company going. They were very important to the internet, very important to AOL. We loved and respected Jeff and what he was trying to do. And he was counterintuitive. He basically told Wall Street, “I’m not going to be driven by Ebitda, I’m not going to be driven by quarterly results. I’m going to build a 50-year vision and great company and I’m going to pour all of the profits and all of the cash back into the business.”
Now he’s looking smart.
And to thine own self be true.
All right. I’m going to finish up on some things and then I want you to end by telling me, these are very short answers, some companies now. What you think of them. Short answers. Uber.
Unbelievable. Travis needs to be managed because he’s on top of the world but he has changed everything. It’s, I think, one of the great companies ever.
Airbnb.
Even better. I sold the company to American Express and owned that board and know what’s happening in travel and what consumers are doing, and they just super set the entire hospitality industry. Brian [Chesky] is a saint, he’s a beautiful kid.
Slack.
I don't know if it’s a tool or a platform environment. I think it’s a generational, not a long term.
Ah, counterintuitive Ted Leonsis. I like that. Snapchat.
Snapchat is the first platform that I have not adopted, which shows that I’m old. [KS laughs] I mean, I’m on Twitter, I’m on Facebook, I do my email. And when I first saw Snapchat I said, “Oh I get this, it’s like AOL in the old days, it’s personal communications.” They’ve done an incredible job in creating stories and narratives and being able to communicate to millennials. They could be the sleeper in being able to do something very, very creative with sports.
Ah, wow. That’s interesting. I’ll just leave that open-ended. Last one, Apple. And I’m only including this because they just launched a new something, the weird earbuds.
I love Apple, I’m loyal to Apple. The last conversation I had with Steve Jobs he yelled at me and rightly so, because AOL was Apple Link, and that’s how we started. We had developed clients, different clients, for both Windows and for the Mac; we were an important company at the time, and Apple had less than 5 percent market share and I had to make a really tough decision. I think it was AOL 4.0 and we didn’t do a new client for it. And Steve really yelled at me and I feel terrible about that decision. It was the right economic decision.
Well, he did okay after that. That iPod/iPhone thing.
And I love the company and I’m a family of Apple adopters. The one thing that I don’t feel good about is, jobs are so important in the U.S., and I’m trying to be a part of this maker community with Shinola and Filson, and Apple needs to start to make some things here. Nike needs to start to make things here. We have to have that social responsibility. It’s hard and you’ll take a step back in your business model — there’s a reason everyone went overseas, they don’t pay as much. And they don’t take care of their workers and there aren’t unions.
So they need to come back to the U.S.
But there’s hundreds and hundreds of billions of dollars that jobs overseas ...
Bring them back here.
Start to bring some here and then the government has to play its part because Apple’s got tens of billions of dollars or hundreds of billions of dollars of retained profits outside of the U.S. that they've already paid an international tax, and if they bring it here it will be retaxed so they’ll be paying tax twice. There’s gotta be something in policy that could repurpose rather than taxing you, use those dollars to build manufacturing plants here and train people here. And you know, that’s probably the one thing that’s missing right now. I’m really proud of the work that Steve Case has done in trying to get a ...
Government, a smart government.
Yeah, and Senator Warner here from Virginia. Mark was a tech guy.
Right, my very last question. Would you run for office?
I was already mayor of my town.
I know you were, in Florida.
I'm the only person who was mayor, and I would not run for office because it’s too slow to effectuate change. Being here in Washington, D.C., politics is like sports here. This has been an incredible experience. I traveled a lot over the summer outside of the U.S. and it’s the first time that people look at us and it’s like a clown show. They don’t really understand. AOL had its best days, President Clinton was our president and we got to know President Clinton well and Hillary is experienced. And so, you know, it’s the politic thing to do and I usually do vote Republican, but ...
Please do.
But I'm going to vote…
You’re with her.
I’m with her, I’m going to vote for Hillary Clinton.
Well, we’ll see how that goes. Ted, this has been fascinating. As usual, more to come. I can’t wait to see what your next Ted 3.0 is, 4.0? What are we on now? 10.0?
[laughs] Well it was great to see you.
Absolutely good to see you. And my biggest mistake was not taking a job with Ted Leonsis.
We were trying to get you!
I know, I would have had an island by now at least. Something like that. I’ve turned down every internet mogul, so I feel good about that. I feel terrible about that because I’d do a lot of things with all that money. But you’re doing some cool things with it. Ted, thanks for coming by and talking to me.
And Kara, you work now for an AOL executive.
Yes, I do. Jim Bankoff. One of your mentees.
Who was my intern.
Yeah, intern, he’s my boss now.
And we’re really proud of what you guys are building and Recode is great.
Thank you, I will tell him so.