The NBA and Microsoft, and An Interview with Adam Silver and Satya Nadella

Good morning,

As promised earlier today, today is an exceedingly rare two post day on Stratechery. This is also a post that is a bit out of character for Stratechery: there is less analysis, and more news-breaking.

On to the update:

The NBA and Microsoft

From a Microsoft press release:

The National Basketball Association (NBA) and Microsoft today announced a new multi-year collaboration, which will transform the way in which fans experience the NBA. As part of the collaboration, Microsoft will become the Official Artificial Intelligence Partner and an Official Cloud and Laptop Partner for the NBA, Women’s National Basketball Association (WNBA), NBA G League, and USA Basketball, beginning with the 2020-21 NBA season.

Microsoft and NBA Digital — co-managed by the NBA and Turner Sports — will create a new, innovative direct-to-consumer platform on Microsoft Azure that will use machine learning and artificial intelligence to deliver next generation, personalized game broadcasts and other content offerings as well as integrate the NBA’s various products and services from across its business. The platform will re-imagine how fans engage with the NBA from their devices by customizing and localizing experiences for the NBA’s global fanbase, which includes the 1.8 billion social media followers across all league, team and player accounts.

Beyond delivering live and on-demand game broadcasts through Microsoft Azure, the NBA’s vast array of data sources and extensive historical video archive will be surfaced to fans through state-of-the-art machine learning, cognitive search and advanced data analytics solutions. This will create a more personalized fan experience that tailors the content to the preferences of the fan, rewards participation, and provides more insights and analysis than ever before. Additionally, this platform will enable the NBA to uncover unique insights and add new dimensions to the game for fans, coaches and broadcasters. The companies will also explore additional ways technology can be used to enhance the NBA’s business and game operations.

As part of the collaboration, Microsoft will become the entitlement partner of the NBA Draft Combine beginning next season and an associate partner of future marquee events, including NBA All-Star, MGM Resorts NBA Summer League and WNBA All-Star.

The logic for the NBA in this deal is clear:

  • First, in my experience Turner has dropped the ball in terms of the NBA’s digital experience, particularly League Pass. Microsoft should dramatically improve the experience for the NBA’s digital customers. [UPDATE: I mostly watch International League Pass, which I now understand was not managed by Turner; my apologies for Turner for the mistake]
  • Second, the NBA is, in some respects, no different from a movie or television studio: it produces content and then sells it to the highest bidder, usually delineated by geography. Digital, though, makes it possible to own the customer relationship directly, a la Netflix. Or perhaps Disney+ is the better example, given how differentiated the NBA’s content is; this deal is clearly working towards that goal.
  • Third, that last paragraph from the press release is an important one: it seems likely that the NBA is going to make out well in this deal from a marketing perspective, even if this partnership is underwhelming.

The Microsoft angle is equally interesting, and like many tech deals, has much higher risk/reward:

  • There are significant technical barriers to achieving what this deal entails. Microsoft is going to spend a lot of time and money on a relatively small business.
  • Microsoft, at the same time, is uniquely suited to solving these challenges: what stands out to me in the conversation below is the talk of Xbox, a division that failed to achieve Steve Ballmer’s goal of a universal “three-screens-and-a-cloud”, and has instead become a fine enough gaming option; its technologies, though, could really make this effort sing.
  • If Microsoft pulls this off, the potential to re-use the technology developed for the NBA, not only for other sports leagues, but for media entities of all types, could potentially be massive.

There are other angles to this as well: one thing that intrigues me is the potential for channel conflict on the NBA side. It seems a bit far-fetched to think that the NBA seeking to own the customer relationship is good for TNT or ESPN, or that the latter will help the former achieve this goal. And yet TNT and ESPN pay the NBA’s bills. This will be a project worth watching for many months to come.

An Interview with Adam Silver and Satya Nadella

In the run-up to this announcement I was able to spend a few minutes with NBA Commissioner Adam Silver and Microsoft CEO Satya Nadella. A lightly edited transcript is available below.

As a reminder, the Daily Update Podcast is particularly useful for interviews, even if you are generally a reader, and today’s interview will be posted at the same time as this email is sent.

Adam Silver: Ben, I just want to say, first of all, thank you for taking the time to do this and we’re hugely excited about this new partnership with Microsoft and I think like so many other industries, technology is going to shape our future and this is going to be without doubt one of the most important relationships that the NBA is going to have going forward because it’s gonna define how we relate to our fans.

Just to do a quick overview about what you’re launching, I think that the headline would be that the NBA is partnering with Microsoft on new digital experiences. And to make sure I understand correctly, this entails the website, the apps, the apps on TVs, League Pass, the streaming infrastructure, all of those sorts of pieces. This is an all-encompassing sort of partnership, is that correct?

AS: Yes.

You mentioned that in the future this would be about connecting with fans. How has the NBA not connected with fans that you see needs to change, and which this partnership will make possible?

AS: I think it’s still largely a one-to-many experience, in that there’s very limited customization, and we know that from our fans that they are interested in particular teams, particular players on particular teams, combinations of players that may cross over many teams, or specific aspects of the game, and that we generally don’t have the ability to do that now. Our direct-to-consumer relationship largely revolves now around a website and a delivery system, over-the-top for bringing broadcast game, streaming games to people around the world. But we’re fairly limited in terms of artificial intelligence, understanding what fans really want, customizing the program to their needs, customizing highlights especially. For example, you being in Taiwan, we have a huge following in China and Taiwan, and people being 12 hours away, sometimes it’s not convenient to watch a live telecast, so they want to consume the game in different ways. So it’s really all of that, and it’s sort of reinventing the experience for NBA fans and customizing it more to their liking.

Do you have a concern in the long run, and I’m curious how this fits into it, about young people not watching games or people in different countries not necessarily watching games, but being all about the highlights? Obviously there’s a lot of talk about the NBA being very popular on social media and things on those nature, but how does the NBA actually pay the bills from highlights as opposed to traditional broadcast television?

AS: Well, I’d say one, any type of content we deliver to fans, has either advertising associated with it or it’s delivered on a pay service. For example, the games that we deliver around the world are all part of a pay tier where people pay for season passes, individual games, or even portions of games. And in terms of young fans, there’s no question that their habits are changing, it’s not just for sports. I mean, number one, they’re watching a lot less conventional television and the programs they watch, they often watch for shorter periods of time.

I think that part of that challenge will be met by this relationship with Microsoft, because the way to keep people of any age for watching longer is to create more engagement with them, to deliver to them more of the content that they want, and I think part of this relationship, it also goes to the enhancements around our telecast, whether that be on a separate screen or whether that be part of the telecast itself, in terms of deeper content about particular players they’re interested in, data around those players and in some cases, gaming content, and that can either be fantasy content or sports betting content. You know, again, I think we just have to adapt for younger consumer habits because those younger fans are watching more screen time than any generation in history of media. Every second matters with those fans, they have so many options, you always have to be focused on keeping them engaged.

Do you see a pretty significant second stream screen component to this platform, where you might hope that fans will have the future NBA app open while they’re watching a game on ESPN or on TNT or whatever it might be?

AS: I do. I can’t say whether that second screen will in essence be part of the first screen, I leave that to Satya, the technologist, but I will say right now that’s the case for most of our fans. I challenge anyone who watches any sports program right now and isn’t on some sort of second screen at the same time. That second screen may not be related to what they’re watching on television. I mean they may be doing their Outlook emails, but it’s hard to find anyone who isn’t also engaged in another screen. I think the goal for us is for that additional content to be related to the NBA programming they’re watching on their first screen, and I think what we know from our customers/our fans is they want deeper content about the NBA players and the NBA teams that they care about, and that’s a lot about what this relationship will help deliver.

You mentioned something about you’re not sure which screen it will show up on, so is it possible this partnership will not just be about digital devices but could also impact what is actually shown on broadcast TV?

AS: Absolutely. I mean I think if we do our jobs right, we’re a complement to whoever our broadcaster is, because they have the same interest we do in increasing engagement, increasing time spent viewing, even if it’s conventional, linear television. And so this relationship will come with us to whoever our distributors are.

Do you think you might be hampered at some point in pursuing the full possibilities of everything being digital, in part because you do have this relationship with these more linear focus entities like the big broadcast companies that pay a huge portion of the bills? Or do you think you’re going to be able to navigate that?

AS: I don’t because I’ll just use the two examples in the United States, in terms of our most important national relationships. One is WarnerMedia, which is of course owned by AT&T now, so they’re very focused on our digital distribution. And the other is Disney, owners of ABC and ESPN. ESPN is making enormous investments in ESPN+ right now in the conversations that we’re having with Bob Iger and Jimmy Pitaro and their new CEO Bob Chapek are all about how we can transform with them into their direct-to-consumer business.

Got it. So what you’re doing and the infrastructure that Microsoft is helping you build could potentially plug directly into the ESPN+ infrastructure and so it’s not just like an NBA streaming service, it could plug into the ESPN streaming service.

AS: Yes, exactly. I mean we want to have that ability to have control of our own destiny in terms of direct-to-consumer, but we also recognize our business is based on and built on partnerships. And what we want to offer to those partners is this common experience that NBA fans can have regardless of what service they’re engaging in to receive their NBA content. There should be a certain commonality to our brand and to the delivery of NBA programming and that will come through this Microsoft backbone through their AI technology and through their cloud services.

So I think there’s an obvious play here about the personalization, the AI, I’m sure Satya, you would want to speak to that, but I think about this idea if you’re doing a one-to-many model, that’s where the NBA came from, and wants to embrace the fact that you can basically connect with individual consumers and they can get exactly the content that matters to them that is special to them, that’s compelling in part.

But if you go to being a platform, that’s still a broadcast model, it’s more of an individualized broadcast model. Could there be other parts like more of a social model, like you can have different shared experiences with fellow fans or with other people watching a game, I think people in quarantine right now wish they could watch an old playoff game together at the same time and sync up the start and talk about it, etc, or even remix your content. So like Nate Duncan and Danny Leroux, do these broadcasts on Twitter alongside games, is that something that could be incorporated into this — you get your own custom feed?

AS: I love your question. I’m going to answer it then hand it over to Satya because I think it’s precisely that. I think there’s so much focus now on our potentially playing fanless games this summer, and one thing that I keep pointing out to people is that the vast majority of our fans, probably 99% of them plus, are never stepping foot in an NBA arena. So we’re always playing in front of fans even if you don’t have those physical fans in the arena. It does change the experience and we’ll miss them greatly but I think it just creates an even greater challenge on how to reach them.

One of the things we thought about from a technology standpoint is if maybe that it is a unique experience to be in an NBA arena, but the next best thing is to in essence sit down to watch a game, Xbox-like maybe with your headset on, and you have a friend on your left, a fan on your right and it’s just as if you were in the arena talking to those friends during the game. And then maybe also rather than limiting yourself to the 19,000 people in the arena with you, this global community of NBA fans is all coming together in real time, and there’s a way where you’re getting sort of instant wisdom of the crowd in terms of whether they think it was a good call or a bad call or they’re cheering or they’re jeering or whatever is going on. Part of what we hope to build with this relationship is a way to replicate that incredible experience that we have now in our arena.

Satya Nadella: I think just to add to that, Adam captures the depth of, the richness one can create in terms of the experience. And you went Ben, to the obvious place, essentially the same engine that’s driving all of the deep personalization, which is the RL-based Azure engine for Xbox is going to be the same thing that’s going to be available for the NBA to drive some of the deep personalization right there with the same type of yield.

But to your point, it’s not just about the one-to-many with personalization. One of the exciting things for me is we’ve being working on this thing called LiveOps. Basically there’s a product called PlayFab, which came out of Xbox. Essentially what it does is just like our DevOps was a thing, LiveOps comes out of game development. So in the context of the NBA, of course let’s say there’s the game itself, but around the game you can build all these other scenarios, whether it’s in the second screen, whether it’s the social dimension, and all of that is software driven based on what you are watching, what you want and who you are and whom are you watching with. It’s kind of like the Xbox Live experience for the NBA. That’s the type of stuff that I think, I know Adam and team have lots of great ideas and we have all of the building blocks. So now it’s just that art of being able to take these building blocks, which we, in our own case have expressed it, used it in the context of gaming, to a new type of media product, which is a sports franchise like the NBA, building a media product that engages these 1.8 billion people who follow it all throughout the world.

I’m curious how this relationship came together, because you made the point, Adam, that particularly in the world of fanless games, something like this is so critical. Did the pandemic add urgency to putting this deal together?

AS: Well one, this process began about six months ago in our discussions with Microsoft, and this was the track we were on. If anything, it got delayed of course, a bit in the last month just because we had to work around some issues in terms of being at home, et cetera. But I think it did take on urgency, certainly for me, given that we’re potentially looking at fanless games, and it has just really highlighted for us the importance of technology and how technology will define our future. If anything, I think if you think about the fact that putting aside me, you have the CEO of Microsoft taking the time to do this right now, I think it is amazing from my standpoint that what while we’re relatively a small company, but I think the fact that actually with all that’s going on in the world and what’s going on with Microsoft, we’re able to stay essentially on schedule and make this announcement, to me is just indicative of why we chose Microsoft and how and how important this relationship is for them and what it will mean for us.

Did this require a reworking of your relationship with Turner or Warner since they handled the digital side previously — how is that going to work going forward?

AS: It did require a little bit of a reworking, but they’ve embraced this relationship as well. AT&T, of course the parent of WarnerMedia, already has a huge relationship with Microsoft, they were very supportive of this partnership and we will remain with WarnerMedia as our partner as well, but what we’re shifting some of the things from Turner Sports over to the NBA. But again, it’s a collaborative partnership and again, they were part of the process in the selection of Microsoft.

Got it. Well, I think to me, the real headline here is that the NBA is now back in Seattle.

AS: (laughs) Just don’t get me in trouble.

I will speak for myself, this is very exciting. I am a huge NBA fan, I’m a huge Bucks fan, so I am particularly devastated by the recent turn of events.

AS: You guys are right there!

I’ve had my, shall we say, frustrations with the current leagues’s digital product of which I’ve been a loyal customer for many, many years. So from that perspective I’m quite excited. What do you think about the timeline for this? Obviously building the stuff that you’re talking about, this is going to be a multiyear thing, different features will roll out at different times. But where do you see a V1 coming out? A big change in infrastructure like this seems like would make more sense in sort of an offseason context, which we might have a longer offseason this year, so what is your thinking about that?

SN: It’s going to be lot more phased, Ben, in some sense some of the earnest product work will start now. I think one of the places you’ll start perhaps seeing it first is some enhanced broadcast capability because you’re able to post-process the stream, and add some AI and that’s probably the place we will go. And then similarly in parallel we’ll take some of the archival footage and then enhance it and then stream that. Obviously those are the kinds of things that we’ll start doing, but it’s not going to be a big bang. Basically we want to put up our teams together, build a road map and then move it forward in a pretty phased way.

Is it fair to think about, you’re going to start with the digital apps and the NBA streaming experience, and then back into more of these ideas about getting into the actual production of broadcast content — I’m curious how you see that approach

AS: That’s fair. To your point, we’ll start with the essential NBA products, our app, our website, but I think at the same time, as I know you recognize, this is not off the shelf software. There are some parallels, for example, the work that Microsoft currently does for LA Liga, and we spoke to our counterparts there and it was very meaningful to us that how much they value this relationship with Microsoft. But almost by definition, so much of this work is custom that — part of the reason we wanted to get this deal done and announced is so we could get to work and so to your point, I think they’re the certain core products that we focus on, but I think as we tier them and as Satya said, this stuff will be brought on incrementally, that we’re going to begin with those products before we move to the telecast, which will be more complicated.

Very good. Again, I am excited as a fan, but I’m also excited as an analyst. I think this idea of switching from being like a studio where you make content and give it to anyone that’ll buy it, to ideally being more of a Netflix where you own the customer and have a direct connection, that customer relationship is the future for media companies generally. It makes sense to see the NBA moving that direction.

SN: You put it very well, Ben, in some sense that’s what was Adam and his team’s vision is to be in control of their own destiny and in some sense have the digital capability in their own hands to be able to control that destiny.

AS: Yes, absolutely.

Makes sense. Well, hopefully we can all be sitting on a call watching an NBA game sooner rather than later.

This Daily Update Interview is also available as a podcast. To receive it in your podcast player, visit Stratechery.

The Daily Update is intended for a single recipient, but occasional forwarding is totally fine! If you would like to order multiple subscriptions for your team with a group discount (minimum 5), please contact me directly.

Thanks for being a supporter, and have a great day!