I was thinking about yesterday’s post and the Newhouse family’s strategy for reducing their estate tax liability. The fact that they had a tax strategy, and the results, stuck with me and reminded me of a tax conversation I had.

A successful entrepreneur once pointed out that taxes are a successful entrepreneur’s biggest expense, yet most spend less than 1% of their time thinking about them. They don’t have a strategy or defined actions around taxes. Most entrepreneurs spend time scrutinizing and optimizing their biggest business expenses on their profit-and-loss statement but don’t do the same with taxes. He believes this is a big mistake and that founders should spend some percentage of their time, say 5%, on their tax strategy every year. Doing so can have a material impact on business finances and the ability to reinvest in growth opportunities.

Regardless of how you feel about Newhouse's estate tax strategy, the result highlights that an effective tax strategy can indeed have a material impact on a business. To be clear, I don’t believe in tax dodging or doing shady things to avoid paying taxes. That’s just silly and can land you in jail. But I think there’s something to be said about having more of the capital your company generated available to reinvest in growth.

I finished reading Newspaperman: S.I. Newhouse and the Business of News by Richard H. Meeker. The biography is about Samuel Irving Newhouse Sr., who founded Advance Publications. At Sr.’s death, Advance Publications owned multiple newspapers and Condé Nast, which publishes famous magazines such as Vogue, Vanity Fair, GQ, and The New Yorker. Since then the company has grown rapidly, and it owned 26.5% of Reddit when Reddit began trading on the public stock market this year (see here, page 194). Reddit’s market capitalization (i.e., valuation) is just under $12 billion as of this writing.

This book and Newhouse: All the Glitter, Power, & Glory of America's Richest Media Empire & the Secretive Man Behind It by Thomas Maier detail one key strategy the Newhouse family used to grow their wealth: they optimized their tax liability and maximized the compounding of their wealth. The family studied the tax laws and implemented strategies that reduced their tax liability. This gave them more capital to reinvest in growing their companies or acquiring new companies.

Both books contain numerous examples. Their estate tax strategy especially caught my attention. When someone dies, their estate is transferred to heirs and a tax is due on the value of the estate being transferred if it exceeds that year’s federal threshold. When Sr. died in 1979, his sons filed a return valuing his ownership in Advance Publications at roughly $182 million and showing an estate tax due of roughly $49 million. The IRS said his estate was worth somewhere between $1 billion and $2 billion and that the estate tax due was, at a minimum, $600 million, and as high as $1.2 billion. At the time, Advance Publication owned thirty newspapers and various magazines. Its two most prosperous newspaper properties alone were worth more than $182 million.

Sr. had studied other publishing families to understand how death and estate taxes negatively impacted their family empires. Families often had to sell all or some of the company’s assets to pay the estate tax upon the founder’s death. Sr. developed a dual-share-class strategy to avoid that outcome. Sr. owned common shares in Advance Publications but issued preferred shares to his siblings, wife, and sons. His common shares carried voting rights and, essentially, control of company decision-making, but the preferred shares gave holders the right to vote on a company liquidation or sale. Said differently, if a buyer wanted control of the company, the buyer had to get the approval of the preferred shareholders first. The result was a gray area in the tax law. It could be argued that the fair market value of the company—the price a willing buyer and seller would transact at—was significantly lower than the IRS’s figure because there would be fewer buyers willing to buy a minority stake in a family-owned company that had such a bizarre ownership structure. Most buyers spending that kind of money would want majority ownership so they could have control. To gain control, they’d have to convince multiple family members to sell, a prospect many buyers would rather avoid. There’s more to this, but that’s the gist of it.

The IRS took the family to court, and the family prevailed. The result was that the family paid an estate tax bill that was a fraction of what it would have been if Sr. hadn’t planned so carefully. It wasn’t a material amount for the company, so it didn’t have to sell any assets to pay the tax. The Newhouse family’s empire could continue compounding for another generation and grow exponentially under Samuel “Si” Newhouse Jr.’s leadership for the next forty years.

I’m continuing to read a biography of Samuel Irving Newhouse Sr. that describes the empire he founded with Advance Publications. Newhouse was in the media business. He started with newspapers but expanded into magazines, broadcast television, and cable systems before he died in 1979.

Newhouse was in the business of providing information to people, but he was adamant that the information must be unrelated to him. He went to great lengths to make sure there was no reporting on him. Sr. had a “genuine, abiding mistrust of the press,” according to the book.  

I’m sure he had his reasons. I’d imagine a big one was that he didn’t want to be perceived negatively, as most people don’t. Negative publicity could have made his empire-building difficult and his family uncomfortable. Maybe Sr. realized it’s easier to manage public perception if it doesn’t exist. If people don’t know who you are, there’s nothing to manage.

We’ll never know why Sr. was adamant about avoiding publicity, but given his business, I found his disdain for the press noteworthy. And it may have been influential, since his son Samuel “Si” Newhouse Jr. and other descendants felt the same way.

As I understand Newhouse: All the Glitter, Power, & Glory of America’s Richest Media Empire & the Secretive Man Behind It, its author, Thomas Maier, said the Newhouse family was in the business of providing information to Americans. They owned magazines, newspapers, and cable systems, but newspapers were the empire's backbone. Growth potential was capped, but profit margins and cash flow were fat.

For many years, newspapers were the best way to distribute localized information, so they captured the attention of many readers. The Newhouses recognized this and executed a local monopoly strategy. Newhouse newspapers were often the only paper in town—the only way consumers could read local news. The papers, which had the attention of an entire community, were a microphone with which to talk to it. Companies paid a premium for the right to use the microphone to speak to the community, which drove highly profitable advertising revenue. Once a local monopoly was established, it was hard to compete with. It would generate predictable revenues and cash flows for years and wouldn’t require much reinvestment from the Newhouse family. The result was an annual stream of cash that the family invested into other businesses.

The book was first published in 1994 so it doesn’t capture how the internet disrupted their local monopoly strategy, but I’d imagine it negatively impacted their newspapers as it did the rest of the industry. The internet made information more readily available and made it easier for companies to reach consumers in a specific community. Meta (Facebook), Alphabet (Google), and others are now enormous companies and still growing quickly. Much of their revenue comes from advertising, which went to newspapers before the internet era.

The Newhouse family still has an empire, but I’m pretty sure that newspapers are no longer its backbone. I’m curious about how the family adjusted their strategy to respond to the internet’s impact and about what business is now the empire’s backbone. The Newhouse family’s companies aren’t publicly traded so information isn’t available via the SEC, but I’ll do some research and see what I can find.

Brett Pulley’s The Billion Dollar BET: Robert Johnson and the Inside Story of Black Entertainment Television chronicles Robert “Bob” Johnson’s journey, his highs, and his lows.

Bob wasn’t a well-rounded founder and didn’t have a well-rounded founding team. Bob had deficits, but he shrewdly got around them to navigate unfamiliar waters. Some people work on their weaknesses. Bob took a different approach: he leaned on his strength, relationships (he was a lobbyist). Here are a few examples:

Satellite

After launching, Bob wanted BET’s programming to expand from six hours a week to 24/7. Through his cable relationships, he learned that HBO had unused satellite capacity. It was worth $2–$3 million a year, money Bob didn’t have. Bob negotiated a deal with HBO: it took a 15% stake in BET in exchange for the satellite time. HBO was owned by Time Inc., a major cable system, so Bob was now partnering with two large cable systems, Time Inc. and TCI (i.e., John Malone). And BET was a 24/7 network.

Sales & Marketing

Bob had no sales or marketing staff, so he struggled to sell advertising or convince cable operators to carry BET. His relationship with Time Inc. solved this problem. For $450,000 a year, Time agreed to manage BET’s marketing and affiliate sales using experienced HBO employees. This deal jump-started BET’s charging per-subscriber fees to cable systems, a new revenue stream. BET also leveraged Time Inc.’s lawyers for negotiations and its engineers for developing BET’s technical skills. After several years, BET gained expertise in these areas. The partnership ended in 1988. Bob hired a sales leader and built a sales team. By 1991, BET reached 53% of US homes wired for cable and reported $50 million in annual revenue and $9.3 million in annual profit.

Finance & Capital Markets

Bob knew nothing about raising money or about capital markets, which put him at a resource disadvantage. Luckily, his first investor, John Malone, was a financial engineer and master capital allocator who sold TCI to AT&T for $48 billion. Bob sought his counsel on capital-related issues. Malone was instrumental in Bob using savvy tactics in the early years, such as paying interest on $8 million of debt by issuing additional BET shares while not diluting Bob’s or Malone’s stakes. Malone planted the idea of BET capitalizing on a booming stock market by going public. He coached Bob through the IPO process, and the company’s stock began trading on NYSE in 1991. He helped Bob navigate BET buying Time Warner’s equity for a discounted $58 million (it was worth $191 million two years later). And he advised Bob to take the company private again, which he did in 1998 at a $1 billion valuation. Malone was at Bob’s side for the pinnacle of his career: negotiating and selling BET for $2.3 billion in stock to Sumner Redstone and Viacom.

Bob’s tactic of leaning in to his natural strength—relationships—was masterful. Using the expertise and assets of his partners kept him from wasting time and making mistakes while simultaneously lessening his weaknesses.

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This weekend I read Brett Pulley’s The Billion Dollar BET: Robert Johnson and the Inside Story of Black Entertainment Television. Pulley details Robert “Bob” Johnson’s path from poor kid from Mississippi to cofounder of BET and billionaire.

When Bob landed John Malone’s investment in BET, he’d never run a business. He asked Malone for advice (after getting the investment check). Malone was direct: “Get your revenue up and keep your costs down.”  Bob took that advice to heart and combined it with a mercenary founder mentality to find a profitable content strategy.

Bob couldn’t afford to produce content on par with broadcast networks like NBC and CBS. He needed something else. Music videos were the new craze, but Black artists weren’t being played on MTV. BET got promotional videos from record labels free of charge and aired them. Viewers loved them, and artists loved getting national exposure.

Bob had hit on a winning strategy: Find a form of entertainment with high Black demand not being satisfied by other networks and a large supply of Black talent. By connecting supply to demand, he added value to both sides. Also important was that the talent valued the national exposure it couldn’t get anywhere else and didn’t expect much, if any, compensation. Bob had found a highly profitable content strategy.

ESPN launched and was a success. Bob noticed that ESPN didn’t broadcast games played by Black colleges. BET began broadcasting football and basketball games from well-known Black colleges such as Grambling and Jackson State. He made sure to broadcast the half-time performances of school marching bands and dance teams, something Black communities enjoy to this day. BET could broadcast games for less than $15,000 per game, while networks like ABC paid up to $50,000 per game. Black colleges enjoyed the national exposure, viewers enjoyed watching games they couldn’t watch anywhere else, and BET got exclusive low-cost programming.

Bob also noticed there were many talented but undiscovered comedians. BET launched ComicView, and the show became one of its most successful shows ever. The show propelled the careers of now-famous comedians such as D.L Hughley, Cedric the Entertainer, and Kevin Hart. Keeping costs down was taken too far, though. The result was a mini public relations crisis. BET learned from this and modestly increased pay to comedians and moved production from Los Angeles to Atlanta, whose comedians were plentiful and non-union. A one-hour episode of ComicView cost $18,500 to produce—while “inexpensive” half-hour sitcoms cost big networks $500,000 an episode and hits like Friends cost over $6 million an episode.

Bob’s focus on entertainment content gained him critics in the Black community. But his goal was clear: generate profits and become wealthy. He aligned his content strategy with that goal. Advertisers were paying BET rates that were less than half of those they paid MTV and other networks, yet when Viacom acquired BET for $2.3 billion in 2000, BET’s profit margins were the highest in the industry and strongly influenced Sumner Redstone’s decision.

You can listen to audio versions of my blog posts on Apple here and Spotify here.

After reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, I wanted to learn more about the CEOs profiled in the book. I was especially interested in Henry Singleton, given that Warren Buffett likely borrowed from Singleton’s playbook when building Berkshire Hathaway.

Singleton didn’t do many interviews, and no one has written a biography about him. I managed to dig up Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It. It’s hard to find, but I got lucky and started reading it.

Singleton went on an acquisition spree during Teledyne’s early years in the 1960s. Two things likely led to Singleton embracing this strategy and making it so effective:

• The stock market valued Teledyne richly in the 1960s, and Singleton shrewdly took advantage. He used Teledyne’s stock as currency. Teledyne traded at a double-digit P/E multiple ranging between thirty to seventy times earnings (i.e., high valuation) as a public company, while smaller, private companies were valued at single-digit P/E multiples of roughly nine times earnings (i.e., lower valuations). Singleton recognized this arbitrage and paid for his acquisitions using overvalued Teledyne stock.
• World War II took place mostly in the 1940s. New technologies were created, and many small companies were founded to help the war effort. After the war, veterans benefited from the G.I. Bill, receiving tuition-free college educations, from which they learned new technologies and methods. This combination of newly educated and tech-savvy veterans and a wave of new technology led to a boom in entrepreneurship in the 1940s and 1950s. By the 1960s, many of these small companies had matured, and the founders were ready to sell or needed growth capital to reach the next level.

Singleton’s genius was in recognizing that he was positioned to benefit from twin tailwinds. Two forces were occurring simultaneously, and he crafted a strategy to take full advantage of both. There was a large supply of entrepreneurs interested in being acquired, and he could fund acquisitions using richly valued Teledyne stock instead of cash. His strategy led to over one hundred companies being acquired in a decade and Teledyne growing from $4.5 million in revenue and $58,000 in profit to $1.3 billion in revenue and $60 millions in profit annually by the end of the acquisition spree.

You can listen to audio versions of my blog posts on Apple here and Spotify here.

In every entrepreneurial story I’ve heard, luck played a role to one degree or another. I’m a big believer in luck, and I think it’s possible to manufacture your own luck.

I’m finishing reading The Almanack of Naval Ravikant by Eric Jorgenson. This book shares Naval’s thinking around several types of luck:

• Blind luck – Something completely out of your control happened, and it benefited you.
• Persistence luck – You’re taking actions that set things in motion and result in something happening to you. Think working hard, hustling, or shaking a bunch of trees to see what happens. You’re creating forces that could generate a lucky break.
• Spotting luck – You’re knowledgeable in a field and able to spot a lucky break in that field. Your specific knowledge allows you to see and understand what’s happening before others do.
• Magnetic luck (my wording, not his) – You’ve built something that attracts others, who’ve gotten lucky, to you. You might have a unique brand or specific skill. People want to be associated with that brand or need your skill set to help them capitalize on an opportunity.

The first three types of luck are straightforward. The fourth is the “hardest kind of luck” to get.

I’m a fan of persistence luck and magnetic luck. Both are good ways to manufacture luck that anyone can take advantage of. A big difference between the two is the time frame. Persistence luck often optimizes for luck in the short term. You can take action tomorrow, and you might get lucky tomorrow. But magnetic luck is the “hardest kind of luck”—a long-term game. You’re building something, maybe a reputation or skills, over time. This requires commitment. But when this work is done, luck goes from being something that happens by chance to, as Naval says, “your destiny.”

If you’re interested in this book, it’s available for free. You can download the e-book file or PDF here.

You can listen to audio versions of my blog posts on Apple here and Spotify here.

Leverage is the ability to multiply the output of your efforts. You achieve more with the same level of effort. Leverage allows you to 10x or more your outcome.

Today I started reading The Almanack of Naval Ravikant by Eric Jorgenson. You can download the e-book file or PDF for free here. Naval thinks about leverage in three classes:

• Labor – Having other humans work for you. You can get more accomplished if others are working on something than you could by yourself. This is the oldest form of leverage and likely the hardest to use. Managing people isn’t easy.
• Capital – Having money work for you. You can magnify your decisions with money. Entrepreneurs use capital leverage by borrowing money to help their company grow, while investors borrow money to purchase investments. More on this type of leverage here. This is likely the most dominant form of leverage used to accumulate wealth over the last century.
• Products with zero cost of marginal replication – Having your product work for you. Duplication of these products costs little or nothing. Think software or media. You write the code once (assuming you don’t update it) or record the video once. Your cost is the same whether one person or one million people buy the software or watch the video. This is the newest form of leverage and has been used by the new billionaires.

Naval also shares why the last of these forms of leverage is so powerful and the most democratic, accessible by all.

Labor and capital leverage require someone else’s permission before you can use them. People must agree to work for you or agree to give you capital. This limits who can take advantage of these forms of leverage. You can have the best business idea, but if people won’t work for you or give you money, the size of the business is capped.

Products with zero cost of marginal replication are permissionless. You can write software, create a video game, write a book, or record a YouTube video and share it anytime. If your product resonates with others, they can buy or consume it without your incurring additional costs. The upside potential of these types of products is hypothetically unlimited.

The book says we now live in an age of limitless leverage where the economic rewards have never been higher.

Naval’s thinking about leverage is simple and thought-provoking, especially for entrepreneurs.

If you're interested in hearing Naval discuss leverage in more detail, you can listen here.

I’m looking forward to finishing this book and sharing my takeaways.

You can listen to audio versions of my blog posts on Apple here and Spotify here.

Reading about John Malone’s and Shelia Johnson’s journeys gave me perspective on two great company builders and the rise of Black Entertainment Television (BET). Two things stood out about the company’s early days.

BET was founded in 1979, when the cable programming market was young. New satellite technology and outlawing pirated broadcast signals caused demand for programming to explode.

Per Johnson’s autobiography, Malone acquired a cable system in Memphis, Tennessee, which had a roughly 40% Black population at the time. He needed cheap programming that resonated with the city’s Black audience. Bob Johnson, BET’s cofounder, knew Malone. Bob got permission to repurpose a proposal for a cable channel targeting elderly people. He then changed “elderly” to “Black” and pitched Malone. Malone loved the idea. He invested $180,000 for 20% ownership and loaned an additional $320,000.

At launch in January 1980, BET broadcast movie reruns during a two-hour time slot every Friday. It was a start, but not enough. Programming hours had to expand for the company to survive, and reruns couldn’t be the only programming.  

Entertainment and Sports Programming Network (ESPN) launched in 1979 and had early success broadcasting college basketball games. BET noticed that ESPN didn’t broadcast the games of Black colleges. BET decided to fill this gap and began broadcasting Black colleges’ basketball and football games. Programming expanded to six hours per week, but that still wasn’t enough.

In 1981, MTV launched. Consumer demand for music videos skyrocketed. Every artist wanted their video on cable TV. But MTV executives wouldn’t play videos from most Black artists. BET saw this “big cultural gap” in music videos as an opportunity. Artists’ desire for exposure on cable TV made creating music video programming cheap. And strong consumer demand for videos translated into strong viewership. BET saw filling the music video gap as a win for BET, artists, and consumers. In 1981, BET launched Video Soul, which aired for fifteen years.

Music videos and college sports helped BET find product–market fit. Things were going so well that in 1982, BET sold 20% of the company to Taft Broadcasting Company for $1 million. By the fall of 1984, less than four years after launching, BET had 24-hour-a-day programming, 18 million subscribers, and more than 36 employees.

BET’s early success boiled down to two strategic things:

• Cloning – BET didn’t try to reinvent the wheel. Instead, it took ideas that others had proven were viable, cloned them, and applied them to market gaps.
• Market – BET was early in the cable programming market, which grew rapidly. A rising tide lifts all boats. In BET’s case, the market was moving so fast that it yanked BET along. BET made a lot of mistakes early on, but being early in a growing market meant those mistakes weren’t deadly.

BET was a massive financial success for John Malone and Sheila Johnson. It’s interesting to see how two simple strategies, taken seriously, were central to their early success.

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