Warner Bros. Discovery (NASDAQ: WBD) CEO David Zaslav recently made headlines when he told attendees at an RBC investor conference that the media giant did not “have to have the NBA” when its current rights agreement with the league expires following the 2024-25 season.
Most media observers believe the chief executive was posturing, negotiating the company’s next deal with the league through the media, as rights owners often do. They see that Turner Sports, now WBD Sports, has enjoyed a broadcast relationship with the NBA for decades, that the company is engaged in a profit-sharing partnership with NBA digital and that it just re-signed the cast of Inside the NBA to long-term extensions and assume WBD will retain the property within its rights portfolio.
But with more than $50 billion in debt, the business’ core revenue streams under pressure, and Zaslav committed to cutting costs, the comment could have been a warning to shareholders—and the league—that the company will move on if it’s unable to get as Zaslav called it, a “favorable deal.” The NBA is reportedly seeking between $7-8 billion/year for its national rights, more than three times the $2.6 billion/year it currently takes in from TNT and ESPN.
WBD declined to comment.
JWS’ Take: The NBA is expected to get its three-fold increase during the upcoming round of rights negotiations. Premium sports is the last bastion of destination programming on television, and the NBA is the last of the big four leagues with rights still up for grabs. The rest are locked in through at least 2028.
However, the $7-8 billion/year figure was first floated in March of 2021, and it is no longer clear how the legacy networks could afford such an increase. It has become apparent that distributors will have a hard time passing along price increases to their established pay-TV bundle customers and that complementary streaming services are not going to generate the economics needed to help shoulder the burden anytime soon.
That is certainly a question with Warner Bros. Discovery, which formed earlier this year with $58 billion in gross debt.
Zaslav is doing what he can to right-size the capital-intensive business, but WBD finished Q3 with $50.4 billion in gross debt still on the books. In a world where the cable bundle is shrinking, yet more dependent on sports than ever, and streaming is eating up profits, paying down debt is, to put it mildly, a challenge.
And it is only getting more difficult as interest rates rise and cord-cutting accelerates. WBD’s networks segment, largely made up of its cable stations, generated 11% less revenue on a pro forma basis in Q3 ($5.2 billion) than it did during the same quarter last year. That includes a 5% decline in distribution revenue.
The shrinking linear subscriber count, along with macroeconomic headwinds and a depressed ad market, negatively influenced advertising revenue, too. Cable network ad sales fell 14%, to $1.9 billion, in Q3.
With distribution fees and advertising sales declining, it’s also becoming clear there is no streaming cavalry coming to save the day; the streaming unit lost $634 million last quarter.
WBD has said it wants to trim $3 billion in expenses within the next two years. Committing 3x the amount of money it currently spends on NBA rights to the property wouldn’t seem to align with that initiative. Industry analysts assume there are outs in the Inside the NBA talent contracts the network could exercise if it fails to retain league broadcast rights.
But it remains hard to imagine WBD Sports walking away from a league broadcast partnership. The NBA remains strategically vital to its business. WBD needs the ratings and advertising dollars that come with having league rights to both meet its debt obligations and grow its streaming business. The company is able to use the NBA on TNT to drive viewers to HBO Max.
Cable distributors would also likely look to cut TNT’s sub fees if it lost the NBA.
JWS views Zaslav’s comments as standard negotiation tactics. He knows the other legacy media companies are facing similar challenges, that Amazon and Apple are not assured to be interested enough to drive up the bidding, and that strong back-end rights will enable his company to retain what they want from the current NBA package.
The media landscape will surely look different a year from now when the negotiations begin in earnest. But as it stands, WBD is widely expected to remain an NBA rights holder.
That does not necessarily mean it will retain the entirety of the slate it now controls. A favorable deal for WBD could mean taking an alternative package of games.
A favorable deal could also allow WBD to allocate a portion of the games to HBO Max. Having broadcasts exclusive to the streaming service could help WBD grow its new D2C subscription business while the old business remains intact.
The established bundle will continue to produce necessary economic profits for WBD for the foreseeable future, regardless of how much cord-cutting occurs over the next two years. Enough live games need to remain to ensure those subscribers feel they’re receiving value.
The NBA is also not going to want to sacrifice reach for its biggest games.
