Last week was a tough one for Warner Bros. Discovery (WBD). Its stock plummeted to a new rock bottom following a news report that the legacy media giant is at risk of losing a key media rights deal with the National Basketball Association.
According to a report from the Wall Street Journal, Comcast's NBCUniversal (CMCSA) is working on a $2.5 billion bid that could move the league off Warner Bros.' TNT network.
Wall Street analysts say that possibility would have lasting consequences on the embattled media giant.
"Losing NBA rights would be a big negative for WBD," Macquarie analyst Tim Nollen said in a new note to clients on Thursday. "While the cost savings may help earnings, we think sports content is key both for linear TV ad sales and carriage fees, and for the Max streaming service's prospects in a competitive direct-to-consumer landscape, especially as it prepares to join the sports streaming [joint venture] with Disney and Fox."
WBD currently shells out $1.2 billion annually for the NBA rights but was unable to strike a new agreement with the league before its exclusive negotiation period expired last week, according to the Journal. The NBA's current rights deal expires at the end of next season.
Disney (DIS), the NBA's other major broadcast partner, has reportedly agreed to increase its payment of $1.5 billion a year to $2.6 billion in order to renew its deal. Amazon (AMZN) is also in talks for a streaming rights package through its Prime Video service.
Sports rights have become increasingly important for legacy media giants as more consumers cut the cord. The content is viewed as "sticky," meaning loyal audiences are more willing to fork over their monthly cable package or streaming service fee to access sports over other types of content.
But the field has become more competitive, with tech giants like Amazon, Apple (AAPL), and YouTube (GOOG, GOOGL) committing more heavily to sports streaming deals over the past year. That's inflated the overall costs of sports as traditional media giants struggle to keep up amid steep streaming losses and major declines in linear advertising revenue.
Bank of America analyst Jessica Reif Ehrlich described the NBA rights renewal as "critical" to WBD's future given that TNT boasts the highest carriage fees, or fees pay-TV providers pay to network owners to carry their channels, out of all of the company's cable networks at an estimated $3 per subscriber.
"Should they lose these rights, there is a real risk WBD will not be able to maintain these affiliate fees in upcoming negotiations," she said.
Moreover, flagship content like the NBA is "typically used as a hook for negotiations with distributors that can drive carriage/rates across the rest of the portfolio."
"In light of the recent Disney/Charter renewal, the loss of the NBA could also have a derivative impact across the rest of WBD's cable networks which could have negative implications to WBD's future earnings power," Ehrlich warned.
Citi analyst Jason Bazinet estimated a $250 million hit to adjusted EBITDA should the company lose the media rights, driven by a $270 million loss in annual ad revenue and a potential 45% decline in TNT's affiliate fees.
"Despite all the other assets at WBD, from its streaming service to films and games, the company still is first and foremost driven by its linear networks," MoffettNathanson analyst Robert Fishman added in a note published on Thursday.
Fishman said the company's networks segment accounted for 51% of overall revenue and 89% of EBITDA last year with TNT estimated to have contributed roughly 30% to total domestic linear distribution revenue.
"TNT [is] one of the biggest drivers [of the networks segment]," the analyst wrote. "It is clear NBA is an anchor to TNT’s schedule."
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at [email protected].
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