WBD May Be Eyeing an NFL Distribution Partner

WBD May Be Eyeing an NFL Distribution Partner

Warner Bros. Discovery (NASDAQ: WBD) recently made all its sports programming available to Max customers via a new Bleacher Report branded add-on. The company is flanking its entertainment programming with sports content in hopes of attracting incremental streaming subscribers and younger viewers.

But no sports property drives fan engagement like the NFL, and Warner Bros. Discovery does not control any of its six rights packages. With none becoming available again before the start of the next decade, and WBD CEO David Zaslav having recently stated the company would be an active player in the M&A space over the next year or two, some industry insiders suspect the media conglomerate may be eyeing one of the league’s existing distribution partners.

“Putting those pieces together, we feel that’s either the direction they actively are considering or should be considering,” Mike Morris (senior managing director, Guggenheim Securities) said.

FOX and Paramount are the two rights holders viewed as viable takedown candidates.

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Historically speaking, there have been a half dozen companies atop the media industry.

“You think of the old world and there were six film studios [competing for content and audience],” Morris said. Then there were “six or so major [network groups] in the cable world.”

Now, competition exists to be among a select group of ‘new media’ winners. The problem is there are more television networks/streaming services than there have historically been spots atop the pyramid.

Warner Brothers Discovery currently ranks 4th in terms of global SVOD subs with 95.1 million (trailing: Prime Video, Netflix and Disney+).

“Really on the back of HBO more than anything else,” Morris said.

The hope is the B/R branded sports add-on will change that.

The service is currently free to subscribers.

“Come next spring, [however], it is going to be [paid] and investors are going to want to know how many sign-ups [it is driving] and how it’s contributing to ARPU etc.,” Morris said.

While the Turner Sports portfolio includes NBA, NHL, MLB, and March Madness rights, there are doubts that is enough to satisfy WBD’s aspirations.

“The NFL is must-have if you’re going to be a major player in sports and in media in general,” Morris said.

That can be debated (see: Netflix), however, the league has put a network on the map before and would likely drive subscriber numbers far in excess of what WBD’s current rights portfolio is capable of.

“The deal FOX did back in ’93, they paid what at the time seemed to be an exorbitant amount for the NFL,” Morris said. “It looked like they were going to lose a bunch of money on the deal but [ended up building] the FOX Network on [the back of that agreement] because they were able to use the popularity of the games as a promotional platform to drive more sustained audience engagement.”

The NFL could, in theory, do the same for MAX if WBD were to acquire one of its marquee rights package. But, as noted, they are all tied up through at least 2029.

However, WBD CEO David Zaslav recently indicated that the company was ‘in position’ to be acquisitive over the next 12-24 months.

“And by be in position, that means having the balance sheet health necessary to be active in the M&A market,” Morris said (think: cash flow relative to debt obligations).

FOX and Paramount seem to be the most sensible acquisition targets. In addition to having the AFC and NFC Sunday afternoon broadcast packages, they would be the easiest to digest among the NFL’s current partners (think: Alphabet, Amazon, Comcast, Disney).

Paramount would come with some additional assets, and presumably cost synergies, across the studio, networks, and streaming businesses.

“If you look at what David Zaslav’s entities in the past have done, it’s buy out companies and then look for ways to reduce overhead costs,” Morris said.

Tubi excluded, FOX doesn’t have a streaming business, a television studio, or a robust networks business (one must assume WBD isn’t going to be buying Fox News). So, it isn’t going to offer much in the way of efficiencies.

“WBD would, [however], be at an early stage for using all of [the FOX] content to make money in a streaming world,” Morris said. “That would be attractive.”

Streaming isn’t as profitable as the old bundled cable system, at least not at this point. So, it’s logical to wonder why WBD wouldn’t just wait until the NFL’s next round of negotiations to pursue league rights. Perhaps the business’ economics will be more favorable at that time.

Opportunity cost is one reason.

“Netflix grew [in Q3], Amazon Prime grew. If [WBD] waits, if [it isn’t] putting [its] best product on the field, [it] risks being a share loser,” Morris said.

Competitive risk is another. Should it wait, another company could swoop in and take down one of the two smaller rights holders.

“Paramount Plus [also] has a lot of debt and a fair amount of it is locked in at [lower] rates,” Morris said. WBD could “effectively use that debt financing as capitalization to lean into the business. As [it] generates cash flow, and the bigger the business is the more cash flow [it will] have, [it can] deploy it –at least in theory– into [other] equity growing businesses after meeting its lower-interest debt obligations.”

FOX would not come with nearly as much debt.

FWIW, Morris does not subscribe to the idea that burning capital is a ‘structural requirement’ of the streaming business. He sees it as a byproduct of overspending in a crowded landscape.

“With more aggressive curation of the offering, meaning only spending on the things that drive the most revenue, many of the major streaming services can be profitable businesses,” Morris said.

Antenna data shows NFL games drive sign-ups and are effective in helping to retain subscribers.

“The signups for Paramount Plus and Peacock during NFL season run at a higher rate than they do out of season, and the retention of subscribers who come in during that period and stay is higher as well,” Morris said (i.e. the LTV on NFL fans is higher than other leagues).

There are a few arguments against WBD trying to replicate FOX’s old NFL strategy with an acquisition.

“Number one, [control] of NFL rights is expensive,” Morris said. “We’re talking about something that costs in excess of $1 billion a year to carry and making money on the rights themselves is challenging.”

Of course, cord cutting has made making money in the networks business, in general, increasingly difficult.

“So, if you buy another company that also [owns] networks [as Paramount does], you’re [in essence] doubling down on your challenges,” Morris said.

And there’s no guarantee WBD will be able to retain league rights once they come up for bidding again at the end of the decade. So, the company could end up spending billions to, in essence, rent the rights for six years (on top of the billion dollars plus a year it would be paying in rights fees).

The pursuit of NFL rights through a strategic acquisition might still be worth the gamble.

“You just don’t get an audience size like [Fox was able to cultivate] without taking a big swing,” Morris said. “The strongest streaming services will deliver the most ‘must-have’ content balanced with disciplined programming investments. We see these potential combinations [with Fox and Paramount] as providing a solid foundation for those goals.”

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