Good morning!
The Medium delivers in-depth analyses of the media marketplace’s transformation as creators, tech companies and 10 million emerging advertisers revolutionize the business models for “premium content”.
Warner Bros. Discovery subdivision Turner Sports has held the rights to broadcast NBA games since 1988—nearly 40 years—and now seems poised to lose them to a combination of NBC Sports and Amazon (Disney is renewing its existing agreement with the NBA). Without the NBA, TNT will have less value to both Warner Bros. Discovery and its linear distribution partners. “About $2.5 billion in fees from pay-TV operators and $700 million or so in advertising sales”, according to Bloomberg’s Lucas Shaw, will be at risk.
Without TNT, the Warner Bros. Discovery media conglomerate’s economics of scale and “free money”—recurring monthly revenues from pay-TV distributors across millions of homes and at a low churn rate—are projected to inevitably decline. With less scale, the more compelling the rationale is for Warner Bros. Discovery's walled gardens to become more permeable, if not for the media conglomerate to be broken apart.
In this sense, Warner Bros. CEO David Zaslav’s failure to renew his NBA deal is poised to be the proverbial straw that broke the camel’s back of the Warner Bros. Discovery media conglomerate. But, there is a case to be made that Zaslav is being a bit savvier than his media critics suggest.
If the biggest sports rights deal in the marketplace—the NFL receiving $110 billion across five partners—has a growing likelihood of being terminated in 2029 by the NFL via an opt-out clause, then why wouldn’t the NBA’s deal include a similar clause with similar odds of being used? And if you are Zaslav and his management team, why would you take that risk?
Key Takeaway
If the NBA is indeed following the NFL’s playbook, it will likely opt out of its new deals with NBCUniversal and Disney/ESPN merit within the next seven years. Whether intentionally or unintentionally (or both), Warner Bros. Discovery's loss of NBA distribution rights actually may be smarter in the long run.
Total words: 1,300
Total time reading: 5 minutes
The NFL’s Opt-Out
We learned about the NFL’s opt-out in NBCUniversal’s press release for its $2 billion per year deal in a lone sentence: “This long-term agreement can be terminated on a one-time basis by the NFL after seven years.” All recent distribution deals with the NFL (Amazon, ESPN/ABC, CBS, Fox) carry the same clause.
Many observers and analysts believe the NFL is inclined to use it. Its recently announced three-season deal with Netflix for Christmas Day football games—a new offering announced in March—adds to this speculation that the NFL is gaming the market for a new bidding war in 2029. Like Netflix’s live-streaming capabilities, streaming technology may evolve in ways where additional business models or distribution channels become feasible.
The WWE’s deal with Netflix—launching in January 2025—also has an opt-out clause, but for Netflix rather than WWE. Netflix has the option to extend the deal for 10 years, too. The message from both the NFL deals and Netflix-WWE deals: opt-out clauses are important insurance policies against the uncertainty of the next decade in sports distribution.
Will the NBA Have an Opt-Out?
It has not yet been reported whether the NBA deal will have an opt-out clause after some number of years. The deal reportedly will pay the league an average of about $7 billion annually over the next 11 years. Disney will pay $2.6 billion per year, Amazon will pay $1.8 billion per year, and Comcast’s NBCUniversal has lined up a deal worth $2.5 billion per year. This deal represents a significant increase over its current nine-year, $24 billion deal.
The NBA’s strategy has been the NFL's negotiating playbook of "always having more bidders in play than packages.” That is how it was able to drive up the price despite flat television ratings. If the NFL can find ways to extract additional value from new partners, then the NBA should be able to do so, too.
So, the tactical need for an opt-out would mirror the NFL’s: If circumstances change within five-to-seven years, an opt-out will enable it to extract more value from the marketplace. The NFL also has retained flexibility with its rights, allowing it to both create the Christmas games and secure alternative distribution with a partner like Netflix.
Presumably, if the NBA is committed to the NFL’s negotiating playbook, its distribution deals will permit it to retain similar flexibility to create and distribute tentpole games with a third party like Netflix. Notably, its new in-season tournament was rumored to be an attempt to secure Netflix as a distribution partner.
NFL & Tech Partners
In February’s “We May Never See A Streaming-Only Super Bowl”, I discussed the implications of NFL Commissioner Roger Goodell telling the media that we will not see a streaming-only Super Bowl “in my lifetime”. He argued that the NFL still has “over 90% of our games on free television.” However, the league will “continue to reach our fans where they are with the best possible production, the best possible technology”.
The NFL is increasingly partnering with the tech giants. The Sunday Ticket deal with YouTube from January 2023 is one solution that offers the best possible technology (and distributes all regional Sunday afternoon games produced by Fox and CBS). Its Amazon Prime deal with multiple productions attached to a single game (in different feeds). Now, Netflix has been added to the mix, though it is not yet clear who the production partners will be.
Its Netflix deal implies the NFL is becoming skeptical about its media conglomerate partners. Paramount owes the NFL $2 billion per year, and in 2023 it generated only $56 million in free cash flow while carrying $12.1 billion in debt. NFL Chief Media & Business Officer Brian Rolapp recently told The Washington Post’s Futurist Summit that they are “not worried about any insolvency risk” for its traditional media partners. Rolapp claimed for Paramount in particular, “there’s no risk in our view of them being a going concern.”
But, NFL owners are notoriously risk-averse and this Netflix deal tests streaming NFL games globally on one platform for the first time. Paramount is nowhere near being able to deliver that—it is in a fraction of the 190 countries where Netflix is accessible—much less 71 million subscribers or 26% of the scale of Netflix globally. If the NFL's concerns about its partners are not financial, then the Netflix deal suggests they are technological.
Placing A Put on the Media Conglomerate
Value creation has been a priority of NBA Commissioner Adam Silver, having already more than doubled the NBA’s annual revenue to $12 billion from $4.8 billion a decade ago. If the NBA is indeed following the NFL’s playbook, then its deals with NBCUniversal and Disney/ESPN merit suspicion in the long run. All reporting, to date, has suggested Warner Bros. Discovery will lose its NBA rights because it cannot afford them: Zaslav’s bid topped out at $2.1 billion and NBCUniversal’s bid is 20% higher.
On the other hand, if you are Warner Bros. Discovery management and all signs point to the NFL opting out of its deal in four years, why promise over $23 billion over 11 years to a partner with the NFL's playbook? What will be the upside to shareholders if all trends suggest a conglomerate is likely unable to afford the deal by then?
Existing management teams at Disney/ESPN and NBCUniversal seem willing to stick their successors five years down the road with distribution partnerships that will be outdated by then. If their current streaming efforts do not evolve or scale—and all signals suggest they seem unlikely to—these two competitors face inevitable abandonment by their biggest and most valuable sports league partners by 2031.
So, a strategy with the premise that the finances and scale of a media conglomerate are unlikely to exist in five years is not a terrible idea. It is realistic. Either by Zaslav's error (likely) or business savvy (also likely) or both (most likely), it may be a smart decision to walk away from the NBA rights deal while legacy media competitors allocate billions to a long-term deal that is increasingly unlikely to last.
The onus on Warner Bros. Discovery management, then, is to show shareholders how it envisions its business in 2029. As I wrote in last November's "Iger, Zaslav Answer For “A Generational Disruption”, Warner Bros. Discovery management has yet to deliver a roadmap through “a generational disruption” to 2029. Acknowledging the inevitable and investing elsewhere is a positive first step.