Will Warner Bros. Discovery’s NBA Suit Save Face or Create New Headaches?

After Warner Bros. Discovery was left on the sidelines when the NBA rejected its matching proposal for Amazon’s $1.8 billion per year basketball broadcasting package, the David Zaslav-led media giant is taking its rights dispute into overtime, filing a lawsuit alleging the league breached its contract with the company.

But going the litigation route may create more challenges for the struggling media conglomerate than solutions. While the loss of the NBA could result in billions of dollars in lost revenue and reduce the company’s negotiating power in future cable and satellite system carriage negotiations, the costs of going to court or reaching a settlement are not worth the longer-term headaches that may result, Wall Street analysts say.

WBD, which had a long-term contract for TNT and TBS to broadcast NBA games through the 2024-25 season, would be committing roughly $20 billion over the next 11 years to match Amazon’s package as it faces pressure from a declining linear television ecosystem, analysts with MoffettNathanson wrote in a research note. Suing the NBA, they said, could also potentially harm WBD’s relationships with other sports leagues and team owners.

“Even in the ultimate ‘win’ where Turner prevailed in court, it would be difficult to see how this would be viewed positively by investors,” MoffettNathanson said.

And as Warner Bros. Discovery prepares to release its latest quarterly earnings on Wednesday, the failed NBA negotiations point to the company’s financial vulnerabilities. In its complaint, WBD alleges the NBA’s deal with Amazon was structured differently for “the sole purpose of attempting to thwart TBS’s matching rights.”

The tech giant’s agreement included three years’ worth of rights payments up front, totaling approximately $5.4 billion to be held in escrow – the kind of cash WBD would be hesitant to spend given its heavy debt load. (An individual familiar with WBD’s decision-making previously told TheWrap that the company had secured a letter of credit that would help cover that payment.)

Warner Bros. Discovery and the NBA declined to comment for this story. NBA spokesperson Mike Bass previously told TheWrap that WBD’s claims that the league breached its contract are “without merit” and that its lawyers would respond in court.

The litigation comes as the already troubled company faces an uncertain future — Warner recently recently considered plans for a possible break-up that would separate its linear TV networks and some or all of its debt from its streaming and studio businesses. Losing the NBA “may now accelerate” those plans, Macquarie Research analyst Tim Nollen said in a research note.

While WBD may have enough to get its claims to trial, the lawsuit is more about CEO Zaslav “trying to save face” and demonstrating to shareholders that the company is willing to fight, Corey Martin, managing partner of Granderson Des Rochers LLP’s entertainment finance practice, told TheWrap.

“It’s highly unlikely that the relief they’re calling for — which is essentially for the NBA to enter into a new media rights deal with them — is feasible or practical,” Martin said. “If a commercial partner that you’ve been in business with for the better part of four decades says they don’t want to be in business with you anymore, the toxicity around that would make it untenable for them to be in a business relationship with each other for another 11 years.”

WBD v. the NBA

In a letter sent to Warner, the NBA cited a provision from their agreement stating that an existing media partner can exercise its matching rights “only via the specific form of combined audio and video distribution.” If it’s Internet distribution, a matching company can’t exercise its rights to games via traditional TV distribution.

But WBD says the league “grossly misinterpreted” its contractual matching rights.

“The NBA has asserted that because Amazon proposed to distribute NBA games on its Prime Video platform, TBS could not match by telecasting the games on TNT and Max … but the NBA is wrong,” the complaint states. “TBS properly matched the Amazon Offer by agreeing to telecast the games on both TNT and Max.”

While Warner’s move to sue could simply be a cash grab to extract a monetary settlement from the league, others believe it might be a last ditch effort to get a fourth package of games.

“If [Zaslav] doesn’t get games out of it, then he’s not a pretty smart executive that I think he is,” IAC chairman Barry Diller told CNBC last month. “Money is not going to do him any good. He needs games.”

At the time, Diller said he expected the two parties to reach a settlement in their dispute rather than go to trial.

While a judge could theoretically order the NBA and WBD to create a fourth package of games, that would mean they would either be pulled from NBC, ESPN or Amazon or from regional sports networks like the YES Network or MSG.

“The sentiment amongst the big market owners is that these national media rights deals have a disproportionately negative impact on their regional broadcasts,” Martin said. “To the extent they were to dip into those regional broadcasts in order to carve out a fourth package, there’d be very little momentum on the part of the owners and I don’t think that [NBA Commissioner] Adam Silver would be able to carve that out realistically.”

A legal fight could get messy quickly. Analysts and experts don’t see Warner, the NBA or its media partners wanting to be dragged into a drawn-out discovery process.

“The process is the punishment. I imagine we’re going to some kind of negotiated settlement, but God knows we could go right down to the wire and let a judge decide this,” Patrick Crakes, a former Fox Sports executive turned media consultant, told TheWrap. “I don’t think it’s obvious what happens in that case.”

‘Hard to see an amicable endgame’

Face-saving aside, it would be “hard to see an amicable endgame” from pursuing litigation, Macquarie Research’s Nollen said, noting the move would “only extend the uncertainty” around the company. He downgraded Warner’s stock in a July 25 research note.

Since the April 2022 close of the merger between WarnerMedia and Discovery, WBD’s shares have fallen over 67%, closing at $7.88 per share at the end of Monday’s trading session.

In the event that WBD gets to trial with the NBA and wins, the two parties would become 11-year partners — but would be “hating each other,” Lightshed Partners analyst Rich Greenfield wrote in a blog post .

“The NBA has wide latitude in its media rights deals to determine what games air on which networks and you have to imagine the best games will not go to Turner,” he said.

Amazon, which is the single largest distribution partner for Max via Amazon Channels, would likely be “furious” about being boxed out — such a move would come back to hurt Max in the future, Greenfield said. He added that NBCUniversal would be unhappy with three linear TV companies competing for eyeballs and ad dollars as opposed to two, which could put strain on the studios’ relationship.

“If a commercial partner that you’ve been in business with for the better part of four decades says they don’t want to be in business with you anymore, the toxicity around that would make it untenable for them to be in a business relationship with each other for another 11 years.

Corey Martin, managing partner of Granderson Des Rochers LLP’s entertainment finance practice

USA Network’s failed legal challenge in 2000 to enforce its matching rights for the World Wrestling Federation (WWF), predecessor to WWE, may serve as a precedent that could give the NBA “high odds of success,” Greenfield contended in a follow-up post .

In the event that WBD loses, Greenfield said the legal fight would “irreparably” destroy the company’s relationship with the NBA and send a negative signal to other leagues who might want to do business with them. The message: that they’re a “difficult and litigious partner.” It would also be “wasted executive time and cash resources” that could have been put toward operations and reducing the company’s $39 billion in debt.

Warner without the NBA

Without the NBA, WBD could take a $1.55 billion affiliate revenue hit, including $1.3 billion for TBS and $250 million for the company’s other networks, Bank of America analyst Jessica Reif Ehrlich estimated in a research note. The firm also estimated that WBD could lose another $700 million in advertising revenue, bringing the overall revenue impact to $2.25 billion. Additionally, Ehrlich anticipates a $700 million EBITDA loss over time.

WBD argues that the NBA telecast rights are a “unique asset that cannot be replaced,” which drives “significant viewership and ratings” on TNT — impacting the price the company can charge to advertisers and downstream distributors that license the network.

The NBA rights also provide a “halo effect” WBD has used to promote other content and drive attention and viewership to other channels, networks and properties. And it helps the entertainment company negotiate rights to telecast other sports leagues’ events and get more favorable terms with TBS’s own downstream distributors, such as cable and satellite networks.

But without its financial commitment to the NBA, WBD could gain more flexibility to allocate that cash — savings that could go towards paying down debt or chasing after other, less-expensive sports rights. Warner already has the rights to NASCAR, the NHL, MLB and March Madness college basketball, and it recently acquired the U.S. rights to the French Open tennis tournament starting in 2025. WBD also struck a licensing agreement with ESPN for the College Football Playoff.

“While we are skeptical the new agreements can replace the NBA, these added properties plus WBD’s current sports portfolio…could help mitigate some of affiliate fee decreases in the next round of distributor negotiations and help drive advertising,” Ehrlich said.

Still, the NBA rights are important to the future success of Max, which has struggled to achieve sustainable profitability. The loss makes its sports offering weaker and could hasten the downturn of WBD’s linear networks.

“It now loses a core content asset for both its linear networks and its Max streaming service,” Nollen said. “The former is bad enough — ad revenues will now drop sharply starting in [Q4 2025], and bargaining leverage on cable affiliate renewals now falls. But it’s the opportunity cost of not being able to offer this key programming for the Max streaming service that worries us the most over time.”

If the troubled company were to be split up, as Warner Bros. Discovery has reportedly been considering, the network business could be worth $42.5 billion and the studio and direct-to-consumer business worth $24.7 billion, according to Macquarie Research analyst Nollen.

But the Financial Times reported Tuesday that WBD’s senior management viewed a split as a potential “nuclear option” and has moved away from the idea, warning it could create “very significant operational challenges” and could trigger lawsuits from the company’s debt investors.

Instead, the company is reportedly in favor of pursuing smaller asset sales instead, such as Polish broadcaster TVN or a stake in the Warner Bros. gaming division. Bank of America has previously estimated that Warner Bros. Games could be worth $5.6 billion if spun off, while Poland’s TVN could be worth $3.5 billion.

As of Monday’s close, Warner Bros. Discovery’s market cap sat at $19.57 billion. According to the Financial Times, Warner’s management team believes a turned-around company’s true market capitalization could be $60 billion, or $25 per share.

A spokesperson for Warner Bros. Discovery declined to comment on the FT’s report.

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