WarnerMedia, Discovery Merger Could Push Netflix Into Sports

·4 min read

AT&T announced Monday that it intends to spin off WarnerMedia and merge the mass media conglomerate with Discovery Inc. under a newly formed publicly traded company. AT&T investors will control 71% of the NewCo—in large part because of the sports assets WarnerMedia brings to the table. Media consultant Ed Desser (president, Desser Sports Media) said the alliance is the latest indication that sports content will not be marginalized as streaming plays an increasingly pivotal role within the media ecosystem. “It shows sports still matter—and will continue to matter—in a major way,” Desser said. “You can’t really have a streaming service with broad appeal without a representative sample of key sports.”

Our Take: While the spinoff and subsequent merger say a lot about the value of sports programming, the plan also shines a light on how the each party views its role in a shifting media landscape. “AT&T has figured out they are not an entertainment company. That it’s not in their DNA,” Desser said.

As a result, they’ll look to develop content “externally through alliances and owning a part of these assets [as opposed to developing it in-house],” Pat Crakes (principal, Crakes Media Consulting) explained.

Discovery, on the other hand, has come to the realization that its collective of niche channels is no match for the likes of Disney, Peacock and Amazon. “Having a news play, a sports play, a general entertainment play and a premium play is much more of a future than [the narrow offering they had],” Desser said. “You have to have critical mass and scale to play in streaming in a big way, and they really couldn’t compete with Discovery+ by itself.”

Meadowlark co-founder John Skipper applauded long-time Discovery CEO David Zaslav’s move to pursue a merger. “[Discovery] has done a smart thing in that they’ve created a bundle that has wide appeal,” he said. “Sports on TNT and TBS [along with CNN and HBO] are must-haves. They have put themselves in a position where they can now compete.”

The transaction isn’t expected to close until mid-2022. But once it does, the NewCo will become the second largest media company, trailing only Disney (in terms of enterprise value). So, the NewCo will have the resources to add sports rights to a domestic portfolio that already includes the NBA, NHL and MLB (along with the NCAA tournament and Bleacher Report) should they so choose. As Bruin Capital founder George Pyne said, “The new entity can invest in adding more global sports rights to its NHL, NBA, MLB, PGA Tour and NCAA [Division I Men’s Basketball] Tournament content and create a must-have sports streaming service.”

Both Crakes and Desser believe the NewCo will do just that as sports rights become available over the next several years, which should bode well for the owners of those T1 rights. “Rights fees haven’t peaked yet,” Desser said. WarnerMedia declined to comment on the NewCo’s future plans.

While there has been speculation the NewCo could pursue sports rights abroad, that seems to be a fairly dubious assumption. Discovery’s sports efforts to date have underwhelmed (see: plan to create international, multi-platform home for golf), and Eurosport appears to be in retreat. The network shed some rights during the pandemic (see: Bundesliga).

If we’re heading towards a world where all of the major streaming services include a live sports component, it’s reasonable to wonder—again—if Netflix will need to make the move into live sports to compete. “Disney’s offering is entertainment plus sports plus news (think: Disney+, Hulu and ESPN+ package). This new entity is going to be entertainment plus sports plus news. Does that mean [Netflix] has to be in sports?” one media insider asked.

Desser does not necessarily think so. He acknowledges there is an argument to be made that if the company desires to make the service “absolutely pervasive, sports is the missing link.” But, he said, “It’s not in their DNA” (which is largely predicated on owning long-tail content worldwide). The media consultant also suggested that Netflix might be able to continue to get by without sports simply because of the amount it spends annually on content. Though, at $20 billion annually, WarnerMedia and Discovery combined spend more than Netflix has budget for (over $17 billion in 2021).

Crakes indicated that if Netflix were to eventually go the sports route, it would likely occur via “the kind of cooperation that you used to see in the established bundle, where movies ended up in packages on other companies’ distribution assets,” as opposed to the platform acquiring the rights themselves. “The most efficient way to do it is to get together with someone else. It seems complicated to make acquisitions fast enough because the content simply isn’t available,” he said. Sports are also an expensive sector to enter, and NFLX shareholders, who have been told time and time again that the company isn’t getting into sports, may be less-than-pleased with an endeavor that eats at their free cash and earnings.

Netflix did not respond to requests for comment regarding its sports programming plans.

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