Time Warner Seeks NBA Renewal to Tap Sports Gold Mine

Time Warner Inc. is hustling to keep the NBA in its lineup to help fulfill a pledge to lift cable-network sales.

The media company’s discussions with the National Basketball Association over a contract to air games on TNT and TBS are critical to Chief Executive Officer Jeff Bewkes’s promise, reiterated in May, to boost license fees by at least 10 percent a year.

Time Warner, along with Walt Disney Co.’s ESPN, is seeking to renew the last major U.S. sports deal that’s up for grabs until 2021, according to people familiar with the talks who asked not to be identified because the negotiations are private. Time Warner and Disney, which split up airing the games, pay the league an average of $930 million a year combined. The NBA is said to be looking to double its fees this time around.

While the current deal doesn’t expire until 2016, Bewkes is under pressure to strengthen viewership at the cornerstone Turner cable unit, which runs TNT and TBS, after advertising growth came in at the low end of the company’s expectations. Live sporting events like the NBA are ratings gold mines, driving licensing fees higher because viewers stay glued to their TVs to watch stars like LeBron James and Carmelo Anthony, who themselves have signed major new contracts this month.

Higher Fees

“Time Warner’s growth comes from having a passionate audience -- that’s why sports is so important,” David Bank, media analyst with RBC Capital Markets, said. “It would be damaging if they lost the NBA.” He has the equivalent of a buy rating on Time Warner.

The contract is even more important after Time Warner spun off the Time Inc. magazine unit last month, the last piece in Bewkes’s five-year effort to slim the company down to entertainment assets.

Sports help programmers negotiate for higher subscription fees from cable and satellite operators like Comcast Corp. and DirecTV because viewers like to watch them live, even through commercial breaks -- an increasingly rare phenomenon as more people turn to streaming video and recorded shows.

Exclusive Window

The NBA is looking to double its rates over the previous agreement that expires after the 2015-2016 season, according to people familiar with the negotiations. James, the league’s four-time Most Valuable Player, limited his new $42.1 million agreement with the Cleveland Cavaliers to two years to let him negotiate a new deal for the 2016-17 season, when the new TV rights will boost contract values, ESPN reported last week.

Time Warner currently has rights to air 52 regular-season games and up to 52 playoff games. Disney’s rights include 75 regular season games and up to 29 playoff games.

The three parties are already discussing renewal terms, and the talks have been fairly informal, the people said. Disney’s ESPN and Time Warner’s Turner have an exclusive window in which to negotiate.

Adding to the pressure, other channels such as 21st Century Fox Inc.’s new sports network are interested in pursuing rights to the games, according to a person familiar with its strategy, who asked not to be named because the matter is private. Fox could try to snatch away rights to the games after the exclusive period ends. Lou D’Ermilio, a spokesman for Fox, declined to comment.

’Kiss,’ ’Tell’

While others are interested, the contract only lets the league talk to its current television partners at the moment, Adam Silver, the commissioner of the NBA, said in an interview last week at the Allen & Co. conference in Sun Valley, Idaho.

“We are just talking to incumbents right now,” he said. When asked whether he thought the price they were negotiating for was fair, Silver said: “I don’t kiss and tell.”

In a statement, ESPN said “the NBA is a valued partner and we hope to continue our rewarding relationship for years to come.” Keith Cocozza, a spokesman for Time Warner, declined to comment on any contract talks.

In November, John Martin, who runs Time Warner’s Turner division, said he won’t pay an excessive fee to renew the NBA agreement.

’Alternative Plans’

“We understand that it will be a competitive bidding situation,” he said at a conference. “If the rights costs get to be in excess of what we think the economic value is, we’ll have to make alternative plans.”

Turner’s value to pay-TV companies doesn’t only come from sports. It’s spent more to develop original series such as “Rizzoli & Isles” as a way to increase viewers. The lineup of original shows increased by 40 percent last year, according to Bewkes.

“Basically the mix at TBS and TNT is, it’s about 70 percent acquired, it’s about 20 percent original in terms of slots and about 10 percent sports, which were impactful and important but expensive,” he said at an investor conference in December.

The NBA is seeking to boost its fees after other leagues have done the same. Major League Baseball signed a deal two years ago with Fox and Time Warner that runs through 2021 and doubles the revenue of its previous contract. Later that year, the National Football League agreed to a 60 percent fee increase with Fox and CBS Corp. in a contract that goes through 2022.

Media Mergers

Time Warner’s Turner division generated $4.9 billion in fees last year, accounting for almost a fifth of total revenue, excluding Time Inc.

Because sports programming draws the highest fees from TV distributors, it’s been one of the main drivers behind a spate of major media mergers this year that so far has topped $134 billion.

The merger of Comcast and Time Warner Cable Inc. will give the combined company 30 million TV subscribers, while AT&T Inc.’s bid to buy DirecTV will give it a total of about 25 million subscribers. The added heft would give them more leverage when negotiating licensing agreements with programmers like Time Warner.

The carriage deals that cable and satellite companies currently have with Time Warner are probably contingent upon retaining the NBA, according to Tony Wible, a media analyst with Janney Montgomery Scott LLC.

Fox Merger

While losing the NBA would put Time Warner in an weaker position, “another way to look at this is to see if there could be an opportunity for Time Warner to merge with someone who has leverage with sports,” Wible said, citing the benefits if Time Warner merged with Fox.

“One cannot overlook this megadeal given its immense financial benefits that dovetail with a number of strategic benefits like the added sports rights,” he wrote in a research note last month.

Time Warner needs the NBA more than ESPN does since it represents a bigger slice of its overall sports programming, according to Lee Berke, president of LHB Sports Entertainment & Media Inc., a firm that advises professional sports leagues on media rights.

“The NBA is vital for them,” he said. “It’s a substantial part of their winter and fall programming.”

Ratings Declines

Indeed, NBA games played on Turner’s networks ranked among the top 10 rated programs on all of cable TV for 10 weeks in the recent TV season, according to data from Nielsen. For the entire month of May, when the NBA stages its playoff rounds, Turner’s networks claimed at least five of the top-rated cable programs every week.

The highly watched games spotlight the importance of retaining the NBA. TNT’s ratings have dropped 16 percent since 2011, while TBS is down 13 percent, according to Nielsen data. Turner’s networks saw a 5 percent gain in advertising in the first quarter from a year earlier, compared with the company’s forecast for growth in the mid- to high single digits, because of weaker viewership overall.

While Time Warner has a good chance of renewing with the league, it may not get as many games as in its previous deal, according to Berke.

“The NBA offers up a combination of quantity and quality,” said Berke, who is not advising the league on its negotiations with the networks, yet does count some NBA franchises among his clients. “Its exclusivity and the growing demand from distributors leads to the same bottom line: The NBA is going to do very well for its next contract.”

Before it's here, it's on the Bloomberg Terminal.