Analyst: Lost NBA Season Would Lower Revenue, Boost Profit at Time Warner, Disney Networks
NEW YORK - In case the full NBA season gets cancelled, "the risks to Time Warner and Walt Disney appear manageable," Credit Suisse analyst Spencer Wang said Friday.
"Our analysis finds that a lost NBA season would have a negative impact on advertising revenue for TW's and Disney's cable networks segment," he said in a report. "However, given the higher margin profile of replacement programming [college football and college basketball in the case of ESPN, and primetime library content in the case of TNT], we believe profitability and margins would improve moderately for each network."
For TW, TNT is carrying games. For Disney, ESPN recognizes all advertising revenue from the NBA, even from games shown on Disney's ABC broadcast network, according to his report.
"Based on Kantar Media data, we estimate the NBA generated roughly $664 million in advertising revenue, net of about 15 percent in agency commissions, during the 2010-11 season, up about 7 percent from about $620 million in the 2009-10 season," Wang wrote. "Given that ESPN telecasts more games and, more importantly, the NBA Finals, we believe advertising revenue is heavily weighted in favor of ESPN (about 70 percent) compared to TNT (about 30 percent)."
On the TV rights cost side, ESPN and TNT hold rights through the 2015-16 season in a $7.4 billion deal package. "ESPN pays slightly more (52 versus of the total versus 48 percent for TNT) since it holds the rights for the NBA Finals and broadcasts more games overall," Wang said.
For both entertainment giants, the loss of an entire NBA season would add "moderately" to 2012 earnings before interest and taxes, Wang calculated.
In TW's case, he estimated 2012 cable networks unit revenue to be $119 million lower without the NBA, with the current fourth-quarter hit likely to be $46 million. But earnings before interest and taxes could see a benefit of $137 million next year and $43 million in the fourth quarter, according to Wang.
In Disney's case, Wang sees a fourth-quarter drag on cable networks revenue of $28 million, with the 2012 figure to be $310 million lower in case of a lost NBA season. But its EBIT would be virtually unchanged in the current quarter and $7 million higher in 2012, he said.
"In our view, the longer term risk is that once NBA games resume, viewership suffers from fan backlash, resulting in lower audience levels and ad revenue, while NBA programming costs for the TV networks would remain fairly fixed. This would (obviously) result in lower profitability for the networks," the Credit Suisse analyst cautioned though.
On the other hand, the NBA could benefit from stronger fan support after the labor dispute "if it can address its business model and the competitive imbalance between teams, leading to increased popularity and higher profits for TV partners in future years of the current TV contract."
Meanwhile, NBA stars are eyeing a possible international exhibition game tour, according to the Wall Street Journal.
On Sunday, players such as Kobe Bryant of the LA Lakers, Dwyane Wade of the Miami Heat and Amar'e Stoudemire of the New York Knicks will play an exhibition game in San Juan, Puerto Rico in an 18,000-seat building, for what they hope will become an international tour that makes stops in London, Australia and China, the paper said.