Warner Bros. Discovery’s traditional networks ‘seeing degree of pressure’ due to streaming: Analyst

Goldman Sachs Managing Director Brett Feldman joins Yahoo Finance Live to discuss the streaming industry, including the role sports play in services' success and what's next for Disney and Warner Bros. Discovery.

Video transcript

DAVE BRIGGS: All right, the NBA playoffs are set to tip off this weekend after a regular season that broke some records. The league announcing this week it set new records for total and average attendance at games this season while selling out a record 791 games. The NBA hoping to carry that momentum into strong viewership numbers on ESPN and TNT this spring.

Joining us now for what the NBA's success could mean for Warner Brothers Discovery and the overall outlook for the company amid the launch of new streaming platform Max is Brett Feldman, Goldman Sachs managing director. Good to see you, my friend. So curious with this new deal coming up, and obviously, Warner Brothers Discovery looks like a front runner with Disney. But how does the entrance of Amazon and Apple into the sports streaming world raise the price, or at least complicate the matter, for two companies that are in relative cutback mode?

BRETT FELDMAN: Well, thanks for having me here. It's great to be on the show. It's really a question about competition. You had the word up there, streaming wars. Investors have been talking about streaming being a war for a long time. And really what the war is about is engagement. You're trying to get your consumers to sign up for your service and to stay with your service because when you have a cable or a satellite package, you pay for it as if it's a utility even if you're not technically in a contract. But you can toggle in and out of your streaming product any time you want.

And I really think that yesterday's event, the Warner Brothers press event to announce a new Max product, was really them trying to show the market that they think they're building a streaming product that's going to create that level of engagement so that they can get to profitability over time.

RACHELLE AKUFFO: And so in terms of timelines then, when you look at what we're seeing with NBA attendance, how soon will that start translating, I guess, more so when we see the bottom lines for some of these streaming companies?

BRETT FELDMAN: The question is obviously cost. If you look at what's going on with sports rights, the NFL contract that was signed not that long ago is the most recent example of it. These sports rights have been doubling or tripling in value as they go through a renewal cycle. That's exactly why the value of these teams have been going up so much, which you were talking about during the prior segment. Meanwhile, viewers are moving out of the paid TV ecosystem where they've been so much locked into their subscriptions and into an environment where they can toggle in and out, as we just talked about.

So really what companies like Warner or any other traditional media company that has been a partner of the leagues has to do is figure out how to contain that cost because the overall value of the rights are going to keep going up. So they have to ask themselves, does it make sense to pay the full freight to maintain the package of games that I've had all along, or is there some way I can work with the leagues and maybe additional partners to get a contract where it's a manageable cost for me, it brings just enough entertainment, sports entertainment to my viewers, and I can grow and I can make some money?

DAVE BRIGGS: Now it was interesting David Zaslav talking in this presentation about the sports assets they have, which are impressive-- March Madness, we mentioned the NBA, the NHL as well. But they will not be folded into Max, and neither will news, CNN. Why not? And at some point, do you think those are all under that streaming umbrella?

BRETT FELDMAN: Well, really, we don't know. They kind of teased a little bit at the press event, saying that they do expect that they are going to have live news and sports as part of their streaming offering. But to your point, they didn't explicitly say that it was going to be part of Max. They also said we're going to come back and let you know what we're doing in a couple of months.

I think what most investors assumed is that that means they think in a couple of months, they will have resolved their negotiations with the NBA, thereby knowing exactly what they can fold into their streaming service. And whether they're going to bring a separate service to market that is based on live news and sports or maybe whether it's some enhancement to the Max product, we just don't know yet.

RACHELLE AKUFFO: And obviously, a lot of companies have been pulling back on their ad spend. What sort of opportunity does this open up?

BRETT FELDMAN: Well, it's both sides of the coin if you're looking at a Warner Brothers Discovery. So in the case of Warner Brothers Discovery and many other traditional media companies like Paramount and Disney, what that means is that their traditional networks businesses are seeing a degree of pressure on advertising. That's not just because of the economy, but it's also because you are seeing more advertising inventory being made available to them on streaming platforms. In some cases, it's from the exact same companies, meaning Warner is offering advertisements on HBO or Max, as they're now calling it. Disney is now offering advertising slots on Disney+.

And so I think the hope is that if some of the advertising spend that the advertisers are hoping to take away from those traditional channels moves into the streaming platforms, it's going to move on to their platforms. The problem is they're not the only ones out there with advertising. Netflix is out there with advertising. Obviously, there are some mainstays like YouTube and very popular platforms like Roku. So it may not necessarily be that advertising in aggregate is going down. The question is, where is it going?

DAVE BRIGGS: I'd also question about where Disney is going. You are bullish on the company. Stock's up 13% this year. We've heard a lot about Bob Iger's plans to reorganize the company, about some cuts and about siloing off ESPN. But in terms of the catalyst for growth, what is it as you see Disney right now?

BRETT FELDMAN: They got to figure out how to make money in streaming, and they'll tell you that is absolutely the number one priority for Bob Iger and his management team, as he goes through what is supposed to be a two-year stint in the CEO role. They had record losses in their streaming segment in their fiscal fourth quarter, which was two quarters ago. They lost $1 and 1/2 billion on streaming in that quarter alone. They were able to show some progress towards mitigating those losses as they moved into the early part of this fiscal year. And their anticipation is that they're going to break even or make some money at some point next year. But they still have to show investors how they're going to do that.

And inevitably, what that means is that they're going to have to pay close attention to costs. They're also going to have to make sure that they are pricing their product effectively. One of the home runs that we've seen out of Disney very recently was a price increase on Disney+ that they flowed through the service late last year. It was nearly a 40% price increase. It's sort of unprecedented, the extent to which they took up price. And yet, according to the disclosures by management, it had almost no effect on their subscriber trends, meaning that what they've learned is that consumers continue to value their content, just as much in a streaming world as they have in the old world of movies and television.

RACHELLE AKUFFO: Certainly seeing that spread throughout the ecosystem. Very interesting insight there, Brett Feldman. Thank you so much for joining us this afternoon.

BRETT FELDMAN: Great to be here.