Title: Warner Bros. Discovery Faces $9 Billion Write-Down, Sues NBA Over Lost Basketball Package

In a major development, Warner Bros. Discovery has announced a non-cash impairment charge of a staggering $9 billion at its networks division. This move is aimed at aligning the book value of its linear television business with the current market reality, which is marked by uncertain advertising prospects and sports rights renewals. The write-down comes as the NBA prepares to move on, and Warner Bros. Discovery finds itself grappling with the loss of a highly lucrative basketball package to none other than Amazon.

The merger between Discovery and Warner Media two and a half years ago had assigned a significantly higher value to the linear assets compared to their present worth. This decline can be attributed to the migration of consumers to other platforms and a dip in advertising revenues, a trend that has affected the entire industry. However, what sets Warner Bros. Discovery apart from other media giants is its decision to challenge the NBA through a lawsuit in a bid to regain the lost games. Unfortunately, industry experts remain skeptical about the company's chances of prevailing in this legal battle.

David Zaslav, the CEO of Warner Bros. Discovery, had initially stated that the company did not necessarily rely on the NBA for its success. However, the loss of the basketball package has now been deemed a massive blow, leaving investors concerned about the company's prospects. In a statement, Warner Bros. Discovery attributed the goodwill impairment to the disparity between market capitalization and book value, along with the ongoing softness in the U.S. linear advertising market and the uncertainty surrounding affiliate and sports rights renewals, including those with the NBA.

In addition to the write-down, Warner Bros. Discovery also reported $2.1 billion in pre-tax acquisition-related amortization of intangibles, content fair value step-up, and restructuring expenses. The current situation presents a complex challenge for Warner Bros. Discovery, as its stock has dropped by approximately 70% since the merger, prompting investors to call for strategic actions such as breaking up the company. While asset sales, including the games business, are being considered, such a process is expected to be immensely complicated.

Following the release of this news, Warner Bros. Discovery's shares witnessed a decline of around 6.5% after the market closed, mainly due to the earnings report falling short of Wall Street's forecasts. In a bid to address concerns and provide clarity, David Zaslav and the company's executives are scheduled to host a call at 4:30 ET today.

While the write-downs have undoubtedly grabbed headlines, there were some positive aspects to Warner Bros. Discovery's second-quarter earnings report. The company experienced a notable increase in streaming ad revenue and subscribers, thanks to the introduction of the ad-light tier for its Max platform and expansions in Latin America. By the end of June, the streamer had amassed over 103 million subscribers, with an addition of 3.6 million in the quarter. Streaming ad revenue also surged by nearly 100%.

However, it's not all good news for Warner Bros. Discovery, as its total direct-to-consumer sales fell by 6%, and losses grew to $107 million from $3 million in the previous year's quarter. The studio division faced challenging comparisons due to the absence of blockbuster gaming releases like "Hogwarts Legacy," which had greatly aided profits in 2023. Despite a 19% increase in theatrical revenue (excluding foreign exchange), primarily driven by successful films like "Dune: Part Two" and "Godzilla x Kong: The New Empire," studio profits declined by 24%.

The networks division also experienced a decline in revenue and profit, with both figures falling by 8% to $5.2 billion and nearly $2 billion, respectively. Distribution revenue took a hit, dropping by 8% due to a decrease in domestic linear pay-TV subscribers. Advertising revenue also declined by 9% (excluding foreign exchange), a result of a 13% drop in domestic network audiences and the soft advertising market in the United States. On a positive note, content revenue saw a 5% increase, primarily driven by the timing of third-party licensing deals. Overall, Warner Bros. Discovery recorded a 6% decrease in total revenue, amounting to $9.7 billion.

In response to the challenging industry climate, David Zaslav emphasized the company's top priority of expanding its global direct-to-consumer business. He expressed satisfaction with the growing momentum, citing the addition of 3.6 million net subscribers and the company's continued international expansion efforts. Zaslav highlighted the need for bold steps, such as reimagining existing linear partnerships and pursuing new bundling opportunities to accelerate Warner Bros. Discovery's presence on various devices, ultimately driving segment profitability in the latter half of the year, as well as 2025 and beyond.

As Warner Bros. Discovery faces significant hurdles and fierce competition in the media landscape, only time will tell if the company's strategic actions can reverse its decline and pave the way for a prosperous future.