Can the WWE Network
succeed?
Nov 1 2013
Analysis by Chris Harrington (chris.harrington@gmail.com)
Since the WWE Network was trumpeted publicly in September
2011 on Monday Night Raw, speculation has run wild and solid facts have been
scarce. Clearly WWE over-promised when they announced it was coming “sometime in
2012” even going as far as to strongly hint that Wrestlemania XXVIII (April 1,
2012) would be the launch day. Two years after the initial announcement, WWE
has yet to provide fully concrete details on pricing, timing, cable/dish
company provider distribution and programming content. With so many questions looming
and the future so uncertain, does the WWE Network really have any chance of
success?
Yes. After
careful consideration, I certainly believe that the WWE Network has a real
chance for success. In the course of this piece, I aim to paint a holistic picture
of the current state of WWE Financials, and why a bold new venture such as the
WWE Network is a good move for the company.
First, let’s look at the financial trends for the company.
Second, let’s review the company’s history with taking
risks.
Third, let’s talk about what we do and don’t know about the
network itself.
COMPANY FINANCIALS
Out of WWE’s four core segments (Live & TV
Entertainment, Digital Media, Consumer Products and WWE Studio) only one area
is substantially growing – Live & TV Entertainment and that growth is
fueled by one thing: TV Rights Fees.
The difference between today and 2007 levels is that WWE has
shrunk $68 million PPV revenue while they have grown $213 million in TV Rights
Fees. Live events alone have generated
$88 million more in the last six years which offset the entire PPV business
losses. WWE recognizes that they are a
television brand much more than they are a PPV brand. The WWE Network gives them an excellent
opportunity to marry the two in a way that could be far more beneficial to WWE
in the end.
Meanwhile, Digital Media (WWE.com and WWEShop) and WWE
Studios have not been stellar sources of growth while Consumer Products (Home
Entertainment and Magazine Publishing especially) have been on a downward trend for years. Consumer Products has been falling downwards
from $138 million in 2008 to $83 million in 2013. There’s absolutely a future
opportunity in licensing (the annual video game money has proven this), but for
the big picture, WWE’s vast growth is going to come on the backs of TV Rights
increases.
Consider this: when WWE messages potential investors, they
break out their top eight areas:
·
Television:
high growth; low to medium risk
·
Pay-per-view:
low growth; medium to high risk
·
Licensing:
high growth; low to medium risk
·
Home
Video: low growth; medium to high risk
·
Digital
Advertising & Content Licensing: medium to high growth; low to medium risk
·
Shop
(WWEShop): low to medium growth; medium risk
·
Studios
(formerly WWE Films): medium growth; medium to high risk
Again, the only two segments that have the desired mix of high growth potential and lower risk are Television and Licensing. The downside is that
expanding in television isn’t cheap; WWE ranked Television second highest in capital intensity (medium intensity)
only behind the money-draining WWE
Studios project (high intensity).
TAKING RISKS
Titan’s history has many cautionary tales of their odd
detours and poorly executed side ventures. One cannot forget milestones such as
the failed WBF (World Bodybuilding Federation) and related
ICOPRO supplements (in with a bang, out with a whimper), the investment in Evel Knievel’s jump over Snake River (McMahon’s filed for bankruptcy in 1976), the infamous XFL debacle alongside NBC (total losses were $138 million with WWFE covering half), the
Times Square World Restaurant (which lost more than $5 million by the time they
finally shut it down), considering opening a World Wrestling Federation Casino (at the former Debbie Reynolds Hotel and Casino location). Plus there were the
high profile government exchanges including the 1991 Zahorian Steroid Scandal and the Chairman Henry Waxman Steroid Use in Sports investigation in 2008 covering Professional Wrestling.
There are other miscalculations – failing to follow
adequately promote and follow up on their once-in-a-lifetime dirt-cheap WCW
purchase, launching the ECW Brand as a separate touring entity, the Sugar Ray
Leonard boxing PPVs flops, programming tasteless and vindictive angles (and the
future sponsorships it may have endangered), investing in vanity projects
(including Linda McMahon spending $97 million to not be elected and the in-house music label, Stephanie Music) plus movie projects like “No
Holds Barred” and most recently the continuing string of write-offs generated
by WWE Studios.
(This doesn’t even touch on the enormous human toll related to former wrestlers
who have died young and of heart failure, the spotty enforcement of substance
abuse policies, the questionable independent contractor policy and other
muddled issues.)
On the flipside, Vincent Kennedy McMahon has taken big risks
which paid off huge.
His national expansion strategy - secretly buying Capital
Sports, taking top talent from rival federations, paying television stations to
carry his wrestling program in major markets – was a bold, audacious move and
it worked. Vince especially recognized
the power of syndicated television and worked vigorously throughout the 1980s
to crowd out his competitors with a slick, superior-produced product. He formed early partnerships with important cable networks like USA (All American Wrestling, Tuesday Night Titans and Prime Time Wrestling) , MTV
(with the War to Settle the Score and Cyndi Lauper) and HBO (airing Madison
Square Garden shows since the 1970s).
This deals providing the channels with content when they were in their
infancy stages and McMahon’s product with increased exposure. The feather in
his cap building the Wrestlemania phenomenon (and harnessing the huge closed
circuit business alongside it). But importantly he was able to move past the
closed circuit era and bring the WWF to pay-per-view.
In the 1980’s, the business was still dominated by live
events – bringing the big stars to your town to wrestle. However, over the 1990s, WWF continued to
develop the revenue streams into television, PPV, and eventually licensing
which would equal and surpass the live gates. With the advent of Monday Night
Raw, they cemented a strong cable legacy of weekly, often live wrestling. In
time the PPV schedule grew and they learned from experimentation with timing
(Tuesday in Texas, Taboo Tuesday) and pricing variations what their viewers
would and would not purchase. As the
attitude era exploded, WWF made the risky choice to go public. At the dawn of the millennium, they
recognized the diminishing value of syndicated network and instead moved more
and more to work within cable synergies leading to a valuable and difficult
contract struggle where Monday Night Raw moved from NBC/USA to Viacomm’s
TNN. The negotiations and subsequent
move lead to an explosion in WWE’s Television Right Fees which has continued to
this day. Most recently, assertive
international negotiations have expanded WWE’s presence internationally which
has provided not only fruitful touring grounds but lucrative television
contracts.
In short, the many of
the areas which McMahon took aggressive (and productive) risks were related to
television– finding a wedge into markets using a syndicated network,
creating Wrestlemania and revolutionizing the wrestling PPV event, conducting
complex contract negotiations and leveraging cable synergies to find the best
home for this product on the television channels. It’s
in this paradigm that the WWE Network seems like an appropriate risk to pursue.
THE NETWORK ITSELF
While the company has been opaque on particulars regarding
the WWE Network launch, there has been numerous breadcrumb trails which offer
insights:
Timing
is a slippery thing
2014? WWE Executive Vice President of Creative development and Operations Stephanie McMahon was quoted by Broadcasting & Cable during October 2013 NYC Television week, "We are looking at traditional and nontraditional distribution, and we're targeting first quarter next year."
2013? In August 2012, Vince McMahon tolds analysts, “I hope next quarter I will be making an announcement”. "WWE Close To Pinning New Net." Daily Variety 316.24 (2012)
2012? Trade publications such as Multichannel News reported in April 2011 that World Wrestling Entertainment was “working on a cable network as part of a major rebrand of the company”
2011?
Going back to the earnings call in February 2010, Vince McMahon specifically noted that they’d been doing a “great deal of due diligence” on working on a
standalone WWE cable network.
Ever? Vince McMahon probably put it best during a July 2012 interview, “I don’t want to commit to a time, you know, because it’s probably not a good idea for us to do that. I’d rather not say.”
In WWE’s Business Plan and Potential Path toSignificant Earnings Growth, they suggested the network could be offered as a Premium Channel at between $13 and $15 per month.
Content
·
On the proposed WWE Network, all WWE
Pay-per-views with the noted exception of Wrestlemania would be available.
·
WWE would be developing both new reality series
(the taped, previewed but never aired Legends House, for instance) and
harnessing their vast tape library.
·
From the very beginning, WWE has emphasized that
their core, first-run weekly programming such as Raw and Smackdown would not
be moved to the new WWE Network. Instead those shows would be remain separate
contracted entities. It’s possible that WWE Network would add pre and post
shows to the broadcasts. It’s likely WWE programming will include
rebroadcasting already aired weekly episodic TV shows, it remains to be seen
just how long will elapse between when shows first air on their primary network
(currently NBCU channels) and when they would be shown again on the WWE
Network.
What is taking so long?
From a company that has showed remarkable skill to pivot on a
weekly basis (at least creatively), roll out of the actual network has
certainly taken much longer than originally expected.
Some of it was distribution problems. For instance, in March
2012, with the strongly foreshadowed but not outright promised April 1 launch
looming, the New York Post reported that WWE had "yet to strike a single
deal with a cable or satellite-TV provider to carry its own cable channel".
Their goal of 40 million homes did not materialize. Shortly after the supposed
Wrestlemania launch day came and went, a month later CEO Vince McMahon said, “the (network) holdup is on our end, it’s not on the end of the
distributors.” Soule, Alexander. "WWE Network Inches Along." Fairfield County Business Journal 48.20 (2012): 9
WWE claims they are committed to learning from the mistakes of
others. There’s certain ample material in the difficult, cumbersome and
troublesome experience of launching a new channel. For instance, Oprah
Winfrey’s OWN network famously joined the cable docket in January 2011.
However, it’s struggled immensely since its introduction – a May 2012 Bloomberg News estimated $330 million in losses after just 15 months. In an interview with R. Thomas Umstead and Mark Robichaux
in July 2012 (while promoting the Raw 1,000th episode), Vince
McMahon specifically diagnosed OWN faltering network problems noting that,
“Oprah herself is a brand. Anything beyond herself is not a brand… So the very
thing that catapulted her into stardom year after year was not on her network.
Certainly, we’re not going to make that mistake.” For the McMahon’s, they see
the appeal of a channel that is an extension of the WWE brand. However, this
predicates itself on the notion that the WWE Network channel must have WWE
brand content that is fans will pay to see.
Obviously, hiring for a complex new venture like this is
neither easy or cheap. WWE CFO George Barrios noted they expected to spendbetween $30 million and $45 million to get things running and hiring 200 employees.
Content
WWE has offered content through premium services in the past.
For almost a decade they’ve offered a subscription video on demand services
(originally WWE 24/7 later
rechristened WWE Classics of Demand).
With a few hundred thousand subscribers the service has generated annual
revenues around $5 million to $7 million – only about 2% of their total Live
& TV Entertainment segment. Just offering old content isn’t enough of a
hook.
For a truly successful WWE Network, they need something that
would be monumentally important enough to WWE fans that a substantial
proportion, more than a million households would subscribe to. The current
model seems to dangle the non-Wrestlemania PPV business as the bait. The idea
would be for a low subscription price (probably between $7 and $15 a month),
fans would get access to the same PPVs that normally cost $45 (SD) to $55 (HD)
domestically.
It’s important to note that the plan is for WWE PPVs to
continue to be offered on pay-per-view. While the premium channel offers a nice
enticement to WWE fans (save $40 and see the show), they stil have another
option for people who are only interested in select events. This ensures that
cable and satellite providers that don’t choose to carry the new premium WWE
Network would still be able to supply WWE fans with monthly action (and split
the revenue with the company). Also, it provides a failsafe that should WWE
Network capsize and disappear, there is still a method to distribution the PPVs
without interruption. Lastly, WWE remains an important player in the PPV
industry (and one of the pioneers who helped grow the practice) – they know
that only their biggest event, Wrestlemania, is truly a competitor to Boxing
and UFC megaevents.
It’s certainly a large and risky gamble, but I don’t feel it’s
a fool’s gambit destined for failure. There are scenarios where the financials
work out – and in some cases, work out massively in favor of WWE Network.
First of all, as discussed in the company financials section,
PPV has not been a growing business for WWE for a long time. Other
organizations, specifically UFC and Boxing, have proven that the final nail has
yet to be driven into the PPV coffin. But the reality has set in for WWE that
beyond the granddaddy of them all, Wrestlemania, most of their PPV events (even
with high-priced talent such as the The Rock and Brock Lesnar) can’t hold a
candle to their record PPV levels set during the Attitude Era.
Instead, WWE has pulled back on the number of pay-per-view
events, increased the price of PPV (most recently achieving a subtle $10 boost
from many consumers by offering their PPVs in HD for an extra price) and
continued to grow their overall revenue from increasing Television Rights Fees.
Put bluntly, WWE has not been growing non-WM PPV revenue. It’s time for a new
approach, and unless WWE can master streaming video-on-demand services to cut
out of the cable/satellite provider as a middle-man, their next best option is
moving the PPV content onto a platform such as a premium channel where they can
reach more people and not be hamstrung into splitting PPV buy revenue with
distributors.
WWE is also aiming to strike while the iron is hot. According
to a January 2013 article from Ad Age, cable companies are looking to drop networks (as Time Warner did with the
Ovation channel). The message to aspiring networks is clear: the only thing getting attention from distributors are live sports.
Live sports are popular for several reasons. For one, they are perceived as DVR-proof
which means that audiences watch the show live and that includes watching the
commercials. Secondly, live sports are exclusive and these rabid fan bases will
keep their cable & satellite subscriptions in order to retain their ability
to view live sports. All of this has
corresponded with skyrocketing sports right fees.
WWE is doing everything they can to lump themselves in with the
live sports crowd. They want WWE Network
to be counted amongst the midst of the Golf Channel, MLB TV, NHL Network,
Outdoor Channel, Sportsman Channel, The Ski Channel, World Fishing Network, and
NBA TV.
WWE knows the enormous money that sports leagues are
getting. For instance, NASCAR signed a10 year, $4.4 billion deal with NBC in Summer 2013. This is why WWE has been projecting such
confidence in each conference call that they are going to vastly increase their
Television Rights Fees when their Raw and Smackdown come up for contract
renewals in 2014. And on the heels of this, WWE is trying to launch WWE
Network, which is essentially a premium sports entertainment channel. While it’s an uphill battle, it’s a decent
fit. At least they are coming at the
marketplace armed with two things that cable and satellite providers want to
see – a huge & loyal audience fanbase (which has a history of paying to
consume their product) and a package filled with exclusive, live sports. In this way, the WWE Network is really more
of a monthly PPV network filled with other supplemental content which is actually
radically different from just being a snazzier version of a dedicated WWE
Classics on Demand 24/7 channel.
The Future
I believe firmly now is the time for this project like
this. The most difficult math is around
the financials for the WWE Network.
WWE has repeatedly offered up hefty numbers suggesting things
such as the domestic fanbase is composed to 57 million households (based on an independent survey of 9,000 households and extrapolating to
digital multichannel households) with some affinity for WWE programming.
It’s bold claim which puzzles why they only have 4 to 5 million
weekly viewers for a show such as RAW and less than three million cumulative
domestic (US & Canada) PPV buys (across 13+ events) each year.
It’s time to
finally do some math and determine whether the WWE Network is viable.
First, one should quantify what is at risk – the most
immediate danger is that WWE would lose the domestic pay-per-view revenue for
all PPVs besides Wrestlemania. I’ve
estimated that the 2014 Domestic PPV market for WWE is worth between $35 million and $40 million. It’s important to emphasize that number
because that’s the revenue that WWE is potentially giving up if a premium
channel such as WWE Network which offered monthly WWE PPVs (except for Wrestlemania)
was fully distributed in the domestically. In addition, there is the cost of running the WWE
Network.
One estimate that for a breakeven point which has been
bandied about one million subscribers.
Both Dave Meltzer and the WWE have calculated a similar number though they use
different methods:
·
Dave estimates the network would cost $50
million a year. He figures that all of
the annual domestic revenue for non-WrestleMania shows (approximated at $35
million) would be cannibalized. If WWE
receives half of the subscriber monthly fee for an entire year, that would be
about $90 million dollars ($7.50/month x 12 months x 1 million subscribers)
which would cover the $85 million ($50 million cost and $35 million lost
PPV).
·
WWE wrote that should the network achieve
between 2 million and 4 million subscribers that would “represent incremental
revenue to WWE of between $125 million and $250 million”. Assuming this lower bound corresponds to
erases existing domestic PPV revenue (about $40 million), that implies 2
million subscribers equals about $165 million in revenue (which implies earning
about $6.88 per monthly subscriber which is firmly at the 50% mark for the
midpoint of their monthly network cost at between $12.99 to $14.99.)
·
Most importantly, WWE emphasized that they
believe they could achieve “incremental EBITDA between $50 million and $150
million” with a 2 to 4 million subscriber base.
Since they explicitly state that “until a base of approximately 1
million subscribers is achieved, we estimate the network would represent a net
investment for WWE”. WWE’s entire annual
EBITDA has been on the low end of $50M to $60M recently, so earning an
additional $50M to $100M would be massive.
Can they get there?
I’ve done some extensive regression analysis looking at
what would WWE PPVs would perform at different price points..
This looks at the worldwide buys. If we assume that the WWE Network would be priced between $10 and $15 and would include the major PPVs except Wrestlemania, then average( 1205000 , 888000 ) x 70% domestic = 732,550 subscribers. If you look at the WM calibre number, it would be 2.2 million subscribers. The midpoint of the two estimates is 1.5 million subscribers - firmly in the "above break-even" but below "wildly profitable" point.
With full distribution, for a network on the level of Royal Rumble/SummerSlam, with the proper gestation period (i.e. ramp up period will probably be at least 9-18 months from launch), they should be able to hit three-quarters of a million subscribers. If they can make things more exciting and turn the clock back to 5-8 years ago, they could hit above a million subscribers.
Summary of Findings
While WWE has had some high-profile failures, their greatest successes have come when they took risky ventures related to television expansions (syndicated TV, cable networks, TV Rights Fees with cable synergies, PPV, international expansions). Only element of WWE's business that has shown both growth potential and actual growth has been in TV Rights - PPV has continued to slip. Using regression based on domestic PPV consumption at different price points over the last many years, model suggests that a $15 WWE Network with full distribution could achieve at least a million subscribers. The delays and struggles we've seen reflect WWE's priorities in re-negotiating their Raw and Smackdown contracts with NBCU (and other possible players), utilizing the growing Live Sports fee trends (potential to double-triple TV Rights Fees) and the extensive staffing and building the WWE Network. This is a terrific opportunity to vastly grow WWE at a rate they haven't been able to do through Consumer Products, international expansions or PPV mega-events. The single most unclear point is how Cable and Satellite providers will react and whether WWE Network can get nearly the full distribution they need in order to be possibly successful; whether this will be part of the the flagship show 2014 negotiations is unclear.
Chris Harrington
chris.harrington@gmail.com
@mookieghana
3 comments:
I'm suspicious of WWE's estimates of the potential revenue they would be able to generate from the network. Their estimates of the potential cannibalization of domestic PPV revenue are ridiculous ($5-10 million for a million subscribers and $20-25 million for 4 million subscribers); I also don't understand how they could keep the annual expenses for the network to $25-30 million when Dave Meltzer has noted that network executives he has talked to don't believe WWE can do it on $50 million a year. If those figures are unrealistic, isn't there good reason to doubt the revenue numbers?
There's unfortunately no way to know this for sure, but from what I can tell, they're going to need more than a million subscribers to break even.
For a million subscribers at $15, we can estimate they'd get about $90 million (assuming they get $7.50/subscriber) annually. Even with losing $40 million in domestic PPV (which is pretty much all domestic PPV money except for Wrestlemania), that still leaves $50 million dollars in Network costs. I think they can cover that.
Is there any reason to believe they can get $7.50 per subscriber? I know Dave has used that number, but the estimate WWE has given is $40-70 million ($3.33-$5.83 per subscriber).
Granted, there are other factors to consider (such as whether or not the companies cut deals with providers to get more subscribers rather than more money per subscriber), but the only premium channel that I know of that gets at least $7.50 per subscriber is HBO.
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