Friday, December 06, 2013

Let's play the predict WWE Network Revenue Game~!

Let's play the predict WWE Network Revenue Game~!
by Chris Harrington (@mookieghana)

With the possible launch of an online-only WWE Network, a host of new variables are being introduced when it comes to calculating how the WWE Network could affect WWE's Revenue Streams and what exactly would it take in terms of subscriptions in order to be a profitable endeavor?

Step One: Review Current WWE Revenue Streams - will they be affected by WWE Network?

Live & TV Entertainment Division was $376.7M for last 12 months.

  • Live Events: $109.4M = assume no impact
  • Venue Merchandise: $19.8M = assume no impact
  • PPV: $79.8M = assume HEAVY impact
  • TV Rights Fees: $160.2M = will be going up but assume no impact from WWE Network
  • TV Advertising: $2.1M = will probably be going up slightly but assume no impact from WWE Network
  • Other (includes Classics on Demand): $5.4M = assume HEAVY Impact

At risk: Significant portion of $85M in PPV/WWE Classics on Demand

Consumer Products Division was $82.7M for last 12 months

  • Licensing (includes WWE Music): $44.8M = assume no impact
  • Home Entertainment: $28.9M = assume SUBSTANTIAL impact from WWE Network
  • Magazine Publishing: $6.1M = assume no impact (though this segment is already in decline)
  • Other (includes appearances): $2.9M = assume no impact
At risk: Substantial portion of $29M in Home Entertainment

Digital Media Division was $38.9M for last 12 months
  • $23.5M = assume SOME impact from WWE Network
  • WWEShop: $15.4M = assume MINOR impact from WWE Network
At risk: Some portion of $39M in Digital Media

WWE Studios Division was $6.4M for last 12 months
  • WWE Studios: $6.4M = assume SOME impact
At risk: Some portion of $7M in WWE Studios

Total Revenue with some Risk Associated : $160M

Commentary: The largest risk is in the immediate redundancies PPV and Classics on Demand (COD). (We already know that COD is going away so that's -$5.5M assured off the bat.) Home Entertainment (specifically DVD/BluRay) is likely to take a hit because an extensive on-demand back library would naturally compete with selling discs to consumers with the same content. Similarly, I'd expect some impact to be felt in the WWEShop realm, though not nearly as severly.  Whether or not the WWE Network will have any advertising (you'd think a subscription service would preclude this, but we've seen other online streaming services like Hulu retain ads.) there is going to be some natural competition with the video collections that are currently housed online.  In theory, it revenue may just pass from the right hand ( to the left hand (WWE Network), but there's bound to be some disruption. The fate of WWE Studios is a complete crapshoot. While the two ventures may not be directly linked, it's quite unclear how the boondoggle of WWE Studios will fare - will they leverage WWE Network to run their new content? Will they abandon the film division as a burdensome distraction?  Only time will tell. 

Step Two: Rank & Dissect the Risk Profiles

LARGEST ($ risk)
Domestic non-WM PPV*: $47.8M x 50% change = -$23.9M
Domestic WM PPV*: $26.1M x 40% change = -$10.4M
Int'l non-WM PPV*: $6.7M x 15% change = -$1.0M
Int'l WM PPV*: $3.6M x 20% change = -$0.72M
Home Entertainment: $28.9M x 33% change = -$9.5M = $23.5M x 10% change = -$2.35M
WWE Classics on Demand = $5.4M x 100% change = -$5.4M
WWEShop = $15.4M x assume 10% change = -$1.54M
WWE Studios = $6.4M (unclear how it will be impacted)

Potential Loss: $54.8M

* (Obtaining the splits for domestic/int'l PPVs was a complicated process which involved taking the 2006-2013 PPV Buy #s and cross-referencing with WWE's International/Domestic PPV splits 2006-2011 to produce an extrapolation that was applied to 2012 and 2013.  Nov 2012-October 2013 PPVs were used in the above number.)

I made up all of the risk adjustments above.  Those percentages were plucked from thin air.

Step Three: Estimate Revenue Generation from WWE Network

I'm going to go with a starting price of $10/month and look at things from a 12-month view.  I will assume that WWE will retain 83% of that price.  It could be much higher (or lower), but that's a number I'm comfortable with guessing at.

Annual Revenue per Subscriber: $100.

Number of Annual Subscribers required to offset current Potential Loss: 548,000.

This DOES NOT include the $30 to $45 million that George Barrios mentioned going into setting up the network.  Under my estimate, that would be another 300,000 to 450,000 subscribers.

So, all together the break-even point would probably be around a million subscribers.

Conveniently, that's exactly the number that WWE threw out there:
...Until a base of approximately 1 million subscribers is achieved, we estimate the network would represent a net investment for WWE.
Step Four: Find the Flaws

#1: Penny Profit
I haven't spent a lot of time thinking about costs and the profit percentage of WWE Network Dollars versus Home Entertainment Dollars versus PPV Dollars so there could be a flaw in my reasoning.  I just wanted to play out this little thought exercise to the end.

#2: Those Percentages
Also, can we really assume that WWE would get A MILLION subscribers to their service but only lose 50% of their domestic subscribers?  I don't think so.

#3: Full Year Subscriptions
The service was rumored to be launched as a six-month bundle (including Wrestlemania) to get things off to a hot start. However, will everyone stick with the service when they're going to be getting the equivalent of Battleground and Survivor Series 2014?  What about 2015 when Wrestlemania may not be included - how would people handle the shock of going back to a $60+ event after paying only a fraction of that previously?

#4: The Great Unknown
How will UFC react (when they're trying to launch a digital network)? How will the Cable companies react (when they are negotiating with WWE about Raw & Smackdown contracts and stand to lose at least $34 million in revenue from PPV dropping)? How will consumer react (if the stream is a hit or a failure)?  We just don't know.

The "too long, didn't read" version of this story is.... "$160M in WWE Revenue in some way could be affected and I think almost a third of could disappear. It would take about 500k-600k subscribers to cover that and another 400k subscribers to cover the startup costs. That's about a million subscribers for a break-even point which coincidentally was exactly WWE's prediction."

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