Indeed Wrestling - Pro Wrestling Analytics - by Chris "Mookie" Harrington
Sunday, May 18, 2014
WWE TV Deal Analysis
Yesterday, as expected, WWE announced a new, multi-year deal with NBC Universal. NBCU will continue to air WWE programming on their networks: Raw (USA), Smackdown (SyFy) and also Total Divas (E!). The exact terms (length, size of contract) were not revealed in at the NBC Universal Cable Upfronts presentation (where NBC Universal Chairman Bonnie Hammer and WWE Executive Vice President Paul “Triple H” Levesque took the stage and announced the deal).
After the NYSE stock market closed, WWE released a “Business Outlook”. The document offered guidance on WWE’s projected performance for 2014 and 2015. In this forecast, WWE offered some projections about several things: the size of their “Key Content Agreements”, the financial impact of WWE Network expansion, overall ranges for profitability.
Investors were not (to put it mildly) impressed. WWE stock had closed the Thursday night at $19.93/share. Overnight, the stock lost almost half of it’s value. It opened at $11/share.
That’s certainly not the response that WWE wanted. For months, they sounded the steady drumbeat that they were going to get a monumental television deal. This was their opportunity to grab some of that “live sports” money and lock down a long-term, big money contract. WWE pointed to their high ratings. WWE pointed to their DVR-proof programming (with 90%+ watching Raw live each week). WWE timed their deals to be coterminous (ending at the same time). WWE hinted at multiple bidders. WWE signed big international television deals (UK, Thailand) that were represented several-fold increases. The company believed they had things right where they wanted them for a nice, juicy domestic TV contract.
In the middle of this, WWE decided to launch the WWE Network. Launching the Network in February was a double-edged sword. On the plus side, it painted the WWE as an innovative and leading company that was embraced the future of digital media. They were rolling-out a state-of-the-art over-the-top subscription service for their fans! WWE received loads of publicity, and on opening day demonstrated an the onslaught of hungry fans (who promptly crashed the servers). On the negative side, WWE Network continues to be an expensive project with ambitious break-even points. As a result of launching, WWE’s relationship with multi-channel video programming distributors suffered and some PPV providers (notable DirecTV and Dish Network) dropped carrying WWE pay-per-views.
But, all in all, the WWE Network made WWE seem like a really big deal. Imaginations started running wild and the stock price soared (reaching $31 by mid-March). The first major hurdle was Wrestlemania 30 and proving the Network handle the demand. Analysts were pleased to see that technology worked and the WWE Network withstood the test. Things looked rosey.
Then WWE announced the post-Wrestlemania WWE Network subscriber number. it was 667,287 subscribers. While some media reports proudly championed this as “well on the way to a million”, the reality stung. WWE had thought they could do better. Many Wall Street Analysts believed WWE was going to announce more than a million subscriptions. Instead, after the biggest event of the year, WWE still had a significant way to go (300,000+). And that was just to hit their own “break-even” point. The stock began to tumble. Even the following week’s surprise good news – “Almost 400,000 US Households order WM30 via traditional, full-price PPV!” – did not trigger a massive stock rebound.
Things were amiss. However, despite these hiccups, investor optimism remained. For they were looking at the true prize which lay ahead: the new domestic TV rights deal. While the WWE Network was a neat adventure (a noted departure from relying on selling expensive three-hour PPVs via cable and satellite systems), the real money rested in WWE’s weekly television deals. Worldwide Pay-per-view revenue had been eclipsed by worldwide television rights fees back in 2008. (If you include advertising alongside TV rights, they actually started beating PPV back in FY2002.) While WWE makes a lot of money off live events ($112M), PPV ($83M) and Licensing ($46M), their largest revenue source remains their television contracts ($161M). WWE may be a “integrated media organization and recognized leader in global entertainment” but moreover they’re a television company. They need the weekly outlet to stay connected to their global fanbase, and without television, the company would be an exceptionally bad place. The lessons from the collapse of their chief rival (World Championship Wrestling) are not lost on WWE: Without a television contract, a professional wrestling company is completely crippled.
Many pointed to the fact that Monday Night Raw is often the top rated show on Monday Night cable. It regularly deliverers four million viewers (three million households) and WWE produces original content all year long. Those are important facts, but that overlooks another stunning fact – wrestling gets lousy advertising revenue. Despite all of those dedicated fans, advertising rates for professional wrestling remains exceptionally low. According to Scarborough’s research, slightly more than a quarter (28%) of WWE avid fans earn more than $50,000 annually – that compares to 51% for the U.S. adult population. Compare as one might to NASCAR, you don’t see Car commercials and Beer ads during wrestling broadcasts.
Several months ago, an analyst told me that based on the advertising rates they estimated for WWE, they couldn’t fathom why a network would pay more than $160 to $180 million annually for the WWE contract. After all, WWE viewers can’t be counted on to stick around. Or in television lingo: “WWE doesn’t provide much of a halo effect to other network programming” (with the notable exception of MMA reality shows). Yet, without addressing this fundamental paradox, WWE continued to promise potential investors (and potential bidders) that since live sports were hot and signing huge contracts, so they expected to sign a huge contract too.
How confident was the WWE? At the Q2 Conference Call last year (August 2013) Vince McMahon promised (with trademark gusto) that if they did not double their rights fees, the analyst could put him in a hammerlock.
Over the past 15 years, WWE has done a decent job of diversifying their revenue streams. This gives them some flexibility so they don’t have to rely on a single area of business (digital media, live events, licensing, magazine, television contracts, movie studio, PPV money, merchandising, etc.) to be the sole engine of growth. However, it’s been clear for some time that bundling all of the domestic television deals together to sell them in one swoop was supposed to be prop up the company in the near-term while the WWE Network picked up steam. The guidance they realized suggests they’re expecting to lose money in 2014 (even at a million Network subscribers, they’re projecting -$20M for annual net income). Since they keep promising future years are going to be big – built mostly on the back of WWE Network growth and WWE TV Contracts, how did they make out?
Now, there’s something to be said for WWE’s chart: it’s confusing. They “Key Content Agreements” represent “television distribution agreements in the U.K. and Thailand, an agreement in principle in the U.S., and an estimate for India.” The “Prior” Deals refrences 2009 to 2010, the “Current” Deals references 2013 to 2014 and the “New” Deals references 2014 to 14. However, it appears they’re only looking at Domestic Television revenue for the “Prior” and “Current” deals. We know that WWE grossed $73M-$83M (domestic) plus $39M-$45M (international) in TV rights in 2009-2010 alone. Yet, they’re only showing $76M on this chart. Baffling. Are they leaving out cancelled shows (Saturday Morning Slam, WWE Superstars, Main Event, NXT, ECW on SyFy)? Are they leaving out non-UK International revenue (and if so, why)? It’s a curious bit of financial “storytelling” on WWE’s part. However you decide to slice it, it seems to imply that WWE only walked away with about $92M more in new TV deals, and some portion (we estimate a third) is from international contracts.
The current domestic WWE television contract has three pieces: Monday Night Raw, Friday Night Smackdown and Total Divas. Combined, their 2013 value (on North American television) was worth a little under $100M. Additionally, back in January 2014, WWE announced they’d extended their BSkyB deal in the UK (5-years). It’s been estimated that the new agreement was worth triple the old deal, a number that some analysts have put at $30M. Additionally, WWE negotiated a new Thailand TV deal (approximated at $3.5M, up from $500k) and is currently working on their new India TV deal (which is currently estimated at $12M; let’s assume they double it). So, international new deals would represent about $35M in annual incremental revenue. If WWE guidance is that new “key content agreements” are worth an increase of $92M overall, that would only leave about $57M for the domestic TV rights. That implies domestic television rights received a little more than a 50% increase which is a far cry from “doubling the TV rights”.
It should be noted that not everyone thought the contract was going to double. While WWE wanted a number closed to $280M and Investors salivated at the notion that the annual domestic WWE TV contract could be worth $400M, others had set more realistic estimates. (I had suggested it would probably start in 2015 around $160M/yr – pretty close to the $150M it appears to be.) We still don’t have guidance on the full details of the contract – how many years (typically it’s been five-years), what are the rebroadcast rights (WWE wants to get a deal at least as good as Hulu for the WWE Network to show Raw/Smackdown), will it include new WWE programming (Tough Enough was mentioned in the last conference call, but as a new show on the WWE Network), will any programming change nights (Live Smackdown on Tuesday Nights on SyFy has been rumored, but WWE wanted a large contract to offset the added cost).
It’s important to emphasize that that the sky isn’t falling. The company is set to make a lot more money in the beginning of 2015 for producing the same amount of television content they produced in the middle of 2014. Being cancelled by a major network would be devastating news for WWE. That didn’t happen. Only receiving at 50% price boost isn’t a disaster – just a failure of WWE to live up to the hype and promises they’ve been issuing. But however WWE wants to spin it, this week’s events have been a blow to WWE’s credibility. If WWE wants investors to believe their “sky’s the limit” promises about WWE Network growth (and the corresponding hundreds of millions of dollars of profit), the company needs to account for what happened so they can start rebuilding that trust.