How many WWE Network subscriptions are needed to achieve PPV-level profitability?

Someone recently asked me, "How many subscriptions are needed to achieve the profitability levels that WWE had prior to launching the WWE Network?"

To answer that question, there's three pieces of information to gather:

1. What are we calling "pre-WWE Network profitability"?
2. What's the conversion from WWE Network subscriptions to WWE profitability?
3. Where are WWE Network subscriptions now?

1. Pre-WWE Network Profitability

WWE Financials

$WWE	2007	2008	2009	2010	2011	2012	2013	2014
Net Revenues	485.7	526.5	475.2	477.7	483.9	484.0	508.0	542.6
OIBDA	77.7	83.4	91.5	94.0	52.0	63.2	30.4	(15.5)
Depreciation & Amortization	9.3	13.1	14.4	11.7	15.0	20.0	24.5	26.7
Operating Income	68.4	70.3	77.1	82.3	37.0	43.2	5.9	(42.2)

On February 24, 2014, the WWE Network launched domestically after years of discussion. 

Let's go back to the "glory days" for WWE profitability between 2008 and 2010.

While WWE did not publish "OIBDA", we can calculate an adjusted OIBDA (operating income before depreciation & amoritzation) by adding the D&A and OI. From 2008-2010, WWE averaged a little under $90M in adjusted OIBDA.

Therefore, let's set our target, annual pre-WWE Network profitability, at $90M.

For perspective, the latest guidance from WWE (in the Q3'15 earnings release) was that 2015 would end around $38M to $42M in Operating Income and adjusted OIBDA of $62M to $66M. Essentially, if Q4 goes according to WWE's projections, WWE will be back at the 2012 level of profitability. (Again, that's technically a pre-WWE Network year, though starting in 2011, WWE had already begun investing and spending money on developing what ultimately became the WWE Network.)

2. Converting WWE Network subscriptions to WWE Profitability metrics

The WWE Network is only a slice of the overall WWE business model. (There's live event revenue, television rights fees, licensing & merchandising revenue, WWE Studios, Digital Media and so on.)

Yet, WWE repeatedly insists that, "The level of WWE Network subscribers is a critical determinant of the Company’s projected future financial performance."

In fact, look at the "2016 Perspective" in the Third-Quarter 2015 filings:

2016 Perspective

Using Netflix growth as a potential benchmark, management would characterize an annual growth rate of 20% to 25% for WWE Network as very strong performance. If the average paid subscribers to WWE Network increased at a rate within this range in 2016, management currently estimates WWE’s overall revenue could grow approximately 5% - 10% driven primarily by the increase in network subscribers and the escalation of television rights fees. Management currently estimates that this level of revenue growth could result in 2016 Adjusted OIBDA of approximately $90 million to $100 million with no other changes to the Company’s operations.

Paraphrased: If WWE can achieve a 20-25% growth on 2015's average paid subscribers number, they would achieve adjusted OIBDA of $90M-$100M in 2016.
That begs the obvious question: what is 2015 average paid subscriber number?

3. WWE Network subscriptions today

WWE Network subscriptions

qtr ending	paid subscribers	domestic subs.	int'l subs.	qtr avg paid subs.	qtr gross additions	qtr churn	ytd avg paid
9/30/2015	1,233,000	990,000	243,000	1,173,000	453,000	(376,000)	1,106,000
6/30/2015	1,156,100	939,300	216,800	1,215,170	337,300	(508,400)	1,072,100
3/31/2015	1,327,000	1,131,000	196,000	927,000	795,000	(284,000)	927,000
12/31/2014	816,000	772,000	44,000	721,000	336,000	(251,000)	567,000
9/30/2014	731,359	702,883	28,476	723,174	286,000	(255,000)	514,652
6/30/2014	699,752	699,752	-	665,000	349,000	(144,000)	406,000
3/31/2014	495,000	495,000	-	147,000	519,000	(24,000)	147,000

We know that year-to-date (YTD) through Q3, the average number of paid WWE Network subscriptions in 2015 was 1,106,400. The unknown is how Q4 is going to perform.

Luckily, WWE did provide some guidance on how they believed they would end the year:

2015 Business Outlook 

For the fourth quarter 2015, the Company expects ending paid network subscribers of approximately 1.2 million, representing essentially flat results from the third quarter 2015

Therefore, let's assume that there is 1,200,000 paid WWE Network subscribers as of December 31, 2015. Assuming that average WWE Network paid subscriptions during Q4'15 was about 1,216,500 (halfway between 1.2M and 1.233M), then the average paid WWE Network subscribers for 2015 would be 1.133M.

WWE's earlier statement was that 20% growth (1.36M) to 25% growth (1.42M) in average paid WWE Network Subscribers would result in $90M to $100M in OIBDA.

The Answer?

This analysis suggests that to achieve pre-WWE Network OIBDA level of about $90M, WWE would need to average about 1,360,000 paid WWE Network subscribers in 2016.

Final Thoughts

If we start 2016 at 1.2M paid WWE Network subscribers, that's an increase of less than 14%. In terms of new markets, WWE is now available in India (though subscriber numbers are unlikely to be significant for a variety of reasons) and will be available in Japan and Germany starting in January 2016. Still, questions remains whether WWE can consistently grow subscriber numbers in 2016 in the wake of slumping ratings and a rash of superstar injuries.

Lastly, WWE's goal isn't to return to pre-WWE Network profitability, but to grossly exceed them. Contractually-obligated WWE Television Rights fees are the engine for WWE's growth.

In 2010, WWE earned $127M in Television Rights and Advertising Fees. From Q4'14 to Q3'15, WWE's Television segment has already earned $226M. That's more than a 75% increase in television rights revenue, and yet 2015 will be about $30M less OIBDA as compared to 2010. The natural escalation of key bundle of television rights for WWE will deliver $15M more in 2016 ($190M) than 2015 ($175M). 

The point being that WWE takes in $100M more in Television Revenue and $55M in WWE Network Revenue ($70M PPV in 2010 versus $125M in WWE Network Q4'14-Q3'15) to generate less 30% less OIBDA than five years ago. There's certainly been shifts in other segments (International Live Event revenue is down, licensing is down, magazine publishing division closed, home entertainment continues to slide). In 2010, WWE generated 3.63M PPV buys at $45/non-WM buy. In 2016, they'll need to generate the equivalent of 16.32M WWE Network monthly "buys" at $10/domestic sub (+350% the buys for +130% the revenue).

Analysis and Commentary by Chris Harrington (chris.harrington@gmail.com)

Barrios at Wells Fargo Securities Technology, Media & Telecom - November 2015

WWE CFO and Chief Strategy Officer George Barrios presented and answered questions today at the Wells Fargo Securities Technology, Media & Telecom conference in New York City.

My live-tweet coverage from the event:

Presentation materials link: http://ir.corporate.wwe.com/Cache/1001204397.PDF?Y=&O=PDF&D=&fid=1001204397&T=&iid=4121687

He's giving the "media eco-system" pitch with the three pillars. 

#1) Social
"We need to own social." 
"We feel really good about the job we've done over last few years" 

#2) Pay Eco-System 
(talking about securing the pay-tv contracts) 
(Core programming - Raw & SmackDown) 

a) Premium live content
b) Originals/Specials - "Swerved did really well on Network"
c) Library

#3) Direct to Consumer
We believe over time we can get to 3 to 4 million subscribers globally - Barrios 

Q&A

Q: Released earnings, better than expected.. Q4 guidance/2016. Any more color will give? Why not avg paid instead of quarter subs?

Barrios: We're still learning. The one thing you notice is the peak in Quarter 1, and a decline. We have a seasonal product (WrestleMania our Super Bowl). As we move forward, unlike a Netflix that grows sequentially, because of the seasonality inherent in the content we might see year-over-year growth but sequential declines. We'll see how it plans out in April. 

Investment Areas:
1) Content
2) Emerging Markets
3) Technology

1) Content - We see how much consumption there is;it creates an asset value. we're experimenting how much drives subscriptions? 

2) Emerging Markets - about 25% of the business outside of the US. 3rd largest market is India. See more people on ground in India, Middle East, Latin America, China. China has changed for willingness to pay rights fees for exclusivity to Western content. China may skip to digital content without pay-tv phase. Starting to invest in Chinese social media content (outside of YouTube, Facebook, etc.) 

3) technology - some of that is Network itself. Add new features to network to help acquisition and retention. Primarily in Data Analytics stack. Use data to drive thinking. We've got a rich data-set in the Network data in real time. Stitching together all of the disparate data elements - using Twitter, e-commerce, TicketMaster, YouTube, etc. We think it's worth it in the long term. 

On China: "no direct table table on china WWE Network launch" 

Q: Looking 5 years out, what does the entertainment landscape look like? 
A: More and more people are watching content "non-linearly except live content". Globally, the penetration and quality of broadband will improve. More and more content owners will have some element of their business direct to consumer. You hear a lot about skinny bundles, cord cutting, cord nevers - I think how you bundle will evolve - that makes sense, basic economic theory - the question is who is doing the bundling and what do they look like? I think there will be more choice. Where is the money? It will follow the eyeball. We can't control that element. We can control being incredibly strong and penetrated in the platform. That's why YouTube and FaceBook is strategic for us. 5 years ago FB and YT was at the CEO level with his direct reports giving him updates on what we wanted to do with that.  We're going to continue to drive the value of core programming Raw/SmackDown. We will have the choice for the best place for our audience and our shareholders for where we want to put our content. How does that all shake out?I don't think anyone knows.There's a lot of uncertainty. We can control being strong across board 

Barrios is talking about the long-tail value of the archive/library footage. "It's varied." 

Audience Q&A  

1) Balance Sheet Mgmt
2) Cash-Flow

A: We generate a significant amount of cash. We have a fairly plain-vanilla balance sheet.  Only debt is the corporate aircraft.  Return of cash to shareholders.  Given to transition, we've stayed away from talking about the future. We're a high dividend payer. We've stayed away from prognosticating around usage of cash. If you look historically, the company has been an aggressive return of capital. 

Churn?

A: In terms of churn, subscription businesses are akin to retail. It's a ground game. There's no silver bullet. It's lot of initiatives layered on top of each other. Tell future subscribers "here's what's coming" way ahead of time. Segmenting subscribers into cohorts. Target messaging to them. Adding watchlists. We're doing collections coming up. New payment methods - gift card (no CC required) at Walmart. A lot of little initiatives that you hope will reduce the churn. 

Let's say Netflix is a 10. We're probably a 3-4 now. Hope is 2-3 years from now, we'll be an 8 or 9. 

Five Narratives coming out of WWE’s Q3 earnings call

Links:

• WWE announced their Q3 earnings on Thursday, 10/29.
• I wrote an article at WO/F4W breaking down the key elements
• I also discussed the Q3 results with Bryan Alvarez and Mike Sempervive on Wrestling Observer Live
• See transcript of the conference call at Seeking Alpha.

·        TV Rights remain the engine of profitable growth

For all of 2014, WWE earned $176.7M in television rights (which was 91% growth over where the company was in 2007). After just three quarters of 2015, WWE is already at $175.5M. WWE’s built-in escalators in the television contracts guarantees that the key agreements will continue to deliver more and more revenue for new programming through 2018/2019. 

Meanwhile, the WWE Network continues to be bound to the Royal Rumble through WrestleMania boom, Q2-Q4 malaise. WWE would need to be willing to give up some WWE Network autonomy and sell stake/control of the WWE Network (probably to a major media OTT conglomerate like NBCU or MLB AM) before they would be able to deliver constantly rising WWE Network revenue numbers.

With stalwarts such as ESPN are in the middle trimming $100 million from their budget, already the narrative is moving from the “live sports are the DVR-proof bubble in a cord-cutting world” to “the heyday of giant television rights contracts for live sports may be over”. What media eco-system does WWE face when it’s time to renegotiate multiyear centamillion contracts in just a few years?

·        Wall Street was not impressed

Prior to the earnings announcement, WWE was trading at $20/share. Since 10/29, $WWE has been trading at $17-$18/share. Investors seem frustrated that WWE projected flat WWE Network numbers for Q4 (though that shouldn’t really have been surprising), lower-than-expected cash flow ($4M-$8M is half of what Wall Street expected) and exceptionally vague 2016 guidance on the WWE Network.

 “Regarding WWE Network, given the inherent uncertainty of this nascent and growing business, management will not provide guidance for 2016 subscriber levels.”

The WWE Network will launch in November in India and in Germany & Japan in January. WWE keeps insisting there are millions of households with a “WWE-affinity” and their service has the wherewithal to capture and retain millions of paid subscribers at the steady state. However, it will take some phenomenal growth (and retention) to move anywhere close to these lofty goals. Churn remains high (376,000 subscribers left the service in Q3’15 versus 453,000 subscriber additions) and doesn’t show any signs of slowing down. While WWE is running out of new markets for touting expansion, introducing new payment options (such as the 3-month prepaid cards at Walmart) may provide some important upside.

·        Rating Doom: ‘tis but a scratch!

While liveratings for Monday Night Raw have been in the doldrums in 2015 (reaching lowest levels since 1997), WWE is completely no-selling that they are concerned. When BTIG’s Brandon Ross asked about the rating slide (on both RAW and SmackDown), Chief Strategy and Financial Officer George Barrios just said that WWE doesn’t think about one metric in isolation like ratings but instead looks as other items such as “social media engagements” and that WWE believes they are “doing really, really well in the domestic pay-TV ecosystem compared to everyone else.”

As I discuss in my article at Wrestling Observer/Figure Four Online, there’s still a lot of people who care about ratings and television demographics including advertisers, NBCU and WWE themselves (since they need a new fanbase that will subscribe to the WWE Network, buy the superstar merchandise and attend the live events). The company’s story continues to be “win online, win at social media, win where the eyeballs are” and in time that will translate into money.

·        Is WWE Network going to be early Netflix?

The limited guidance that WWE was willing to share for the WWE Network in 2016 was generalizing the domestic growth trends for Netflix’s streaming service (21.5% from Q3’10 to Q3’15). Netflix was mentioned eleven times during the conference call and Barrios is always quick to point out that WWE has been intently studying all subscription services (and not just video-on-demand players).

Despite WWE’s attempts to cage the language and prevent unrealistic expectations (what had burned WWE in 2014 with the TV negotiations hype), the tone of most analysts on the call was that WWE was being too conservative with their estimates for 2016 since their service is available both in the United States (with 80% of the subscriber base) and abroad. There was a brief time in 2014 when WWE even used the tagline, “It’s just like Netflix, but better”. At this point, the prospect of explosive growth seems murky. Until the company cuts down on concurrent streaming/account sharing and the prime programming is available immediately on the WWE Network, it will be tough for WWE to accelerate their paid subscriber growth into the Netflix stratosphere.

·        Now, it’s China. (Thanks India!)

For the past year, expanding the WWE in India has been Barrios’ pet project. Already, the market has become the third-largest television rights deal. Starting today the WWE Network will be available in the Indian sub-continent marketplace (India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, Maldives, and Afghanistan). However, pay-per-view programs will be blacked-out for the initial 24-hours, high price ($9.99 USD) and distribution technology (internet-connection required) suggests that adding India will hardly impact the overall WWE Network subscriber number at this time. However, launching the service does check a box on the “key objectives” list for 2015.

Now the story is going to be all about China. During the conference call, CFO Barrios talked about investing in China in 2016, re-evaluating their distribution strategy in the country and expanding their Shanghai office. There was specific talk about the latest Chinese five-year plan which included “a specific focus on sports and entertainment” along with an acknowledgement that there’s been a “tremendous amount of activity over the last 12 months” in the Chinese media marketplace. I have a feeling that we’ll be hearing a ton about the potential in China in 2016 from WWE. (Though exactly what WWE is doing and they are tracking against those plans will remain firmly in a cloud of mystery.) 

Analysis by Chris Harrington (@mookieghana) - chris.harrington@gmail.com