Wednesday, December 02, 2015

WWE 2015: The financial update

Last year, I wrote a piece for the "Cubed Circle Newsletter" looking at the WWE's 2014 financials. (See pages 8-10 here: )

I started working on the 2015 article. Here's the current draft:

Financially speaking, the story of WWE in 2015 was how it wasn’t 2014. Thank god.

Between Q4’13 and Q4’14, WWE posted five consecutive negative quarters of operating income.

Things turned around in Q1’15 for a variety of reasons. There was a first quarter WrestleMania. WWE started receiving new revenue from a bevy of domestic and international television rights agreements. WWE finally expanded the WWE Network distribution to the U.K. marketplace.

In the parlance of business, 2014 was a “transition year” for World Wrestling Entertainment.

Already, WWE has posted three quarters of positive double-digit OIBDA for 2015. Final OIBDA (operating income before depreciation & amortization – a sort of “profit” calculation) for 2015 should be somewhere north of $60 million. That’s a huge improvement over 2013 and 2014 numbers.

While that may sound terrific, it’s worth reminding readers that from 2007 to 2010 adjusted OIBDA bounced between $78 million and $94 million. WWE started investing in what would eventually become the WWE Network in 2011.

Simply put, 2015 is a positive development. It is certainly not close to record WWE profits.

Digging deeper, let’s examine what is propelling the turn-around for WWE.

First of all, WWE is driving more revenue from their live events.

This is mostly in the form of extracting more revenue per person (higher ticket prices, new travel and VIP packages) rather than actually expanding the overall number of people attending each show.

However, it is worth commenting on how NXT has emerged as a notable live event highlight for 2015. The ascension of NXT as an independent event capable of drawing large crowds when they piggy-back on major WWE PPV event weekends is among WWE’s most noteworthy achievements this year.

WWE Network paid subscriptions in 2015 are much higher than they were in 2014.

It helps that WWE cut-costs in Q3’14, hastily rolled out the WWE Network internationally in August 2014 and added UK/Ireland to the mix in January 2015 (at a 50% price premium). Using WWE’s numbers, they would need to achieve an average of 1.36M paid subscribers for 2016 to return to the levels of profitability that WWE had in the late 2000s under their traditional PPV model. As it stands, WWE will probably end 2015 at an average of 1.1M paid subscribers. It’s a respectable number. However, the company seems to be crawling closer and closer to the artificial interest ceiling for subscribers. Breaking beyond two million paid monthly subscribers still seems like quite a reach.

WrestleMania 32 will undoubtedly attract new subscribers in 2016. The decision in November 2015 to finally add multitude of archival territorial footage (NWA, SMW, AWA) should please many fans. Yet, it’s difficult to assess the ultimate WWE Network growth potential.

Most of the accounts are still registered domestically (80% of WWE Network accounts have U.S. billing addresses) and this year has seen a wild decline with live Raw ratings. Can WWE really expect to keep growing the WWE Network when their best promotional vehicle, Monday Night Raw, is losing traction?

The surprise of 2015 has been the continued moderate success of pay-per-view. WWE generates about the same amount of revenue from PPV that they do from segments such as Venue Merchandise or WWEShop (about $21 million). PPV business is larger than established divisions such as Home Entertainment (DVDs/BluRays - a long-shrinking business) or Digital Media (WWE’s golden calf; big social media numbers but tiny revenue now that webcast PPV aren’t available). PPV is still profitable, even though the majority of the buys are through international distributors at a much lower price than historic US prices.

Television rights continue to fuel the WWE’s growth. That’s how it is. That’s unlike to change in the near future.

The bundle of deals that WWE negotiated in 2013/2014 have built-in escalators. WWE will take home more revenue every year regardless of whether ratings grow or ratings shrink. It’s a pretty sweet deal.

The only hitch is when partners don’t pay.

That was the issue with Thailand’s CTH. In that situation, WWE took the company to court to demand their $23 million in TV fees. Extracting such a bounty from an international corporation can be a lengthy and exhausting process. While the Thai deal only represents a small portion of the overall throng of new TV deals (US, Canada, UK, UAE, Mexico, India), the precedent is unnerving.

The WWE Network was recently rolled out in India at a $9.99 price-point. WWE didn’t include any special mobile-phone support and live PPVs are blacked out for 24 hours. It doesn’t appear WWE is making much effort to gain huge traction in some of these markets.

In January 2016, WWE Network will expand into Japan and Germany. Moving into Deutschland is a worthwhile venture, but it is unclear how many consumers will be join the WWE Network fresh and how many customers will merely switch over existing “domestic” accounts.

There’s only a handful of markets left for the WWE Network to launch. They include the Philippines (where WWE had to sue their TV partner Solar in 2013 over missed TV rights fees), Thailand (where WWE is suing TV partner CTH) and China.

One of WWE Chief Financial Officer George Barrios’ favorite narratives has been how India is the future. In 2016, I expect that tune will switch to talking about the endless possibility of China.

Yet, navigating the Chinese media landscape requires precise dealings in a bureaucratic albatross. Media providers must agree to state oversight (some say outright censorship) to gain licenses and distribution.

There is a family connection. Shane McMahon left WWE to join a media company called “You on Demand”. YOD touts themselves as a “leading multi-platform entertainment service company delivering premium content, including leading Hollywood movie titles, to customers across China via subscription and transactional streaming services.”

It’s completely fathomable that WWE will end up partnering with YOD or possibly even outright buying the company in order to pursue their dreams of achieving WWE Network distribution in China. It’s a noble mission, but my assessment is that will more remain an aspirational talking point for WWE conference calls rather than an executed 2016 project.

With television negotiations locked up and television ratings slipping, WWE’s motive in 2015 was to focus investors on their year-over-year WWE Network subscription growth (an easy target when you’re moving around WrestleMania timing, comparing domestic-only to internationally-distributed platforms) and bragging about their Twitter followers, YouTube video views and FaceBook fans.

The vague but omnipresent “monetize digital and social media presence” objective remains a company mantra.

By adding together all of the accounts for each of the WWE’s superstars, the company loves to brag about their half-billion followers. Obviously, the true number of unique people with a ‘WWE-affinity' (to use the company’s phraseology) is certainly far lower.

The underlying thesis is solid – WWE will figure out a way to turn those eyeballs into dollars.

While they insist they aren’t rushing the initiatives, one wonders who exactly is leading this initiative.

WWE’s last Chief Digital Officer (Lou Schwartz) only lasted 5 months and left quietly in February 2015. Before him, we had Matthew Singerman, Lisa Fox Lee and Perkins Miller. With the WWE Network still in their infant phase, that’s a lot of leaders who have come and gone. What WWE needs is a steady, dedicated, knowledgeable hand leading the WWE Network initiative and separate guidance for their entire social media strategy.

The glory of the WWE business model is that they’ve got guaranteed revenue streams that won’t dip even when interest wanes. And they have a loyal fanbase which will continue to support their large event initiatives (such as WrestleMania and SummerSlam). It’s an environment where the company can afford some mistakes, and carry some unprofitable divisions (WWE Films, for instance).

However, a pat hand isn’t going to satisfy investors. WWE has been talking about reaching lofty subscriber goals of three to four million monthly paid subscribers. Meanwhile, the organic limit of steady-state demand seems to be more like 1.5M worldwide. Will new international markets fuel the demand? Will over-the-top streaming culture carry the service to record levels? Will targeting initiatives and innovative programming connect with the fanbase? Questions abound.

The last major narrative for 2015 is WWE’s legal conundrums.

The company has faced an onslaught of lawsuits from jilted investors (claiming WWE misrepresented NBCU television rights negotiations), to past performers over concussion-related injuries, to so-called “patent trolls” over technology used by the WWE.

So far, the company has dealt with the proceeding deftly. They were able to squash the “confidential informant” in the shareholder lawsuit. They were able to consolidate the concussion-claims and wrongful death lawsuits into a single case in the friendlier state of Connecticut. The hyperbolic nature of wrestlers mixed with lawyers inexperienced with the realm of sports entertainment has left a multitude of legal holes in many of the concussion-lawsuit filings.

While these lawsuits can be time-consuming and expensive, the latest developments indicate that WWE has firmly retained the upper-hand. WWE will not allow any case precedence to be set which would invalidate their “independent-contractor” relationship with their performers. They’ll settle long before things reach a courtroom. The company also does not want to be on the hook for any long-term medical liability due to wrestling-related injuries. The company will fight the concussion suits tough and nail. And thus far, WWE has outmaneuvered the plaintiffs.

WWE is willing to fight these cases for years. They will and they have grinded the proceeding to a halt. There are significant and far-reaching legal questions being discussed. However, as it stands, the assortment of wrestlers bringing these charges don’t have the legal counsel or the substantive standing that is necessary to affect far-reaching change in the pro-wrestling world. The risk to WWE is too high for the company not to dedicate serious resources to dismissing these cases.

WWE’s financial situation is strengthening. The WWE Network appears to be viable platform. While there have been some significant financial sacrifices to get to this point, WWE finally has locked down more guaranteed revenue (from TV rights contracts) than at any point in their history.

The dismal slide of live Raw ratings is alarming, but until we see the 2016 trends, it’s difficult to alarm investors in the wake of a changing television landscape.

WWE’s goal is to expand internationally. WWE wants to generate more and more revenue outside of North America. We’ve seen this strategy before with expansions in Europe and Latin America which didn’t fully take. Perhaps, the situation and leadership has evolved sufficiently that we’ll see a true fundamental shift.

If WWE can focus on growing the WWE Network, minimizing lawsuit burdens and monetizing their digital footprint, there is a rosy future awaiting the company.

Chris Harrington

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