Tuesday, November 22, 2016

Will the WWE Network hit 2 million paid subscribers in 2017?

Some are speculating that rolling out lower-priced tablet-only/AVOD-supported WWE Network tiers will be the pathway for the WWE Network to hit 2,000,000 paid subscribers by the end of the 2017.

Here's some things to consider:

What does 2 million subscriber mean if they have to continue to erode the per subscriber OIBDA to achieve it?
Right now, the OIBDA on the Network segment is 20% ($27.5M OIBDA on $137.2M in revenue.)

Keep in mind that includes $10m of PPV revenue for Jan-September 2016. PPV, even with the majority of it international PPV, is still at a much higher OIBDA % than the Network %. The pure Network OIBDA % is certainly lower than 20% - I'd guess closer to 18%. That would imply that $5 subscriptions would only be generating 9% OIBDA.

Yes, WWE will tout that they're going to be leveraging ad-supported video on demand, but let's be realistic -- they haven't been breaking out their YouTube revenue or their AVOD revenue because it's paltry.

What does WWE's own 2017 outlook suggest?

WWE's 2017 outlook (published as part of the Q3'16 results) noted that "level of WWE Network subscribers will continue to increase, albeit at a lower rate, on a year-over-year basis."

If 2016 is going to end around 1.4 million (that's a range of 1.372m to 1.428m), we're comparing to a 12/31/15 base of 1,217,100 paid subscribers. That's a growth of between 155k and 211k subscribers in 2016.

That gives 2017 a ceiling of 1.64m if you're using growth of absolute subs.

If you're using % growth, that's a growth of 13% to 17%. That still lands us at the same range of ceiling for 2017 - around 1.6m paid subscribers. Either way, you're still 400k short of 2 million subscriber (80% to target).

I think it's very optimistic to guess that WWE will hit 2 million subscribers in 2017 when their own internal outlook if very, very short of that.


Tuesday, November 08, 2016

WWE Lawsuit (McCullough / Bagwell)

Right now, WWE has two active lawsuits:
  1. Russ McCullough et al v. World Wrestling Entertainment Inc
  2. Bagwell v. World Wrestling Entertainment, Inc
(1) The McCullough case is the consolidated case for all of the Traumatic Brain Injury (TBI) & Chronic Traumatic Encephalopathy (CTE) cases which have been filed in the past few years in other states Billy Jack Haynes (OR), Family of Matt Bourne (TX), Russ McCullough/Ryan Sakoda/Luther Reigns (CA), Family of Nelson Frazier Jr (TN) and Vito Lograsso/Evan Singleton (NJ). Recently, a new suit was filed with dozens of plaintiffs which was consolidated with the McCullough case. The new plaintiffs were JOSEPH M. LAURINAITIS, a.k.a. Road Warrior Animal; JIMMY “SUPERFLY” SNUKA, by and through his guardian, Carole Snuka; PAUL ORDNDORFF, a.k.a. Mr. Wonderful; SALAVADOR GUERRERO IV, a.k.a. Chavo Guerrero, Jr.; CHAVO GUERRERO, SR., a.k.a. Chavo Classic; BRYAN EMMETT CLARK, JR., a.k.a. Adam Bomb; ANTHONY NORRIS, a.k.a. Ahmed Johnson; JAMES HARRIS, a.k.a. Kamala; DAVE HEBNER, EARL HEBNER; CHRIS PALLIES, a.k.a. King Kong Bundy; KEN PATERA; TERRY MICHAEL BRUNK, a.k.a. Sabu; BARRY DARSOW, a.k.a. Smash; BILL EADIE a.k.a. Ax; JOHN NORD, a.k.a. The Bezerker; JONATHAN HUGGER a.k.a. Johnny The Bull; JAMES BRUNZELL, a.k.a. Jumpin’ Jim; SUSAN GREEN, a.k.a. Sue Green; ANGELO MOSCA, a.k.a. King Kong Mosca; JAMES MANLEY, a.k.a. Jim Powers; MICHAEL “MIKE” ENOS; BRUCE “BUTCH” REED, a.k.a. The Natural; CARLENE B. MOORE-BEGNAUD, a.k.a. Jazz; SYLVAIN GRENIER; OMAR MIJARES a.k.a. Omar Atlas; DON LEO HEATON, a.k.a. Don Leo Jonathan; TROY MARTIN, a.k.a. Shane Douglas; MARC COPANI, a.k.a. Muhammad Hassan; MARK CANTERBURY, a.k.a. Henry Godwin; VICTORIA OTIS, a.k.a. Princess Victoria; JUDY HARDEE a.k.a. Judy Martin; MARK JINDRAK; BERNARD KNIGHTON as Personal Representative of the Brian Knighton, a.k.a. Axl Rotten, Estate; MARTY JANNETTY; JON HEIDENREICH. TERRY SZOPINSKI, a.k.a. The Warlord; SIONE HAVEA VAILAHI, a.k.a. The Barbarian; LARRY OLIVER, a.k.a. The Crippler; BOBBI BILLIARD; TIMOTHY SMITH, a.k.a. Rex King; TRACY SMOTHERS, a.k.a. Freddie Joe Floyd; MICHAEL R HALAC, a.k.a. Mantaur; RICK JONES, a.k.a. Black Bart; KEN JOHNSON, a.k.a. Slick; GEORGE GRAY, a.k.a. One Man Gang; FERRIN JESSE BARR, a.k.a. JJ Funk; LOU MARCONI; ROD PRICE; DONALD DRIGGERS; RODNEY BEGNAUD, a.k.a. Rodney Mack; RONALD SCOTT HEARD, a.k.a. Outlaw Ron; BORIS ZHUKOV. In addition, WWE preemptively sued Blackjack Mulligan, Koko B. Ware, the Dynamite Kid and Ivan Koloff when it became clear that they were preparing to join the lawsuit.

As you can imagine, sorting through each individual claim and individual's legal standing is turgid affair. WWE assembled a chart looking at Plaintiff / Dates Performed for WWE Based on Complaint / Tort Claims / Negligence Based Claims / Contract Based Claims / RICO Claim / FMLA Claim and Complaint Filed for a "Statue of Limitations Chart" which was filed in October.

Besides trying to exclude standing for most of these plaintiffs, WWE's strategy has been to attack the language used in the original language (by showing that the WWE lawsuit was essentially a retread of the NFL Concussion Injury Litigation) as well as go after sanctions against Plaintiffs' counsel Konstantine Kyros, Brenden Leydon, James Boumil, Anothony Norris, Erica Mirabella and R. Christopher Gilreath. Just last week, Connecticut Judge Vanessa Bryant signed an order to refer the sanctions motions to be reviewed by newly appointed US Magistrate Judge Robert A. Richardson. Also, WWE is contesting that Plantiff's can sue for violations of IRS tax code or OSHA safety code because those claims should be brought by the government and not private entities.

As things have progressed, it appears that the cut-off for whether someone with significant standing in this case (at least in regards to discovery) has been centered around performers who worked for WWE after 2005.

In January 2016, Judge Bryan issued this order:
ORDER PARTIALLY LIFTING STAY OF DISCOVERY: The parties are Ordered to proceed with discovery as to the claims of Singleton and LoGrasso only until further order of the Court. Discovery is to be bifurcated, with an initial liability phase extending no later than June 1, 2016. During this initial liability phase, discovery should be limited to facts relevant to the question of (1) whether WWE had or should have had knowledge of and owed a duty to disclose to those plaintiffs the risks of long -term degenerative neurological conditions resulting from concussions or mild traumatic brain injuries to wrestlers who performed for WWE in the year 2005 or later, (2) whether and when WWE may have breached that duty, and (3) whether such a breach, if any, continued after Singleton and LoGrasso ceased performing for WWE. Dispositive Motions, if any, on the issue of liability are to be filed by August 1, 2016. A decision on the merits of the pending Motions to Dismiss is in progress, and the parties should expect that the scope of discovery may be adjusted based on the outcome of that decision. The parties are further Ordered to read and comply with Chambers Practices regarding discovery disputes during the pendency of this action.
In May 2016, Judge Bryant issued another order:
ORDER granting in part and denying in part Plaintiffs' Motions to Compel Responses to Plaintiffs' First Requests for Production. This case is not about concussion prevention. The Court has already found that Defendant owed no negligence-based duty to prevent Plaintiffs from sustaining head trauma in their voluntary and compensated wrestling activities. Discovery of information and production of documents which merely reflect a desire to limit concussions and prevent injury to WWE talent - or specific incidences of head trauma occurring during WWE activities are not relevant, nor would such discovery be proportional.
Rather, the sole remaining claim concerns an allegation of fraudulent non-disclosure of knowledge of a link between wrestling activity and permanent degenerative neurological conditions. To the extent there are documents within the categories identified by Plaintiffs Motion to Compel including documents related to the use of helmets, the elimination of wrestling moves, the implementation of the wellness program or the hiring of specific personnel and the adoption of specific protocol, or the incidences of concussions among WWE talent which reflect a specific knowledge of OR an appreciable risk of a link between wrestling activity and permanent degenerative neurological conditions, then WWE is under an obligation to disclose such documents. However, to the extent information within the identified categories merely reflects a general desire to limit or prevent head injury to WWE talent, or the occurrence of head injuries among WWE talent, such information is irrelevant to the claim at hand and is not discoverable.
As the Court indicated in its recent telephonic conference with the parties, Plaintiffs have not presented any factual predicate whatsoever entitling them to discover documents or information dated prior to the year 2005 and absent such a factual predicate Plaintiffs motion to compel is denied on that issue. Lastly, Plaintiffs demand for WWE to disclose Plaintiffs own medical files is denied in as much as it seeks production of information within Plaintiffs control and access and permissibly gathered by WWE at Defendants own expense.
The Court assumes that both parties have gathered, using appropriate litigation holds, and examined, using appropriate diligence, the information at issue in preparing to determine the outcome of this matter on the merits and will not be reviewing such documents for the first time. As such, the Court will permit the parties to supplement their discovery responses no later than fourteen days after the discovery deadline to provide the information they have each been compelled to disclose.
The two sides have been quibbling extensively over depositions around who and when and how many times someone can be deposed. There has been extensive depositions of Vito LoGrasso, Evan Singleton, Stephanie McMahon, Vince McMahon, Dr. Joseph Maroon, Dr. Mark Robert Lovell, former WWE Performance Center trainer Bill Demott, Dr. George Adams and Paul "Triple H" Levesque. (Note that Concussion Legacy Foundation's Chris Nowinski has not been deposed. This has been a point of contention and legal wrangling.) With the exception of LoGrasso and Singleton, these depositions were filed under seal. However, on October 20, Judge Bryant did rule that "Upon review of the documents sought to be sealed, the Court finds that redaction is the least restrictive means of balancing the public's First Amendment right to open courts and the Defendant's business interests. Accordingly, the Defendant is hereby ordered to file exhibits redacted to omit proprietary information." It's possible that the redacted depositions will provide slightly more insight beyond the sparse sentence or two which has been quoted in filings.

(2) The Marcus "Buff" Bagwell WWE Network royalties lawsuit began in August 2016. WWE has been unsuccessful in consolidating this case with the McCullough/LoGrasso/Singleton/Laurinaitis supercase. Recently, Scott Levy (Raven) has joined the lawsuit as a plaintiff. The most concise summary of everything in this case is the "Form 26(f) Report" from a November 7 Parties' Planning Meeting. It lays out the jurisdiction, brief description of the case, statement of undisputed facts (which are few), discovery, plaintiff's claims and defendants' defenses and claims.

Essentially, Bagwell claims that his WCW merchandising contract and his WWE contract entitles him “video cassettes, videodiscs, CD ROM, or other technology, including technology not yet created.” He believes that revenue from the WWE Network should qualify. WWE counters that streaming content is not a "direct sale", does not transfer title or ownership and "calculation of royalty payments cannot logically apply in the context of a subscription service like the WWE Network". There's other objections about which entities & contracts were in place, how WWE is reporting traditional royalty payments on physical media like DVD sales, why WWE is allocating royalties to certain performers, and whether WWE is fulfilling the "audit" clauses that were in the original contracts regarding royalties. The Plantiffs are seeking a class action lawsuit which would include contracted performers who haven't signed "Nostalgia" or "Legends" contract but signed contracts with WWE prior to 2004 (especially in 1993 and 2001-2003). This may take some time to sort everything out.

-Chris Harrington

Thursday, November 03, 2016

WWE Q3 Results & Commentary; will Vince sell?


If you missed last week's coverage of the WWE Q3 results, please check out my article over at wrestlinginc: "WWE Q3 Analysis: Why TV Revenue Is Down, SmackDown Ratings, 2017 Outlook, Attendance Notes, Network" -- http://www.wrestlinginc.com/wi/news/2016/1027/618809/wwe-q3-analysis/

My Q3 analysis article will probably be my last piece at Wrestling Inc. for the time being and I'd like to express my appreciation to Raj for the opportunity to write for the site. I haven't had a lot of time to devote to writing about wrestling financials lately and I decided it would be best if I went back to being a freelance writer.


I also recorded a 90-minute WRESTLENOMICS RAIDO episode with special guests Keith Harris (cagesideseats) and Brandon Howard (fightful.com) which you can listen to over at Voices of Wrestlinghttp://www.voicesofwrestling.com/2016/10/28/wrestlenomics-radio-wwe-q3-results-2/

We cover the WWE Q3 results, whether Vince would ever sell the company, what the potential 2017 drivers/detriments might be and I give a brief update on the WWE lawsuits.


As you can see, paid domestic WWE Network subs have gone up about +131,000 since 12/31/15 compared to a growth of almost +218,000 from 12/31/14 to 9/30/16. Over the same period internationally, we're up about +96,000 subs this year compared to about +199,000 the prior year. Last year lots of new markets were opening up (including UK) while this year was just the final additions of Japan and Germany.

At this point, there's not much sizzle left in the WWE Network. WWE admitted they expected growth in 2017 would be slower than 2016 and it looks like next year will probably be hovering around 1.6m to 1.7m levels barring any major changes. It's pretty clear that targets like "3m to 4m subscribers" remain pie-in-the-sky given current trends. We've tried Free WrestleMania. We've tried doubling up on PPVs through the brand split. We've tried more curated and live content. 

WWE is clearly obtained their share of devoted fans who willingly fork over $9.99 monthly for access to everything. However, they're not Netflix. It's questionable whether rolling over the "free month" trials is really generating the returns they are looking for. Perhaps they will roll the dice and go all-in with some pricing tiers (including a free tier which will allow them to brag about their AVOD numbers and a mobile-only tier which is sorely missing considering the high consumption of their material on tablets & phones). However, the earliest I can imagine that would be closer to WrestleMania, especially if they were aiming to raise prices above $9.99 levels.

Will Vince Sell?

One of the talking points coming out of the latest WWE Conference Call was this exchange with Brandon Ross of BTIG (transcript from Seeking Alpha -- http://seekingalpha.com/article/4015916-world-wrestling-entertainments-wwe-ceo-vince-mcmahon-q3-2016-results-earnings-call-transcript?part=single ):

Brandon Ross
Thank for taking the question. I have just one question and it's for Vince. So the AT&T Time Warner deal has once again highlighted the value of content, after we had to DreamWorks and the UFC deals earlier in the year at pretty significant premiums and multiples. So to unlock the most shareholder value why does it not make sense to consider a sale at this point while values are so high? Then even beyond shareholder value, do you think you could more of effectively unlock the opportunities that you have in front of you, if you are part of a much larger media company.
Vince McMahon
Again we're open to anything but I think that you know controlling all of the dust is so important. And I don’t know well how much you lose control over that you know by being absorbed or sold or what have you, but again, we’re to open to anything, we’re business people, so it's not a question of if the right deal came along, it’s one of those things where you do, to do any good reviews, we're listening. Otherwise you know we're creating our own content, which extremely valuable as George said over all platforms and that's important. The old content is king is true, maybe truer today than it’s ever been. So we're open for business.
Brandon Ross
So if there was a deal that had a structure that effectively allows you to manage your own destiny, would that be attractive to you?
Vince McMahon
We’re open for business.
Brandon Ross
Thank you.
Both Brandon Howard and Keith Harris have written about this. You can read their respective pieces at Fightful ( http://fightful.com/vince-mcmahon-asked-about-selling-wwe-conference-call ) and Cageside Seats ( http://www.cagesideseats.com/wwe/2016/10/27/13447020/wwe-sale-vince-mcmahon-comments ).

I'll add in some of my thoughts on the matter.

First of all, WWE said pretty much the same thing last quarter. Robert Routh asked them about the UFC sale and George Barrios replied, "And as far as the private transaction look, as you know us, we are always willing to listen and all we care about is doing what's best for our audience, for our shareholders, and for our employees. So, someone's got a great idea, we're open to listening to it."

This isn't news. It's just WWE trying to give a cheery business-friendly reply to an analyst's inquiry. 

Second, the scenario that WWE obtains a multi-billion dollar valuation and sells controlling interest to another firm is basically "investor fan fiction". It's a fun thought-exercise which would justify many analyst's who have been giving sky-high valuations on the future of the WWE based on the idea that the WWE Network explodes or that Chinese media rights are going to be huge or the next television rights renewal will extraordinarily outperform expectations. 

Vince McMahon lives and breathes WWE every waking moment. It's his life and his social life. The idea of him "reporting" to someone else would be anathema. While it's very likely that outside investor would still keep McMahon as the company's CEO and/or Chairman position, what isn't as likely is that WWE succession would remain strictly in the McMahon family tree. And that's going to be a big issue. When you consider the elevation of Stephanie McMahon and her husband (for instance, joining the WWE Board of Directors in February 2015), it's clear that Vince continues to position her to have substantial power. However, if WWE were to sell control of their company, the likelihood of another McMahon remaining in the top seat after VKM is gone begins to tumble precariously. I just don't believe that Vince would allow himself to get into a position where he couldn't control that legacy transfer. 

Third, it's unclear what would be the ramifications for other top WWE executives such as George Barrios and Michelle Wilson should voting rights for WWE no longer remain in Vince McMahon's control. Some of these people would get some nice buy-outs to quietly walk away. Some of these people might move up in power (provided they had aligned themselves with the new powerbrokers prior to the sale). Ultimately, I think top brass who don't see working for WWE as a lifetime appointment would view a World Wrestling Entertainment sale as an opportunity to cash out and move on to the next job. To that end, it's probably in the interests of many members of the leadership team to promote such a sale because they think it's the easiest way to get paid top dollar without having to achieve those ultra-ambitious "three to four million" WWE Network numbers.

Granted, everyone has a price. Let's say there was a group that was willing to pay the big bucks (and likely take on a load of debt). Who would want to pay so much for WWE?

Let's say that a major media conglomerate like NBC Universal or Disney might consider it, but it's an enormous burden to take on for relatively low payback. They would be hedging against high domestic television rights renewal fees and counting on striking great international television rights deals for 2019. I still believe that the China marketplace has been completely overblown for rights fees -- WWE is essentially negotiating with state organizations despite the myriad of names they might use. They're not going to be able to leverage them against each other and score some blockbuster deal. Even in India, where WWE has done well recently, the marketplace is narrowing to Sony vs. Newscorp. There would be the options to bundle the WWE Network into an existing digital/OTT platform, but ultimately professional wrestling is niche content. The current marketing plan seems to demonstrate that the appeal has a pretty well defined ceiling of roughly two million subscribers. Like we've seen with UFC, a new buyer would likely to start immediately slashing employee headcount and looking at other cost cutting measures to squeeze additional profit immediately. The five-year explosion of Corporate & Other costs would certainly start moving in the opposite direction. In theory, an owner like NBCU could allow waive their exclusive rights period to allow WWE to put Raw/Smackdown live on the Network. However, that would still run the risk of enormous outcry from WWE's global partners who would feel slighted. Not to mention, cable and satellite operators might be incensed at the perceived undercutting of traditional television value.

It just seems like a lot of risk, a lot of investment, and relatively low upside for anyone except the financial analysts who want to find a story to justify positive ratings on WWE stock and top WWE executives who might get a payday to take a hike. That's why I consider it a non-story.