Monday, February 06, 2017

WWE 2016 Financial Overview

This is a draft of the article that was included in the Cubed Circle Newsletter 2016 Yearbook.
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World Wrestling Entertainment revenues grossed $542 million in 2014
and $659 million in 2015.  2016 will be another gargantuan year for
WWE with revenue in excess of $700 million.

WWE’s narrative is simple: escalating TV rights plus explosive WWE
Network revenues equals massive success.

And it’s true that WWE has experienced a windfall of television rights
over the past decade. In 2006, WWE earned about $93 million for their
TV programming. That number grew 2.5x times to $231 million by 2015.

Meanwhile, the real story on the consolidated “Network + Cannibalized”
segments of business is murkier. When you look at this group
(specifically WWE Network, traditional Pay-Per-View, WWE Classics on
Demand, Home Entertainment/Home Video, Digital Media/WWE.com/Online
PPV) there has not been steady growth. These segments went from
combined $170 million in 2007-2008 but slipped down to about $120
million by 2010-2011.

The WWE Network launched and quickly grew into a major revenue stream
($70 million in 2014, $140 million in 2015, estimated $170 million in
2016). Meanwhile, cannibalized segments have whittled down to less
than $50 million for 2016. Yes, on a net revenue basis, WWE is able to
achieve record net revenues. However, profitability tells a very
different story.

From 2006 to 2010, average OIBDA (operating income before depreciation
& amortization) was $84 million. The high was $94 million in 2010 and
low was $74 million in 2006. From 2011 to 2015, WWE averaged $35
million OIBDA with high of $63 million 2012 and low of negative $15.5
million in 2015. WWE expects 2016 will finish between $80 million and
$84 million. While that would be the highest OIBDA in five years it
will certainly not set a company record. WWE has gone from achieving
double-digit OIBDA as a percentage of net revenues (18% average
between 2006-2010) to single digit (7% average between 2011-2015).
2016 will be an inflection point as this year, WWE hopes to hit about
12% OIBDA %.

This speaks volumes about how WWE has used their lucrative television
contract to subsidize the WWE Network business. It brings in higher
net revenues at a much lower margin. In fact, the OIBDA on the Network
segment (PPV+WWE Network) will probably be lower in 2016 (about $45
million OIBDA) compared to 2015 (which was $49 million OIBDA) despite
almost $31 million more in net revenues generated by the WWE Network.
That’s stunning.

While some of this is related to how much WWE is allocating on WWE
programming for the WWE Network the reality is that in 2016 the WWE
Network is generating just at or slightly below the amount of profit
that the traditional pay-per-view model was generating in the
mid-2000s. That’s on a base of 1.42 million average paid subscriptions
in 2016. With the entire world (save China) able to subscribe to the
WWE Network, how many people are really waiting to pull the trigger on
ordering a wrestling-driven over-the-top subscription service?

So, why does WWE tout their new model over the tried-and-true
pay-per-view delivery system? One important difference between the
traditional PPV model and the modern OTT model is the ability WWE has
to observe the viewing and browsing habits of their WWE Network
customers. In March 2016, WWE announced that Pamela Murrin was joining
the company in a SVP of Data Strategy role as part of Tandy
O’Donoghue’s Strategy and Analytics division. This is an area of the
company that WWE has been quietly beefing up. It’s likely that WWE is
applying their improved data segmentation and audience models to
invest in programming such as the Cruiserweight Classic.

Increasingly, we’re seeing the WWE Network positioned for their
current content and modern material as opposed to marketing their
archival library.  In fact, WWE CFO and Chief Strategy Officer George
Barrios himself recently suggested that people wouldn’t pay ten
dollars a month for the premium content unless they watched the
television shows. Otherwise that would be like “only watching episode
10 of the Walking Dead”. This challenges the notion that WWE really
sees opportunity in the WWE Network as a conduit for their older tape
libraries or that WWE will be expending additional marketing dollars
and effort to recapture lapsed fans beyond the current strategy of
bringing back WCW stars (such as Sting, Goldberg) for nostalgia runs
on the current programming.

It’s important to remember that WWE didn’t need to put all their eggs
in a single basket. Now that they’ve run WrestleMania on domestic WWE
Network (2014), WrestleMania on international WWE Network (2015) and
free WrestleMania (2016) – there’s really no special tricks left in
the hat. WWE acknowledges that growth for 2017 will be at slower rate
than 2016 which demonstrates they understand that it’s getting harder
to attract and retain new subscribers in the increasingly crowded
world of OTT-subscription apps. Meanwhile, WWE continues to position
themselves price-wise against Hulu and Netflix while their programming
is still uniquely niche professional wrestling reality and sports
entertainment shows.

Among the most interesting WWE financial developments of 2016 was the
December 12 announcement that the company would be offering $200
million in convertible senior notes due in 2023 at 3.375% annual
interest. The purpose? A delightfully vague statement about
“supporting the execution of the company’s long-term growth strategy
and for general corporate purposes”. While WWE is certainly not a
professional wrestling monopoly (they would fail either the legal or
economic definition and tests), they are a already financial
juggernaut when it comes to professional wrestling. What do they
intend to do with this all money? Did WWE CFO George Barrios seeking
this financing so he could capitalize on all those appearances at bank
& investors conferences with this credit line of “start-up”-esque
financing (convertible senior notes)? Some have noted that WWE
regularly pays out higher dividends than their free cash flow. Is this
just insurance against the next television rights deal?

Where the company goes from here is difficult to ascertain. While the
brand split has revitalized the relevance of SmackDown, it’s
ultimately insufficient to pull against the waning forces of sliding
television ratings. WWE wants a big television rights deal once their
current bundle of major league deals expire in late 2019, but the
landscape is evolving at such a pace it’s questionable that anyone is
going to bring a big money offer to the table. Instead, we may just
see a series of concessions – change in exclusivity on Raw/Smackdown
rights or reducing number of live hours of content while maintaining
similar TV rights. WWE talks a big game about new international
markets and has done extensive hiring campaigns to find new athletes
in Brazil, India & China, but it’s still questionable whether these
markets will ever deliver the growth that WWE promises or whether
markets like India have also reached the peak of their media bubble.
WWE is certainly doubling down in the United Kingdom marketplace
(interestingly, one of the places they did make a pricing exception
for the over-the-top WWE Network) with the new U.K. tournament and
additional U.K. focused programming. This is a much safer bet than
volatile emerging markets or content-restrictive regimes like China.

Vince McMahon is still emperor of his kingdom. He’s still the Chairman
of the Board, Chief Executive Officer and running the ship when it
comes to creative direction. WWE’s inner circle obviously includes
both Paul and Stephanie Levesque (both sit on the board of directors)
but also key executives like Chief Strategy Officer and CFO George
Barrios (who joined the company in 2008). While we’ve seen McMahon
family members come and go (and come back), it’s a different story
when it comes to top executives.

It was telling that when the WWE President of International Gerrit
Meier quietly left WWE in June 2016. There was a significant
restructuring on international divisions and Meier’s position
(President of International) was eliminated. We’ve seen this before.
For instance, in 2011, WWE removed the COO (Chief Operating Officer)
role after high-level executive Donna Goldsmith left the company.
She’d worked for WWE for a decade and reported directly to Vince
McMahon. Ian Frisch spoke with a former top level WWE executive who
described the experience of working for Vince McMahon as such: “You
are treated like a commodity—just a barrel of corn. You are only a
piece of talent, cultivated and developed, until they need to blame
you and fire you and bring someone else in.”

Financially WWE is stable. They get guarantee rights fess with
built-in quarterly escalators. The WWE Network isn’t likely to break
two million paid subscribers in 2017 (beyond possibly for a single
WrestleMania month), but the subscriber base isn’t likely to collapse
any time soon. They’ve found ways to run more live events annually and
extract higher and higher ticket prices as domestic live events have
grown from $64 million in revenue (2008) to $93 million in revenue
(2015). WWE is set up to have successful 2017 and 2018 years, but
there is still a serious reckoning awaiting in 2019 when it’s time to
pivot and position themselves with new television rights deals.

It’s imperative that WWE finds a way to either effectively monetize
their over-the-top WWE Network through raising prices to achieve a
much higher OIBDA % per subscriber, creating new access tiers (free
with video ads, mobile-only), or striking meaningful partnerships with
other streaming services to provide an OTT bundle. It will be
fascinating to see whether the same inner circle is advising Vince
McMahon in a few years or whether we’ll see another significant
leadership turnover.

Chris Harrington (@mookieghana) writes about professional wrestling
financials and statistics at wrestlenomics.com and indeedwrestling.com
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