Can the WWE Network succeed?

Can the WWE Network succeed?

Nov 1 2013 

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

Since the WWE Network was trumpeted publicly in September 2011 on Monday Night Raw, speculation has run wild and solid facts have been scarce. Clearly WWE over-promised when they announced it was coming “sometime in 2012” even going as far as to strongly hint that Wrestlemania XXVIII (April 1, 2012) would be the launch day. Two years after the initial announcement, WWE has yet to provide fully concrete details on pricing, timing, cable/dish company provider distribution and programming content. With so many questions looming and the future so uncertain, does the WWE Network really have any chance of success?

Yes. After careful consideration, I certainly believe that the WWE Network has a real chance for success. In the course of this piece, I aim to paint a holistic picture of the current state of WWE Financials, and why a bold new venture such as the WWE Network is a good move for the company.

First, let’s look at the financial trends for the company.

Second, let’s review the company’s history with taking risks.

Third, let’s talk about what we do and don’t know about the network itself.

COMPANY FINANCIALS

Let’s look at the Seven-Year Trend for WWE

Out of WWE’s four core segments (Live & TV Entertainment, Digital Media, Consumer Products and WWE Studio) only one area is substantially growing – Live & TV Entertainment and that growth is fueled by one thing: TV Rights Fees.

The difference between today and 2007 levels is that WWE has shrunk $68 million PPV revenue while they have grown $213 million in TV Rights Fees.  Live events alone have generated $88 million more in the last six years which offset the entire PPV business losses.  WWE recognizes that they are a television brand much more than they are a PPV brand.  The WWE Network gives them an excellent opportunity to marry the two in a way that could be far more beneficial to WWE in the end.

Meanwhile, Digital Media (WWE.com and WWEShop) and WWE Studios have not been stellar sources of growth while Consumer Products (Home Entertainment and Magazine Publishing especially)  have been on a downward trend for years.  Consumer Products has been falling downwards from $138 million in 2008 to $83 million in 2013. There’s absolutely a future opportunity in licensing (the annual video game money has proven this), but for the big picture, WWE’s vast growth is going to come on the backs of TV Rights increases.

Consider this: when WWE messages potential investors, they break out their top eight areas:

·         Live Events and Venue Merchandise: low to medium growth; low risk

·         Television: high growth; low to medium risk

·         Pay-per-view: low growth; medium to high risk

·         Licensing: high growth; low to medium risk

·         Home Video: low growth; medium to high risk

·         Digital Advertising & Content Licensing: medium to high growth; low to medium risk

·         Shop (WWEShop): low to medium growth; medium risk

·         Studios (formerly WWE Films): medium growth; medium to high risk

Again, the only two segments that have the desired mix of high growth potential and lower risk are Television and Licensing. The downside is that expanding in television isn’t cheap; WWE ranked Television second highest in capital intensity (medium intensity) only behind the money-draining WWE Studios project (high intensity).

TAKING RISKS

Titan’s history has many cautionary tales of their odd detours and poorly executed side ventures. One cannot forget milestones such as the failed WBF (World Bodybuilding Federation) and related  ICOPRO supplements (in with a bang, out with a whimper), the investment in Evel Knievel’s jump over Snake River (McMahon’s filed for bankruptcy in 1976), the infamous XFL debacle alongside NBC (total losses were $138 million with WWFE covering half), the Times Square World Restaurant (which lost more than $5 million by the time they finally shut it down), considering opening a World Wrestling Federation Casino (at the former Debbie Reynolds Hotel and Casino location). Plus there were the high profile government exchanges including the 1991 Zahorian Steroid Scandal and the Chairman Henry Waxman Steroid Use in Sports investigation in 2008 covering Professional Wrestling.

There are other miscalculations – failing to follow adequately promote and follow up on their once-in-a-lifetime dirt-cheap WCW purchase, launching the ECW Brand as a separate touring entity, the Sugar Ray Leonard boxing PPVs flops, programming tasteless and vindictive angles (and the future sponsorships it may have endangered), investing in vanity projects (including Linda McMahon spending $97 million to not be elected and the in-house music label, Stephanie Music) plus movie projects like “No Holds Barred” and most recently the continuing string of write-offs generated by WWE Studios. (This doesn’t even touch on the enormous human toll related to former wrestlers who have died young and of heart failure, the spotty enforcement of substance abuse policies, the questionable independent contractor policy and other muddled issues.)

On the flipside, Vincent Kennedy McMahon has taken big risks which paid off huge. 

His national expansion strategy - secretly buying Capital Sports, taking top talent from rival federations, paying television stations to carry his wrestling program in major markets – was a bold, audacious move and it worked.  Vince especially recognized the power of syndicated television and worked vigorously throughout the 1980s to crowd out his competitors with a slick, superior-produced product.  He formed early partnerships with important cable networks like USA (All American Wrestling, Tuesday Night Titans and Prime Time Wrestling) , MTV (with the War to Settle the Score and Cyndi Lauper) and HBO (airing Madison Square Garden shows since the 1970s).  This deals providing the channels with content when they were in their infancy stages and McMahon’s product with increased exposure. The feather in his cap building the Wrestlemania phenomenon (and harnessing the huge closed circuit business alongside it). But importantly he was able to move past the closed circuit era and bring the WWF to pay-per-view.

In the 1980’s, the business was still dominated by live events – bringing the big stars to your town to wrestle.  However, over the 1990s, WWF continued to develop the revenue streams into television, PPV, and eventually licensing which would equal and surpass the live gates. With the advent of Monday Night Raw, they cemented a strong cable legacy of weekly, often live wrestling. In time the PPV schedule grew and they learned from experimentation with timing (Tuesday in Texas, Taboo Tuesday) and pricing variations what their viewers would and would not purchase.  As the attitude era exploded, WWF made the risky choice to go public.  At the dawn of the millennium, they recognized the diminishing value of syndicated network and instead moved more and more to work within cable synergies leading to a valuable and difficult contract struggle where Monday Night Raw moved from NBC/USA to Viacomm’s TNN.  The negotiations and subsequent move lead to an explosion in WWE’s Television Right Fees which has continued to this day.  Most recently, assertive international negotiations have expanded WWE’s presence internationally which has provided not only fruitful touring grounds but lucrative television contracts.

In short, the many of the areas which McMahon took aggressive (and productive) risks were related to television– finding a wedge into markets using a syndicated network, creating Wrestlemania and revolutionizing the wrestling PPV event, conducting complex contract negotiations and leveraging cable synergies to find the best home for this product on the television channels.  It’s in this paradigm that the WWE Network seems like an appropriate risk to pursue.

THE NETWORK ITSELF

While the company has been opaque on particulars regarding the WWE Network launch, there has been numerous breadcrumb trails which offer insights:

Timing is a slippery thing

2014? WWE Executive Vice President of Creative development and Operations Stephanie McMahon was quoted by Broadcasting & Cable during October 2013 NYC Television week, "We are looking at traditional and nontraditional distribution, and we're targeting first quarter next year." 

2013? In August 2012, Vince McMahon tolds analysts, “I hope next quarter I will be making an announcement”. "WWE Close To Pinning New Net." Daily Variety 316.24 (2012)

2012? Trade publications such as Multichannel News reported in April 2011 that World Wrestling Entertainment was “working on a cable network as part of a major rebrand of the company” Umstead, R. Thomas. "WWE Cable Network Will Tag In For 2012." Multichannel News 32.15 (2011): 28.

2011? Going back to the earnings call in February 2010, Vince McMahon specifically noted that they’d been doing a “great deal of due diligence” on working on a standalone WWE cable network.

Ever? Vince McMahon probably put it best during a July 2012 interview, “I don’t want to commit to a time, you know, because it’s probably not a good idea for us to do that. I’d rather not say.” "Ringmaster." Multichannel News 33.29 (2012): 14-16. 

In WWE’s Business Plan and Potential Path toSignificant Earnings Growth, they suggested the network could be offered as a Premium Channel at between $13 and $15 per month.

Content

·                     On the proposed WWE Network, all WWE Pay-per-views with the noted exception of Wrestlemania would be available.

·                     WWE would be developing both new reality series (the taped, previewed but never aired Legends House, for instance) and harnessing their vast tape library.

·                     From the very beginning, WWE has emphasized that their core, first-run weekly programming such as Raw and Smackdown would not be moved to the new WWE Network. Instead those shows would be remain separate contracted entities. It’s possible that WWE Network would add pre and post shows to the broadcasts. It’s likely WWE programming will include rebroadcasting already aired weekly episodic TV shows, it remains to be seen just how long will elapse between when shows first air on their primary network (currently NBCU channels) and when they would be shown again on the WWE Network.

What is taking so long?

From a company that has showed remarkable skill to pivot on a weekly basis (at least creatively), roll out of the actual network has certainly taken much longer than originally expected.

Some of it was distribution problems. For instance, in March 2012, with the strongly foreshadowed but not outright promised April 1 launch looming, the New York Post reported that WWE had "yet to strike a single deal with a cable or satellite-TV provider to carry its own cable channel". Their goal of 40 million homes did not materialize. Shortly after the supposed Wrestlemania launch day came and went, a month later CEO Vince McMahon said, “the (network) holdup is on our end, it’s not on the end of the distributors.” Soule, Alexander. "WWE Network Inches Along." Fairfield County Business Journal 48.20 (2012): 9 

WWE claims they are committed to learning from the mistakes of others. There’s certain ample material in the difficult, cumbersome and troublesome experience of launching a new channel. For instance, Oprah Winfrey’s OWN network famously joined the cable docket in January 2011. However, it’s struggled immensely since its introduction – a May 2012 Bloomberg News estimated $330 million in losses after just 15 months. In an interview with R. Thomas Umstead and Mark Robichaux in July 2012 (while promoting the Raw 1,000^th episode), Vince McMahon specifically diagnosed OWN faltering network problems noting that, “Oprah herself is a brand. Anything beyond herself is not a brand… So the very thing that catapulted her into stardom year after year was not on her network. Certainly, we’re not going to make that mistake.” For the McMahon’s, they see the appeal of a channel that is an extension of the WWE brand.  However, this predicates itself on the notion that the WWE Network channel must have WWE brand content that is fans will pay to see.

Obviously, hiring for a complex new venture like this is neither easy or cheap. WWE CFO George Barrios noted they expected to spendbetween $30 million and $45 million to get things running and hiring 200 employees.

Content

WWE has offered content through premium services in the past. For almost a decade they’ve offered a subscription video on demand services (originally WWE 24/7 later rechristened WWE Classics of Demand). With a few hundred thousand subscribers the service has generated annual revenues around $5 million to $7 million – only about 2% of their total Live & TV Entertainment segment. Just offering old content isn’t enough of a hook.

For a truly successful WWE Network, they need something that would be monumentally important enough to WWE fans that a substantial proportion, more than a million households would subscribe to. The current model seems to dangle the non-Wrestlemania PPV business as the bait. The idea would be for a low subscription price (probably between $7 and $15 a month), fans would get access to the same PPVs that normally cost $45 (SD) to $55 (HD) domestically.

It’s important to note that the plan is for WWE PPVs to continue to be offered on pay-per-view. While the premium channel offers a nice enticement to WWE fans (save $40 and see the show), they stil have another option for people who are only interested in select events. This ensures that cable and satellite providers that don’t choose to carry the new premium WWE Network would still be able to supply WWE fans with monthly action (and split the revenue with the company). Also, it provides a failsafe that should WWE Network capsize and disappear, there is still a method to distribution the PPVs without interruption. Lastly, WWE remains an important player in the PPV industry (and one of the pioneers who helped grow the practice) – they know that only their biggest event, Wrestlemania, is truly a competitor to Boxing and UFC megaevents.

It’s certainly a large and risky gamble, but I don’t feel it’s a fool’s gambit destined for failure. There are scenarios where the financials work out – and in some cases, work out massively in favor of WWE Network.

First of all, as discussed in the company financials section, PPV has not been a growing business for WWE for a long time. Other organizations, specifically UFC and Boxing, have proven that the final nail has yet to be driven into the PPV coffin. But the reality has set in for WWE that beyond the granddaddy of them all, Wrestlemania, most of their PPV events (even with high-priced talent such as the The Rock and Brock Lesnar) can’t hold a candle to their record PPV levels set during the Attitude Era.

Instead, WWE has pulled back on the number of pay-per-view events, increased the price of PPV (most recently achieving a subtle $10 boost from many consumers by offering their PPVs in HD for an extra price) and continued to grow their overall revenue from increasing Television Rights Fees. Put bluntly, WWE has not been growing non-WM PPV revenue. It’s time for a new approach, and unless WWE can master streaming video-on-demand services to cut out of the cable/satellite provider as a middle-man, their next best option is moving the PPV content onto a platform such as a premium channel where they can reach more people and not be hamstrung into splitting PPV buy revenue with distributors.

WWE is also aiming to strike while the iron is hot. According to a January 2013 article from Ad Age, cable companies are looking to drop networks (as Time Warner did with the Ovation channel). The message to aspiring networks is clear: the only thing getting attention from distributors are live sports.

Live sports are popular for several reasons.  For one, they are perceived as DVR-proof which means that audiences watch the show live and that includes watching the commercials. Secondly, live sports are exclusive and these rabid fan bases will keep their cable & satellite subscriptions in order to retain their ability to view live sports.  All of this has corresponded with skyrocketing sports right fees. 

WWE is doing everything they can to lump themselves in with the live sports crowd.  They want WWE Network to be counted amongst the midst of the Golf Channel, MLB TV, NHL Network, Outdoor Channel, Sportsman Channel, The Ski Channel, World Fishing Network, and NBA TV.

WWE knows the enormous money that sports leagues are getting.  For instance, NASCAR signed a10 year, $4.4 billion deal with NBC in Summer 2013.  This is why WWE has been projecting such confidence in each conference call that they are going to vastly increase their Television Rights Fees when their Raw and Smackdown come up for contract renewals in 2014. And on the heels of this, WWE is trying to launch WWE Network, which is essentially a premium sports entertainment channel.  While it’s an uphill battle, it’s a decent fit.  At least they are coming at the marketplace armed with two things that cable and satellite providers want to see – a huge & loyal audience fanbase (which has a history of paying to consume their product) and a package filled with exclusive, live sports.  In this way, the WWE Network is really more of a monthly PPV network filled with other supplemental content which is actually radically different from just being a snazzier version of a dedicated WWE Classics on Demand 24/7 channel.

The Future

I believe firmly now is the time for this project like this.  The most difficult math is around the financials for the WWE Network.

WWE has repeatedly offered up hefty numbers suggesting things such as the domestic fanbase is composed to 57 million households (based on an independent survey of 9,000 households and extrapolating to digital multichannel households) with some affinity for WWE programming.

It’s bold claim which puzzles why they only have 4 to 5 million weekly viewers for a show such as RAW and less than three million cumulative domestic (US & Canada) PPV buys (across 13+ events) each year.

It’s time to finally do some math and determine whether the WWE Network is viable.

First, one should quantify what is at risk – the most immediate danger is that WWE would lose the domestic pay-per-view revenue for all PPVs besides Wrestlemania.  I’ve estimated that the 2014 Domestic PPV market for WWE is worth between $35 million and $40 million.  It’s important to emphasize that number because that’s the revenue that WWE is potentially giving up if a premium channel such as WWE Network which offered monthly WWE PPVs (except for Wrestlemania) was fully distributed in the domestically. In addition, there is the cost of running the WWE Network. 

One estimate that for a breakeven point which has been bandied about one million subscribers. Both Dave Meltzer and the WWE have calculated a similar number though they use different methods:

·         Dave estimates the network would cost $50 million a year.  He figures that all of the annual domestic revenue for non-WrestleMania shows (approximated at $35 million) would be cannibalized.  If WWE receives half of the subscriber monthly fee for an entire year, that would be about $90 million dollars ($7.50/month x 12 months x 1 million subscribers) which would cover the $85 million ($50 million cost and $35 million lost PPV).

·         WWE wrote that should the network achieve between 2 million and 4 million subscribers that would “represent incremental revenue to WWE of between $125 million and $250 million”.  Assuming this lower bound corresponds to erases existing domestic PPV revenue (about $40 million), that implies 2 million subscribers equals about $165 million in revenue (which implies earning about $6.88 per monthly subscriber which is firmly at the 50% mark for the midpoint of their monthly network cost at between $12.99 to $14.99.)

·         Most importantly, WWE emphasized that they believe they could achieve “incremental EBITDA between $50 million and $150 million” with a 2 to 4 million subscriber base.  Since they explicitly state that “until a base of approximately 1 million subscribers is achieved, we estimate the network would represent a net investment for WWE”.  WWE’s entire annual EBITDA has been on the low end of $50M to $60M recently, so earning an additional $50M to $100M would be massive.

Can they get there?

I’ve done some extensive regression analysis looking at what would WWE PPVs would perform at different price points..

This looks at the worldwide buys.  If we assume that the WWE Network would be priced between $10 and $15 and would include the major PPVs except Wrestlemania, then average( 1205000 , 888000 ) x 70% domestic = 732,550 subscribers.  If you look at the WM calibre number, it would be 2.2 million subscribers.  The midpoint of the two estimates is 1.5 million subscribers - firmly in the "above break-even" but below "wildly profitable" point.

With full distribution, for a network on the level of Royal Rumble/SummerSlam, with the proper gestation period (i.e. ramp up period will probably be at least 9-18 months from launch), they should be able to hit three-quarters of a million subscribers.  If they can make things more exciting and turn the clock back to 5-8 years ago, they could hit above a million subscribers.

Summary of Findings

While WWE has had some high-profile failures, their greatest successes have come when they took risky ventures related to television expansions (syndicated TV, cable networks, TV Rights Fees with cable synergies, PPV, international expansions).  Only element of WWE's business that has shown both growth potential and actual growth has been in TV Rights - PPV has continued to slip.  Using regression based on domestic PPV consumption at different price points over the last many years, model suggests that a $15 WWE Network with full distribution could achieve at least a million subscribers.  The delays and struggles we've seen reflect WWE's priorities in re-negotiating their Raw and Smackdown contracts with NBCU (and other possible players), utilizing the growing Live Sports fee trends (potential to double-triple TV Rights Fees) and the extensive staffing and building the WWE Network.  This is a terrific opportunity to vastly grow WWE at a rate they haven't been able to do through Consumer Products, international expansions or PPV mega-events. The single most unclear point is how Cable and Satellite providers will react and whether WWE Network can get nearly the full distribution they need in order to be possibly successful; whether this will be part of the the flagship show 2014 negotiations is unclear.

Chris Harrington

chris.harrington@gmail.com

@mookieghana