The Biggest Turn Of All
"Now tell me that's not good for business." - Triple H, WWE superstar
The WWE (NYSE:WWE) Network has been much maligned over the last year owing to some overenthusiastic promotion during its inception. Contrary to rosy expectations and investor speculation and sentiment, all of which drove early stock gains after the announcement of the Network, a surprisingly unsteady subscriber base and middling reviews brought expectations back down to the mat with a crash. Disappointing numbers rolled in, showing that WWE Network contributed to a net drop in revenue compared to the prior year's pay-per-view income. Successive quarterly reports revealed only incremental increases in subscribers. And so on.
Seth Rollins prepares to meet the challenge. (Photo courtesy of wwe.com)
By all accounts, the road to Wrestlemania is a winding one. Approaching the anniversary of the Network's debut, we see a ship struggling to right itself, as WWE continues to reel from diminished revenue and lackluster interest in the paid service.
WWE's efforts to bolster interest in the Network have come across as ham-fisted and obnoxious, with superstars (the company's term for their wrestlers) dropping references to '$9.99' in carefully-scripted promos, each reference a mini-commercial for the service between the usual threats of violence and outrageous insults that comprise the bulk of interpersonal exchange in professional wrestling.
It's a message that's stuck, but for the wrong reasons; a largely self-aware crowd chants along with each new plug, participating with a palpable sense of irony. Certainly CEO Vince McMahon's view that any reaction is better than no reaction has most certainly green-lighted continued in-your-face marketing of the Network. The hope is to communicate the message that the only thing better than to see the bad guy get beat on pay-per-view is to see the bad guy get beat for only $9.99, but the message sometimes transitions from convincing to comical under the din of too-blatant corporate jingoism.
You can buy this t-shirt on the WWE online shop. (Photo courtesy of wwe.com)
So WWE struggles to finetune its sales pitch. And the crowd gets to play along with its blundering. Sometimes a little self-effacing comedy isn't so bad. But besides aggressive advertising, what else can be done to turn this albatross into a swan?
What WWE Network Really Meant To The Fan
Before we take a look at what can be done, let's take a look at what can't be done.
First, the cat has been let completely out of the bag. The rollout of WWE Network was a billion dollar all-in bet that completely upended the company's historical income structure. With one stroke of the pen, the Network demolished the value proposition offered by traditional pay-per-view. With "special events" now run once per month, a single "special event" is now not worth $44.95 in the fan's eyes, but $9.99. The Rubicon was immediately crossed once the first subscriber signed up prior to Wrestlemania 30. A fan accustomed to paying $9.99 per month will have a difficult time being convinced to go back to the traditional pay-per-view price. The company simply cannot go back to traditional pay-per-view without massive, painful shocks.
I do not mean to infer that WWE should entertain a return to traditional pay-per-view anytime in the near or distant future, of course. The heavy capital expenditure necessary to implement a universally available streaming service is (so far) partially offset by the opportunity for WWE to capture the full value of its subscriber dollars, rather than leaving a hefty cut (40% or more) of pay-per-view revenue to the cable companies. By those metrics, a few monthly subscribers equate to a pay-per-view sale, which are often shared by multiple viewers at house parties anyhow. WWE Network's low entry price enables individual viewers to justify the service for their own personal use rather than having to spread the cost of a high-dollar pay-per-view among fickle friends and acquaintances. So, on its face, WWE Network was an excellent idea that just hasn't blossomed yet.
An Overview Of The WWE Network And Its Actual Competition, Which Is Not Netflix
We can see some of the advantages of having an over-the-top service to distribute WWE content. But what kind of service is the Network at its core?
WWE Network has been compared all too often to Netflix (NASDAQ:NFLX) and similar streaming entertainment choices. At first glance, the comparison seems valid. After all, WWE Network and Netflix are both streaming video entertainment providers that feature original and archived shows, for a similar price point. But WWE Network is a niche product engineered solely for fans of WWE, a product that cannot be duplicated or undercut by any competing provider. After all, there is only one John Cena and only one Wrestlemania; WWE is arguably the best-in-class provider for professional wrestling entertainment (and certainly it is the biggest). Its hegemony over its niche ensures that no other product can duplicate it at any price range.
This is why I believe it is folly to compare Netflix to WWE Network. No one is seriously comparing HBO (a division of Time Warner (NYSE:TWX)) to the NFL Sunday Ticket package, after all.
In reality, the only true competitor for WWE and WWE Network is the UFC and its Fight Pass offering.
The UFC Fight Pass is the closest competitor to the WWE Network. (Photo courtesy of ufc.com)
The Ultimate Fighting Championship finally spread its wings in 2005 at the climax of its first reality show offering The Ultimate Fighter, when tough but unknown mixed martial arts fighters Forrest Griffin and Stephan Bonnar collided in a now-legendary bout that showcased the full spectrum of the UFC's brand of high-octane combat sports entertainment. More viewers tuned in by the minute as the exciting and dramatic clash stretched into the later rounds. The gains prompted by frenzied social media word-of-mouth evangelization - you've got to see these guys cage-fighting on Spike right now!
The sometimes gruesome and gritty - but always real - offering of the UFC was a fresh look at human combat sports. A careful counterbalance between the restrictive rules of boxing and the all-too-liberal "rules" of professional wrestling, freed from the need to both acknowledge the fictional good/evil dichotomy in wrestling and grapple with the all-too-real corruption and treachery of boxing's puppet masters. In short, it was as real as it gets - a corporate slogan that actually delivered on its promises.
Forrest Griffin (right) squares off with Stephan Bonnar. (Screenshot from ufc.tv)
On that blood-spattered April night in Las Vegas, the first shots in what became a war for young adult male viewers had been inadvertently fired, and Vince McMahon's opinion of the UFC slowly shifted over time from complementary to competitor. Early seasons of The Ultimate Fighter were broadcast immediately following WWE Raw on cable channel SpikeTV to capture similar viewer demographics. (Here we can see the WWE's demographics in particular, and here is some research on mixed martial arts demographics.)
Since then the relationship has settled to one of uneasy co-existence, both remaining aware of each other, but generally steering clear. The UFC's desire to preserve the legitimacy of its real fights is counterbalanced by WWE's need to protect the image of its worked matches. Actual cooperation between the two companies has therefore been limited.
While the UFC's product is different enough to preclude direct competition with WWE, both companies largely target the same demographics, with WWE trending only slightly younger owing to the popularity of kid-friendly entertainers John Cena and his ilk. Having shed the rough exterior of the late 90's-early 2000's "Attitude Era," where WWE's flagship show Monday Night Raw pushed the (literally) bleeding edges of its infamous TV-14 rating with a crimson cocktail of sex and bloody violence, WWE has settled into a tamer product. Even after a temporary jaunt to TV-PG ended, WWE has attempted to strike a balance with modern sensibilities and be inclusive of younger viewers, while not alienating adult fans. Superstars no longer intentionally "blade" (the surreptitious act of cutting one's own forehead with a tiny blade to draw blood), the female Divas are rarely scripted into titillating situations such as bikini contests and pillow fights and the general level of mayhem seems largely toned down.
To this day the UFC's demographic trends somewhat older than WWE's, due as much to the complexity of actual human combat and its inaccessibility to uneducated viewers as to WWE's intentional push toward focusing on younger viewers. But the core focus of both companies remains the same young males with disposable income. So when the UFC Fight Pass was announced at roughly the same time as WWE Network, at first blush it seemed as if the two would cannibalize one another's potential customers. After all, the two products are even more similar to each other than to anything on Netflix; McMahon is not competing for the same eyeballs who watch Orange Is The New Black, most certainly.
On its face this seems plausible. However, I believe the success of the UFC Fight Pass and WWE Network services, and the impact of each service on the respective companies' bottom lines, need to be examined by crucial differences in their execution.
What Each Company Offers In Their Respective Over-The-Top Services
The main difference between UFC Fight Pass and WWE Network rest in the content provided by, and the value proposition offered by, the services themselves.
For starters, the UFC has scheduled 45 events in 2015, roughly equivalent to 2014's 44 events, which came along with four total seasons of The Ultimate Fighter reality show (three of which were based in regional markets China, Australia/UK and Brazil). Each of the combat events are distinct and unique events; there are no storylines that link each event to the next aside from the organically grown progression of the fighters' careers and professional rivalries. Of the 45 events in 2015, 12 are numbered events - UFC 183: Silva vs. Diaz is the first - and are presented exclusively on pay-per-view.
The biggest stars in the company headline these pay-per-view events, and the final five or six fights of the main card are presented on the three-hour pay-per-view. Each event generally features between 10-13 fights total, and the earlier fights ('preliminaries') are split between the Fox (NASDAQ:FOX) (NASDAQ:FOXA) Sports Network and the UFC Fight Pass. The UFC Fight Pass gets the first fights of the evening, often starting in the afternoon and featuring untested debut fighters or fighters struggling to maintain relevance in their respective divisions.
The UFC also offers periodic international Fight Night cards, events intended to build local buzz in foreign markets. These are available in their entirety on UFC Fight Pass, encouraging U.S. viewers to tune in at unusual times to catch live events in distant time zones. These events are often headlined by local fighters more popular in their local markets than in the United States.
We can see that the UFC has opted to retain its pay-per-view business model by offering an amount of additional content on the Fight Pass network without compromising pay-per-view events. This is consistent with UFC's historical strategy of slowly growing the number of fights it offers television viewers. Up until the last few years, the UFC has simply not been able to show the majority of its fights to viewers in a three-hour pay per view window. In fact, for the majority of the UFC's pay-per-view broadcast history, preliminary fights were only shown as broadcast filler if the fights on the main card concluded swiftly enough. Eventually, UFC briefly streamed the earliest preliminary fights on Facebook (NASDAQ:FB) and Youtube before finally settling into becoming part of the value proposition for the Fight Pass network.
The WWE home page updates its subscribers on the latest developments in the federation. (Photo courtesy of wwe.com)
WWE Network, by comparison, took an entirely different approach, and certainly a bolder one. The company produces two flagship shows per week, Monday Night Raw and WWE SmackDown, stretching for three and two hours, respectively, in addition to some extra programming such as WWE Main Event. This equates to roughly 100 televised events per year not counting 'special events'. Each episode of Monday Night Raw and WWE Smackdown participates in the all-inclusive plot lines of the WWE Universe and is available on common cable television. Any additional offering on WWE Network must be extremely limited due to the need to keep non-paying viewers up to date with developments and storyline progressions. After all, too much content not revealed on the live broadcast would confuse and alienate viewers, potentially turning them off to the free product and driving down ratings.
Therefore, WWE must present a different value proposition than the UFC in its over-the-top business model. Given that WWE cannot use the Network to append much of any consequence to its weekly shows and plot lines, it must instead offer something of more value. Let's examine why.
What The WWE Must Offer In Its Over-The-Top Content
First, owing to the numerous television contracts with cable stations to broadcast its live weekly shows, WWE cannot compete with those providers to simulcast those shows for WWE Network members who do not have basic cable. Given that this content comprises the majority of its offering, not being able to broadcast this content to those viewers represents one missed angle of offering value to customers. After one month in the tank, the events of Monday Night Raw or Smackdown have become well-known and largely irrelevant to current story lines (imagine watching a football game a month after it went live!).
Second, the ancillary benefits of archived pay-per-views and weekly episodes are lightly regarded. Aside from facilitating the occasional viewing of classic matches (and classic screw-ups), archive footage is not a major selling point for WWE Network.
In fact, WWE Network struggles to compete with illicit Youtube uploads of the matches that would best sell prospective viewers on the archive footage offering of WWE Network. In comparison, the UFC has done a much better job levying copyright claims on older footage and the smattering of UFC fights occasionally available on Youtube are dwarfed by the full episodes of Monday Night Raw often uploaded only hours after their televised broadcast (a full month before they hit the WWE Network) and the dozens of available replays of the most classic matches.
Therefore these additions can at best be considered complimentary to WWE Network's primary value proposition, which is the elimination of the pay-per-view model. For this, WWE sacrificed a significant amount of revenue. It has left the company feeling the pinch of tightened purse strings. This has become evident to longtime fans. High-profile (and high-dollar) superstars such as current WWE heavyweight champion Brock Lesnar and Sting work a reduced schedule, leaving the company with fewer draws to sell tickets and encourage recurring Network subscriptions. Pyrotechnics and stunt props have been drastically reduced, robbing modern viewers of current iterations of some of the flashier moments from WWE history, such as the infamous Stone Cold Steve Austin beer truck run-in.
One of the WWE's seminal moments. (Photo courtesy of wwe.com)
On a lower budget, the mayhem is less extravagant. The difference is no less than a studio choosing to film a sci-fi epic on a $20 million budget rather than a $100 million budget; cut corners stick out like a sore thumb.
Finally, one critical difference between the UFC Fight Pass and WWE Network is how often the value adds are experienced by members. The UFC's 45 events per year give members an opportunity to 'use' the service for its premium value add nearly once per week with original, meaningful content. The undercard fighters of today can become the title contenders of tomorrow, after all. While UFC might present only a few new fights on Fight Pass at any given time, they are still meaningful experiences to hardcore fans. However, WWE Network presents top-shelf core content only once per month.
In summary, while the UFC Fight Pass is meant to be a supplementary product to the UFC's pay-per-view events, WWE Network is meant to be the crown jewel of their product chain. The highest stakes and most physically grueling matches occur during the special events broadcast by WWE Network. As such, the two services are not directly comparable by way of intent.
Why We Are Talking About This
This analysis may seem like a tired rehash of the minutiae of the profoundly bizarre world of professional wrestling, and on some level it very well may be. However, WWE is, at its heart, an entertainment company. Careful review of the quality of the product itself is necessary even when the laws of physics themselves do not seem to apply. At the end of the day, the quality of the product and the buzz it generates directly relates to the money that eventually comes in.
In terms of United States television ratings, WWE has seen better days. While the December 9th episode of Monday Night Raw averaged roughly 3.6 million viewers throughout the duration of the episode, the series peaked with over 8 million viewers in its heyday during the whimsical This Is Your Life segment between The Rock and Mick Foley, which was both well-executed and well-received by viewers. The decline in viewership between the "Attitude Era" and modern era cannot be completely explained by declining quality of product. After all, fads are cyclical, and WWE at that point had simply struck gold with its rebellious, anti-authoritarian attitude, rekindling the interests of the childhood fans of Hulk Hogan and his contemporaries. The modern product has its own virtues as well as its vices, and there are plenty of good things to say about it, from the ascent and enduring popularity of strong merchandise movers like John Cena to the recent popular breakout of superstars Daniel Bryan, The Shield, and the spooky Bray Wyatt.
The highest rated WWE Raw segment in history, a fictional recount of superstar The Rock's life as told by Mick Foley. (Photo courtesy of wwe.com)
Despite these successes, WWE has struggled with creative output of late. Mark Twain was quoted as saying that "truth is stranger than fiction, but it is because fiction is obliged to stick to possibilities."
While the product has always been alternately praised and maligned by "smart mark" fans who nitpick the individual facets and offer their own conclusions as to what would truly be "best for business," fans in general seem to sense that WWE is struggling with coherency and consistency at the moment. The unreal world of professional wrestling must still maintain some semblance of real - "real" in this context is inclusive of the suspension of disbelief necessary to watch professional wrestling in the first place. A number of confusing plot twists and turns have long left the product sitting on uneven ground; the flailing Adam Rose, Tyson Kidd's unflattering engagement with Diva Natalya and so on. These things steal airtime from hotter engagements, such as the three-way feud still simmering between Seth Rollins, Dean Ambrose and John Cena.
One of the WWE's weirder moments. (Photo courtesy of wwe.com)
The UFC makes no such demands of its viewers beyond occasionally over-hyping its upcoming matches and fighters, but WWE must struggle with this problem on a daily basis. Compared to the fulfillment fantasy of beating up your own boss that the Stone Cold Steve Austin/Vince McMahon feud from 1998 offered viewers, featuring sheer violence, absolute mayhem and some of the most hilarious one liners in professional wrestling's history, it's no wonder modern viewers do not find the current product quite as engaging as it was during WWE's peak.
Struggling Revenue Generation And Missing Superstars
Despite the UFC's marked advantage in retaining the pay-per-view business model, both companies have struggled lately with generating premium viewing revenues. In particular, the UFC has reported pay-per-view revenues down 40% in 2014 compared to 2013, while WWE has yet to achieve McMahon's loftier expectations:
The company's goal is to have one million subscribers within the next year, though Mr. McMahon said he expected to exceed that number.
Not surprisingly, one of the key factors driving this dip for both companies is the problem of missing high-profile superstars driving premium viewership. Despite expanding its featured weight classes and introducing female divisions, the Ultimate Fighting Championship experienced a drought of high profile bouts owing to a catastrophic string of injuries and delays to headlining fighters.
One such example is former welterweight champion Georges St. Pierre, who did not compete in 2014 following his narrow split decision victory at UFC 167 over Johny Hendricks. St. Pierre has headlined some of the most successful pay-per-view events in UFC history:
UFC 167 vs. Johny Hendricks - 630K buys
UFC 158 vs. Nick Diaz - 950K buys
UFC 154 vs. Carlos Condit - 700K buys
UFC 129 vs. Jake Shields - 800K buys
UFC 124 vs. Josh Koscheck - 785K buys
UFC 111 vs. Dan Hardy - 710K buys
UFC 100 vs. Thiago Alves - 1,600,000 buys
UFC 94 vs. BJ Penn - 920K buys
UFC 87 vs. Jon Fitch - 625K buys
UFC 82 vs. Matt Serra - 530K buys
In particular, the bouts between Dan Hardy and Josh Koscheck are most strongly indicative of St. Pierre's drawing power. Both UFC 100 and UFC 87 also featured former and current WWE superstar Brock Lesnar, whose amateur wrestling pedigree and sheer athleticism vaulted him to a legitimate UFC heavyweight title. However, UFC 111 and 124 were both regarded as being extremely top-heavy cards, with the preliminaries and main card featuring generally unremarkable fights outside of St. Pierre's title defense.
Therefore, in the absence of other major draws on these cards, we can see that St. Pierre contributed disproportionately to the success of the UFC's pay-per-view revenue during his four-and-a-half year welterweight title reign. Twice fighting in 2013 at UFC 158 and 167, the two events combined for well over 1.5 million buys on the strength of opponent Nick Diaz's relentless trash talk that got under the normally respectful and calm St. Pierre's skin. St. Pierre's absence in 2014 meaningfully impacted the UFC's bottom line compared to 2013.
This is just one example of the UFC's struggle in 2014 to draw pay-per-view revenue. The UFC needs strong draws for its premium viewing revenue stream, and 2014's revenue numbers demonstrated that as weaker events failed to draw strong buy rates. In fact, between UFC 170 and 177 (all 2014 events), only one event drew more than 350k buys. Buyrates for subsequent events have not been disclosed.
170 - 340k buys
171 - 300k buys
172 - 350k buys
173 - 215k buys
174 - 115k buys
175 - 545k buys
176 - canceled
177 - 125k buys
Meanwhile, WWE has struggled with its own problems of missing superstars. While the UFC must allow injured fighters to sit out and refuse to fight if they choose to, WWE has considerably more leeway with injured superstars, who can participate in story lines and entertain without physical contact. Promotional engagements can prove just as entertaining for fans as a high-impact wrestling match. WWE superstars suffering minor injuries can even perform limited in-ring duties, concealing the extent of their injury by carefully limiting the scope of their activities.
However, injuries have nonetheless taken their toll on WWE's roster, with top-flight superstars Roman Reigns and Daniel Bryan forced to sit out at the peaks of their popularity. Both had been major draws for WWE and participated in some of the most engaging plot lines of 2013 and 2014. The current WWE heavyweight champion, Brock Lesnar, works a limited schedule due to his high price tag and his unusual reclusiveness, presenting WWE's creative team with the difficulty of writing around an absent champion. Legendary superstar Sting has yet to debut in WWE beyond a brief run-in at Survivor Series. And in a bizarre turn of events, former WWE heavyweight champion CM Punk has just signed a multi-fight contract with the Ultimate Fighting Championship.
These superstars were just as important to WWE's bottom line as the aforementioned Georges St. Pierre. Both companies are suffering from lack of top draws. WWE compounds the error by making inefficient and poor use of its remaining superstars with meandering plot lines and weak writing.
Despite The Similarities, UFC Fight Pass Is Not Quite A Competitor To The WWE Network
As mentioned before, UFC Fight Pass is the closest equivalent to the WWE Network. Both companies are experiencing similar headwinds due to their top performers being out of action. The offerings themselves are similarly priced and offer premium, combat-themed niche content. The concept is basic - two men fight, one man wins. And certainly, both are very different from Netflix and services like it. But the differences in the underlying product are too great to ignore.
Professional wrestling fans and mixed martial arts fans understand greatly the difference between the two products. When WWE superstar Brock Lesnar transitioned to the UFC, many mixed martial arts fans objected to a "fake" wrestler being brought into the premier fighting organization with a 1-0 professional record, despite Lesnar's heavyweight NCAA championship and terrifying physical acumen. The stigma of even participating in an entertainment industry that produces a mockup of a high-octane fight was too great for many hardcore fans to ignore, even after Lesnar crushed Randy Couture with a heavy right hand to secure the UFC heavyweight championship and defended the belt twice thereafter. Lesnar continues to be a subject of debate even to this day. (The backlash about CM Punk, while more warranted due to Punk's lack of combat sports credentials, has been no less vigorous).
The hulking Brock Lesnar has proven to be both a capable fighter and professional wrestler, and has been a major draw for both the UFC and WWE. (Photo courtesy of wwe.com)
Mixed martial arts fans tend to regard professional wrestling as the odd uncle in the combat sports family. Meanwhile, professional wrestling fans often find mixed martial arts boring, as real fights can grind to inconclusive and dull finishes and the complexities of grappling can be difficult to understand for casual viewers. Furthermore, mixed martial arts fighters themselves often do not display the outspoken personalities demanded by professional wrestling entertainment, and subsequently fail to capture the public's imagination despite their martial acumen. At any rate, fans who enjoy both professional wrestling and mixed martial arts will not necessarily choose one service over the other by means of direct comparison. The products, despite their inherent similarities, are still far too different.
WWE Network has created its own moat due to its sheer uniqueness. Following the demise of the WCW, WWE's last major professional wrestling competitor, there is no professional wrestling organization that rivals WWE in terms of scope, structure or notoriety. Either people will buy the WWE product because they like it, or they will not. But there is no substitute for WWE right now and other over-the-top networks and offerings are not stealing market share from the Network.
Therefore, to more swiftly grow membership, WWE must simply improve its in-ring product. New and untested superstars must be pushed toward greater popularity, the quality of the writing must improve and the deficiencies in the current product must be shored up. The only factor holding WWE back from achieving its subscriber goals is the failure of WWE to convince more people that the product is must-see television and that WWE Network special events are worth the money.
Improving television ratings is key. More eyeballs watching translates into more potential customers. Advertising and promotional pricing will only go so far; at the end of the day, WWE must deliver on their promise of excitement.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Author is subscriber to both WWE Network and UFC Fight Pass.