Five Keys For WWE's Success In 2015
Summary
- Continue to grow TV Rights revenue.
- Improve live events revenue stream.
- Complete the roll-out of WWE Network.
- Capitalize on new Home Entertainment agreement.
- Prove viability of new WWE Studios model.
On January 13, at the 17th annual Needham Growth Conference (free registration to listen to webcast at link) Chief Strategy Officer and CFO George Barrios outlined World Wrestling Entertainment's (NYSE:WWE) key objectives for 2015:
- Continue to Grow WWE Network global subscribers.
- Launch WWE Network (same as the U.S. version) live in the United Kingdom and Ireland.
- Communicate plans for WWE Network in Italy, UAE, Germany, Japan, India, China, Thailand and Malaysia.
- Monetize digital and social media presence.
- Increase share of revenue from international markets.
- Continue improving performance of WWE film business.
As clearly outlined by WWE's first three objectives, WWE Network remains critical for the company's business plans and overall evolution.
With WWE Network nearing its one-year anniversary, the company remains blindly optimistic about the overall potential of the service.
At the conference, Barrios reaffirmed the belief that WWE Network could someday achieve three to four million worldwide subscribers. That's a far cry from last quarter's mark of less than 750,000.
The move to abandon pay-per-view and offer marquee events through WWE Network has proved to be an expensive gamble for the WWE.
The reality is that while fixing WWE Network is imperative for the company, WWE's engine of growth in the near term will probably come from other areas of the company.
WWE's net revenue paradoxically grows while operating income plummets.
2014 was supposed to be a banner year for WWE.
WWE secured a plethora of future television deals. It launched a state-of-the-art over-the-top streaming service. It continued to draw large crowds for the annual WrestleMania event.
Yet, WWE will end 2014 firmly in the red.
At least when WWE accepted that WWE Network was not on track to immediately hit the breakeven point (a million subscribers), the company finally took the initiative and implemented cost-cutting measures.
Those cost-cutting measures included staff reductions, department elimination and consolidation (the company shuttered its decades-old magazine business) and delayed producing new content for WWE Network (such as a new season of Tough Enough).
Yet, all of these growing pains have signaled the way forward.
With the right direction, I believe that a leaner WWE has the potential for a much stronger 2015.
Having reviewed WWE presentations and examined the business model, here are the five keys I believe are critical for WWE's success in 2015:
- Continuing to grow the TV Rights revenue.
- Improve live events revenue stream, particularly in the international arena.
- Complete the roll-out of WWE Network.
- Capitalize on the new Home Entertainment agreement with Warner Bros. (a division of Time Warner (TWX)).
- Prove the viability of the new WWE Studios model.
I should note that this piece focuses on the technical aspects of WWE's business.
The underlying popularity of WWE is driven by the company's creative team to create compelling content. WWE must promote superstars and feuds that resonate with WWE's fan base.
There's a lot which can be said about productivity and direction of WWE's "creative team." However, I'm setting that aside to focus on the other business elements where WWE has greater control.
The empire of the modern WWE was built on the enormous success from the "Attitude Era" with stars such as Steve Austin, the Rock and Triple H. Today, the torch has passed to John Cena, Randy Orton and Daniel Bryan. The bedrock of the company is the ability to build and maintain wrestlers who connect with the audience. However, WWE is a wrestling business and there's been a lot of chaos in the past twelve months.
Key #1. Continue to grow TV rights revenue
WWE Television Rights Fees (2007-2014) | ||
Year | Domestic TV Rights | International TV Rights |
2007 | $59,600,000 | $32,800,000 |
2008 | $63,500,000 | $37,200,000 |
2009 | $72,800,000 | $39,100,000 |
2010 | $81,600,000 | $45,400,000 |
2011 | $80,300,000 | $51,200,000 |
2012 | $88,900,000 | $50,600,000 |
2013 | $105,900,000 | $55,000,000 |
2013 Q4 - 2014 Q3 | $109,000,000 | $57,200,000 |
Television rights fees are the lifeblood of WWE's balance sheet.
Over the past seven years, domestic television rights have grown to become the largest single revenue stream for WWE. With average growth of $7M annually, the domestic television rights are driven largely from weekly broadcasts of Raw, airing on the USA network, and SmackDown, airing on the Syfy network.
One of the most important milestones for WWE in 2014 was renegotiating its domestic television deal. The prior domestic television rights agreement with NBCUniversal (a subsidiary of Comcast (CMCSA) (CMCSK)) ended during the 4th quarter of 2014.
After delays and several months of open negotiations, WWE ended up staying with NBCU. While the deal terms were not explicitly revealed, the stock crashed after WWE announced the deal on May 15. Vince McMahon later admitted he was disappointed with the outcome of the negotiations and that launching WWE Network earlier in the year did negatively impact the process.
It's also important to emphasize that television revenue is not solely driven by Raw or SmackDown. Total Divas, airing on the E! Network, has also become a lucrative revenue stream for the company. It has also drawn a new female demographic which other WWE programming has historically lacked.
At the same time, over the last few years, peripheral WWE television programming (colloquially known as the "C-shows") such as NXT(Syfy), WWE Superstars on WGN America, Saturday Morning Slam and Main Event on ION Television have come and gone. The churning of these programs, while only accounting for a small percentage of overall revenue, does create a stagnant portion of monthly revenue.
Moreover, the limited appetite among television networks for this WWE programming speaks volumes about the limited ability of the company to expand its reach in today's marketplace. Some of these shows have lived on as part of international television right deals while others have been canceled outright. With the birth of WWE Network, some shows are becoming supplemental content for subscribers.
The U.S. agreement was one of many agreements which WWE secured in the past year. WWE has disclosed that the company's "seven key agreements" (U.S., Canada, India, Mexico, UAE, U.K. and Thailand) are expected to grow from $130M in 2014 to $235M in 2018.
Having completed negotiations on nearly every existing major market TV rights deal in the past year, WWE is limited in how much more it'll be able to substantially grow this stream of revenue beyond contractually-obligated increments.
However, it's critical that WWE doesn't lose focus. Television programming is the primary gateway to growing its audience.
WWE programming beyond Raw and SmackDown can help the company reach new audiences, like Total Divas. It can also tap into potential new audiences, such as the kids-oriented Saturday Morning Slam show. WWE has already developed other reality-based shows such as Legends House on the WWE Network and Tough Enough. It may be time for a fresh round of selling with a focus on licensing these shows for international broadcasts.
Also, given a strong Spanish/Hispanic skew among WWE fan households, it might be time to revisit the idea of expanding unique Spanish-language programming. The idea that was briefly explored in the late 1990s with WWF's Los Super Astros on Univision, but abandoned.
There was a very positive signal on January 15 when USA Network president Chris McCumber announced that USA was bringing back the Tough Enough reality series.
There had been talk in 2014 that Tough Enough would return as WWE Network programming but those plans were shelved when WWE embarked on cost-cutting measures. It's a great sign for WWE that it was able to sell the programming to NBCUniversal and monetize this franchise on television. Shows such as Tough Enough and Total Divas provide WWE the ability to reach outside the "wrestling fan" bubble and bring in new viewers and wider demographics. Instead of putting the show on WWE Network where it was unlikely to greatly spur new subscriptions (and where WWE's developmental territory NXT already airs programming), WWE is proving it can continue to grow television rights and replace lost income from shows such as Main Event.
Main Event is another interesting WWE property. Originally, the show was developed and sold to ION Television for domestic distribution in October 2012. However, when ION Television did not renew the contract, the last Main Event transitioned from television to WWE Network in April 2014. WWE did sell the shows overseas. In a notable example, the company sold rights to BSkyB as part of the new exclusive WWE broadcast rights in the United Kingdom. That decision has proved messy because now a contractual dispute with Sky has resulted in Main Event being pulled from the WWE Network.
Perhaps this will be a blessing in disguise. If WWE can find a new carrier for Main Event domestically, it might be able to monetize the series with television rights once again.
Key #2. Improve live events revenue stream
Year | Avg. NA Attendance | Avg. Int'l Attendance | Rev/NA Event | Rev/Int'l Event |
2007 | 6,600 | 7,700 | $177k | $775k |
2008 | 6,400 | 8,500 | $208k | $719k |
2009 | 6,500 | 8,500 | $253k | $554k |
2010 | 6,300 | 7,800 | $256k | $539k |
2011 | 6,000 | 6,700 | $269k | $498k |
2012 | 5,900 | 6,000 | $291k | $479k |
2013 | 6,000 | 5,900 | $318k | $463k |
2013 Q4 -2014 Q3 | 6,000 | 5,900 | $310k | $485k |
In an average year, WWE runs about 320 events. Live event revenue derived from the 230 events run in the United States and Canada has been growing steadily for several years. Meanwhile, international live event revenue (notably from the annual European tours as well as forays into Latin America and Asia Pacific) has been declining for several years.
There have been many factors in play - running fewer international events, unfavorable exchange rate dynamics and declining attendance. Also, there was a "wrestling boom" in Europe in the mid-2000s, which lead to comparative highs (which offset the company's weak domestic touring trends at that time).
Profitability of live events involves numerous factors. Television tapings and what were formerly pay-per-view events (now broadcast on WWE Network) are more expensive, but tend to draw larger audiences. Which superstars will be performing at "house shows" (non-televised live events) can affect the overall attendance, especially when WWE is running dual shows on the same nights. The show that has John Cena appearing usually outperforms the other show, even when you take into account the size of the markets hosting each show.
What's interesting is the dual effects of dropping international attendance (despite running less international shows) and the increase in the average revenue per show for North American live events. Five years ago, on average, an international show would generate almost twice as much revenue ($554k) as a domestic show ($253k). That difference has dramatically decreased in recent years. By 2013, an international show grossed less than 1.5x as much as the average domestic live event. Now, converting ten domestic events to international events would only generate about $1.5M in incremental revenue whereas a few years ago it would have generated twice that amount. Of course, international tours have been carefully planned due to logistical concerns (stringing shows together in contiguous areas, providing group transportation for the entire crew, pre-taping television in advance) and the alternative nature of event promotion (sometimes these shows are "bought" shows by promoters).
One interesting possibility that arises with WWE Network is that WWE could hold one of its pay-per-view events overseas. The most likely candidate would be holding an event in the United Kingdom, which has been the largest market for the WWE outside of North America.
WWE has indicated that it plans to capitalize on its latest "push" into the Indian media market with a return to touring in that country. Hopefully, there won't be a repeat of the rash of sicknesses that affected the WWE Superstars on the November 2002 tour in India. (Wrestler William Regal became so ill that he was unable to return to performing in-ring for over a year as he battled serious health problems following a sickness he contracted in India).
Interestingly, the senior Vice President of Live Events, Patrick Talty, left the WWE in January 2015 to work for the new Vikings Stadium in Minneapolis. Perhaps this juncture will provide an opportunity for new leadership in the live events field and an improvement in international live event revenue.
Key #3. Complete the roll-out of WWE Network
Honestly, WWE Network deserves a tome of its own.
The company overestimated the demand for the service and underpriced it. WWE tried to execute a "domestic launch" of an over-the-top service even though it's a global entity.
For the launch of WWE Network, the company made several decisions that had large ramifications:
- WWE decided to include all of its live PPV events (including the juggernaut WrestleMania).
- WWE decided to launch "domestically" (2/24) and attempt to stagger the worldwide roll-out (8/12 for many countries).
- WWE decided to create a low price point ($9.99/month) with the belief it could retain subscribers in 6-month increments.
Each of these choices was important.
By choosing to include all of its live PPV events, WWE quickly alienated the satellite and cable operators who were left with the option of carrying the events at a much higher price. Reaction was swift - both Dish Network (DISH) and DIRECTV (DTV) dropped WWE events from their schedules. It remains to be seen whether any of these MVPD (multichannel video programming distributors) will decide to carry the most popular WWE events - namely Royal Rumble (January 25) or WrestleMania (March 29). At the same time, WWE has taken to regularly devoting a segment on its weekly Raw show to openly mocking consumers who have not yet adopted WWE Network and are instead paying "full price" to the cable operators to watch the PPV events.
On the first day that WWE Network launched, WWE's technology partner, MLB Advanced Media was "overwhelmed" due to the demand. Apparently the system was immediately overloaded. The interest level was a good omen, but an initial survey revealed a fascinating trend - a significant portion of people signing up for the service were actually located outside of the US! These subscribers (largely from Canada and United Kingdom) were using proxy servers to avoid geoblocks. It was a practice that has been popularized among Netflix (NFLX) users anxious for the American-version of the content.
This is an exceptionally important point and helps explain the lackluster subscriber growth WWE Network has exhibited since the initial launch. Namely, many international users have already begun using WWE Network or knew someone who had experience with it. After the August 12 worldwide launch (which included launching the WWE Network as a traditional pay channel in Canada for Rogers Communications (RCI) and reached most, but not all, of the originally targeted Phase I countries), it was surprising that less than 30,000 new subscribers were added to WWE Network. With international WWE Network subscribers comprising less than just 4% of total paid WWE Network subscribers as of 9/30/14, it's reasonable to suspect that some percentage of international subscribers are masquerading as domestic subscribers.
WWE Network is still not available to all countries. Most recently, WWE announced (again) that it was launching WWE Network in the United Kingdom and Ireland after an embarrassing misstep in November where the Network launch was canceled literally minutes before the advertised go-time. The culprit? According to Variety, it was issues stemming from the existing (old) Sky Sports contract. I've speculated that WWE may have been negotiating with BSkyB over whether to launch WWE Network as an over-the-top service or to pursue a hybrid model akin to what WWE ended up doing in Canada with Rogers. In the end, it appears WWE is going with over-the-top and launching in the United Kingdom on January 19, 2015. That still leaves a handful of countries (notable China, Japan, Germany, Italy, India, Pakistan, Philippines Thailand, and Malaysia) without official access to the WWE Network.
When WWE chose the price, $9.99, it boxed itself in severely.
Previously, the domestic price for a PPV was at least $44.95 (most MVPDs charged more for an HD broadcast) and WrestleMania commanded a premium price starting at $59.95. Prior to launching WWE Network, WWE was collecting upwards of $20 per buy when a pay-per-view was purchased. The WWE Network pricing scheme was completely different - it was a flat $9.99 and the understanding was that there be a six-month commitment.
However, as soon as WWE began revealing subscription numbers, a strange phenomenon was observed - hundreds of thousands of subscribers dropping the WWE Network prior to completing their six-month subscription term. For instance, more than 128,000 subscribers dropped the WWE Network during the 2nd Quarter of 2014 despite the service being less than five months old.
It was clear that WWE Network subscription scheme was unenforceable.
That's why WWE decided to drop commitment altogether at the end of 2014 (offering new subscribers a free month in November and no more commitments going forward and migrating existing subscribers to month-to-month starting in December).
Interestingly, WWE did modify the price for WWE Network in the United Kingdom (£9.99) and Ireland (€12.99) which effectively represents a 50% premium versus domestic pricing. (However, it's still a savings to purchasing the Pay Per View via Sky Sports Box Office at £19.95 / €24.95.)
An intriguing phenomenon in 2014 was the quantity of traditional PPV revenue that was still being generated even after the WWE Network had launched. For instance, although WWE offered Survivor Series for free to new subscribers and began mocking people who bought the full-priced pay-per-views, the company's Key Performance Indicators revealed that November's pay-per-view still did 103,000 worldwide buys on traditional PPV (33k in North America and 70k overseas).
The device portfolio which originally supported WWE Network has improved in the past nine months. Notably, for several weeks after the launch of WWE Network, the Xbox 360 app was broken and the WWE App was not available on Smart TVs or Blu-ray players.
Those growing pains have been fixed, but it's a sign of how rushed this projected ended up being.
The initial leadership team with Perkins Miller as the SVP of Digital and Matthew Singerman as the EVP of Programming (including leading the WWE Network) fell apart. Miller joined the NFL to become its Digital Chief in April 2014 and Singerman was quietly released around the same time. WWE did not appoint a new Digital Chief until October 2014 (Lou Schwartz) and just announced a new EVP of Content (Lisa Fox Lee).
It seems that the service was adrift throughout the Summer. WWE is finally completing the roll-out by launching in the United Kingdom, but WWE has yet to clearly articulate how the company is going to bring the over-the-top service to large markets such as India or China.
Key #4. Capitalize on the new home entertainment agreement
WWE Home Entertainment Revenue (2007-2014) | |||
Year | Home Entertainment Revenue | Units Shipped | per Unit |
2007 | $53,700,000 | 4,034,167 | $13.31 |
2008 | $58,500,000 | 4,053,719 | $14.43 |
2009 | $39,400,000 | 3,531,468 | $11.16 |
2010 | $32,100,000 | 3,559,100 | $9.02 |
2011 | $30,400,000 | 3,300,000 | $9.21 |
2012 | $33,000,000 | 3,775,800 | $8.74 |
2013 | $24,300,000 | 3,987,200 | $6.09 |
2013 Q4-2014 Q3 | $24,600,000 | 3,181,300 | $7.73 |
2015 marks the beginning of a new partnership between Warner Bros. Home Entertainment and WWE. The deal was not an enormous surprise considering that the two companies had already partnered on Scooby-Doo - and Flintstone - animated WWE projects.
Previously, WWE's Home Entertainment distribution partner was Gaiam Vivendi Entertainment in a partnership which dated back to September 2009.
However, shortly after WWE announced an extension of its Home Video licensing partnership with Gaiam Vivendi Entertainment in May 2013, Vivendi's "GVE home entertainment brands and content" were acquired by Cinedigm (CIDM).
Over the next year, it became apparent that the relationship between WWE and Cinedigm was on shaky ground.
For instance, during the Q1 conference call in August 2014, Cinedigm COO Adam Mizel dismissed the relevance of WWE:
...WWE will leave us to the end of this year as they did not accept a renewal proposal that allowed us to earn an acceptable return. This was an easy decision for us as WWE has underperformed expectations and is at best now a lower volume breakeven customer.
(Confusion over transferring the rights to distribute the Home Entertainment library led to great confusion in September when TheWrap.com published an article suggesting WWE was in negotiations with Warner Bros., which would include WB acquiring the entire WWE library. This far-fetched scenario did not pan out).
While Home Entertainment (formerly known as Home Video) has been on a downward trajectory for several years, it's still quite a profitable business. As part of the consumer products portfolio, home entertainment OIBDA percentage is usually around 45%. Over the last five years, home entertainment has generated more than $100 million in OIBDA which is more than twice what the digital media segment has contributed in aggregate.
The new agreement with a cooperative partner could have exciting ramifications for WWE. For instance, fans have speculated whether WWE will begin using Warner's "DVD on-demand" printing capabilities to reissue older items from the vast WWE catalog.
With declines in physical media shipments, it's unlikely WWE is going to return to the home entertainment highs of 2007-2008. Still, the company finally has a willing partner who is working on both distribution and content creation with it. There's an awesome opportunity to grow and refine this revenue stream.
Key #5. Prove viability of the new WWE Studios model
WWE Studios Net Revenue & OIBDA | ||
Year | Net Revenue | OIBDA |
2007 | $15,955,000 | -$14,743,000 |
2008 | $24,512,000 | +$7,189,000 |
2009 | $7,671,000 | +$2,173,000 |
2010 | $19,507,000 | -$1,758,000 |
2011 | $20,896,000 | -$29,375,000 |
2012 | $7,877,000 | -$5,457,000 |
2013 | $10,778,000 | -$12,744,000 |
Q4 2013 - Q3 2014 | $12,952,000 | +$985,000 |
WWE Studios (formerly known as WWE Films) has been a financial albatross for over a decade.
As of the last available quarter, across all WWE Studios releases, WWE had earned $115.1 million in net revenue. The sum total from all of these films is an unpleasant -$35.8 million OIBDA. Profitable releases have been rare (The Marine, The Call) and there's been numerous costly missteps (The Condemned, See No Evil).
For years, WWE has been promising that it has finally put its unprofitable WWE film days behind it. While we haven't heard any signs the company is going to take another film impairment charge, the WWE Studio remains an unusual strategic investment.
WWE has entertained a myriad of exotic side businesses such as the World Bodybuilding Federation, The World Restaurant in Times Square, a Casino building in Vegas, Tout and most famously the XFL. While these projects may sometimes turn profits (many didn't) and expand the business's reach as an "entertainment company," WWE cannot let these tertiary divisions become major distractions.
With WWE Network already majorly draining the coffers in 2014, WWE cannot afford to have two dud divisions. It's time for the company to clearly prove the viability of the "new" WWE Studios model, or exit that entire division.
Closing
After a tumultuous 2014, WWE has the potential for a much stronger 2015. It has secured an enormous amount of guaranteed TV rights revenue through 2018. It has already launched its business-changing WWE Network.
WWE loves to discuss how it has amassed an empire of social media followers and how it plans to "monetize" them. It's a noble ambition, but WWE needs to give us greater clarity regarding how, why and when it is going to do that.
Now, can the company continue to tweak the results of the international business and capitalize on its new partnerships (NBCU, Warner Bros.) to propel the balance sheet back firmly into the black?
At the core, WWE is a wrestling company that specializes in its brand of "Sports Entertainment." The attendance trends show that things have stagnated. Hopefully, 2015 is the time to break out of this funk.
WWE has done an incredible job vanquishing its professional wrestling rivals and growing its business. Hopefully, the challenging economics of trading PPV revenue for over-the-top subscriptions won't be a tragic misstep. Beyond just growing WWE Network, there's still a lot of other areas for WWE to focus on and fix in 2015.
Chris Harrington is an analyst who covers WWE. You can contact him at chris.harrington@gmail.com or on Twitter at @mookieghana. He hosts a wrestling statistics and financial analysis podcast called Wrestlenomics.
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