WWE Network Conjures Memories Of Internet Stock Bubbles
Summary
- WWE Network remains a costly investment for the company.
- WWE's corporate legerdemain has attempted to switch focus from profit to revenue.
- Statistics such as increased "social media presence" have not correlated to significant growth.
Mark Joseph Stern had an interesting article on Slate discussing the "Beanie Babies bubble." As the subtitle says, "Why did people lose their minds over Beanie Babies?"
I was never a collector of Beanie Babies, but I do recall some of hysteria.
(If you're looking for a great piece about the genius and luck - and tax evasion - of founder Ty Warner, be sure to read the awesome Chicago Magazine article by Bryan Smith from last year.)
Stern's article referenced an upcoming book by Zac Bissonnette, "The Great Beanie Baby Bubble: Mass Delusion and the Dark Side of Cute" (good title!). Even more interestingly was the author's reference to an economics/psychoanalytics paper written by David Tuckett and Richard Taffler called, "A psychoanalytic interpretation of dot.com stock valuations."
Written in 2005, the paper sets out to explain how when you include a "psychoanalytic perspective," it's possible to understand how investors "became caught up emotionally with the drama" around internet stocks and hype. Investors move from "process of excited overvaluation and seeking to possess Internet stocks at almost any price" to "process of disillusion and panicky valuation markdowns and price collapses and associated blame."
The classic four-stage model of stock market bubbles (the so-called "Kindleberger/Minsky" framework) is:
- Displacement (Exogenous Shock)
- Euphoria
- Boom
- Panic/Revulsion
In Taffler/Tuckett's model, they divide that final stage into two pieces: Panic ("when the bubble bursts") and Revulsion ("when the stock is stigmatized").
This is where the "psychoanalytic theory" piece comes in. Think Freud.
The paper outlines some of the classic incredible Internet stock valuations of the late-1990s, but also throws in sentences such as, "Psychoanalytically speaking, these claims and the level of emotional excitement signal a state of Oedipal triumph and a perverse reversal of generational difference." And "... it now seemed the parents might envy and feel left out by their children, a powerful dynamic normally restricted to infantile phantasies."
It is certainly a different way of characterizing why investors believed the "new economy" had boundless potential and endless profit. I'm not sure I believe (or understand) it all, but it's at least an intriguing perspective on why "emotions determine psychic reality in stock valuations."
So, what does that have to do with World Wrestling Entertainment (NYSE:WWE)?
Read what Taffler/Tuckett wrote about Internet stocks:
Analysts were confronted with a serious problem- how could they value such phantastic objects in any meaningful way? ... The idea, therefore, was not to concentrate on such old economy measures as earnings, cash flows or dividends, which in most cases were likely to be highly negative or non-existent for many years into the future. Instead, new economy concepts were used such as profits net of most costs, revenue growth, mind share, website activity measured in terms of eyeballs, reach and stickiness, lifetime value of a customer, or even less tangible still, a vision of the future. - Taffler/Tuckett, page 13
Suddenly, visions of WWE corporate presentations were swimming in my head.
"Profits Net Of Most Costs"
Profits Net of Most Costs reminds me an awful lot of WWE's adoption of OIBDA (Operating Income Before Depreciation and Amortization.
This is something I covered in my blog. Bob Vause, author of "Guide to Analysing Companies" commented to "be on your guard" for companies choosing to report in non-GAAP financial measures:
When faced with uncertainty, poor performance, or the need to hide incompetence or fraud, directors may be attracted to presenting "pro-forma" figures in their reports to investors... If the terms "adjusted", "normalised", or "underlying" are used in the review of a company's performance, be on your guard. Examples of such measures may be found in the use of EBITDA. A company showing a loss in its published income statement could produce a positive EBITDA figure. If the discussion of performance management choose to use a measure other than one firmly based on the reported financial figures and GAAP, a clear explanation must be provided. - Vause, page 52
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| Analysis by Chris Harrington |
When your Depreciation and Amortization is escalating, using OIBDA can mask that profitability is falling while Operating Income is growing. In this case, WWE's investments (in many things, including the corporate aircraft, but largely in the WWE Network) has driven D&A higher and higher (rate of almost 22% higher each year), while revenue has jumped between $475M (2009) and $526M (2008), but certainly has not been keeping pace.
Specifically, there is a growing chasm between what is a "breakeven" point for the WWE Network.
Source: Q3 2014 10-Q filing
If we take the midpoint of each of these Operating Income ranges, that'd suggest that WWE has fixed costs of about $83M and variable costs of around $9.88M per million WWE Network subscribers. To achieve $0 in Operating Income, that would be approximately an average of 754,500 monthly subscribers. (The range was 664,000 to 845,500.)
Between 2007 and 2010, WWE averaged about $74.5M in Operating Income. If it wanted to return to that level, it would need to achieve an average of 1,431,800 monthly subscribers (1,341,000 to 1,522,750). If you were willing to settle for a lower target, operating income in 2011-2012 averaged $40.1M. To achieve that, WWE would need an average of 1,112,000 monthly subscribers (1,028,000 to 1,210,000).
Between 2007 and 2010, WWE averaged about $86.7M in OIBDA. If it wanted to return to that level, it would need to achieve an average of 1,288,000 monthly subscribers (1,197,000 to 1,379,000). If it were aiming for a lower target, the OIBDA in 2011-2012 averaged $57.6M. To achieve that, WWE would need an average of 1,023,500 subscribers (932,750 to 1,114,550).
Some of the confusion about WWE's "breakeven" or "return-to-previous-profitability" points stems from this - there's about a 100,000 subscriber gap between the Operating Income and OIBDA estimates.
"Revenue Growth"
As WWE converts from traditional PPV to WWE Network subscriptions, the revenue generated by the "Network" segment is certainly expected to grow.
In the three years prior to launching the WWE Network (2011-2013), WWE averaged about 3.9 million PPV buys. That generated an average of $81.5M in annual net revenues. At $9.99 per subscriber (it's higher in Canada and in the United Kingdom/Ireland, but we'll set that aside), that's an average of about 680,000 monthly subscribers to the WWE Network. That's a hurdle that WWE should be able to clear.
Consider that the WWE Network hit 1,000,648 as of January 27, and has been north of 700,000 subscribers since 6/30/14, it's no surprise that we're seeing "Network" (PPV/Cancelled VOD/WWE Network) revenue raise year-over-year.
In fact, next year, if WWE were to average 800,000 subscribers monthly and retain a third of this year's remaining PPV revenue, that would be $115M in net revenue (+10% over the last four quarters).
However, it's important to note that while revenue has grown, OIBDA is way down.
| PPV+ VOD+ Network | "NETWORK" Revenue | "NETWORK" OIBDA |
|---|---|---|
2011 | $82.8 | $41.5 |
2012 | $87.7 | $41.3 |
2013 | $86.3 | $27.9 |
| Q4 2013 - Q3 2014 | $104.4 | -$1.4 |
It's a lot easier to brag about growing your revenue than actually being profitable.
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| From the Q3 2014 Presentation |
Above is an example of the gymnastics WWE has employed to demonstrate how B-level PPVs are getting more attention as WWE Network events than as traditional pay-per-view events. While true, the B-level PPVs actually generated a profit, even at their low transaction levels. That's something which the WWE Network hasn't achieved.
"Website Activity"
WWE loves to brag about its social media followers.
What's not clear is how WWE plans to monetize that segment. It was one of the six goals laid out by WWE CFO George Barrios at the Needham Growth Conference (free registration to listen to webcast at link).
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| From the Q3 2014 Presentation |
A lot has changed in the ten years since the paper was written and the fifteen years since the Internet stock bubble burst. However, it's amazing how often we're seeing the same tricks. As Vause put it,
If you cannot understanding what the company does ... it is not a failure of your analytic ability but someone practising corporate legerdemain.
WWE may have millions of Twitter (TWTR) followers and millions of YouTube hits, but that doesn't necessarily correlate to growing interest in the WWE. That especially doesn't mean it will translate into millions and millions of WWE Network subscribers. The competition for the over-the-top space is heating up (especially with services such as Nickelodeon and HBO Go entering the market).
As detailed in a previous Seeking Alpha piece, WWE's attendance per show has been declining for years and showing signs of stagnation. Similarly, TV ratings for their marquee television show, Raw has been nestled between annual average of 3.3 to 3.5.
WWE might be good at getting hashtags to trend, but that doesn't equal money in the bank. At least, not yet.
"Vision of the Future"
When WWE announced the WWE Network, the company promised that it would be "historic announcement" that "deliver unprecedented value." Vince McMahon told the audience that it had "right model, right formula, right time". It was going to be a model that was "synergistic" and that they would grow the WWE interest globally.
It's been a bumpy ride. WWE Stock started to tumble last year when the company only announced 667,287 for the post-WrestleMania WWE Network subscribers. It fell even further after the 5/15/14 announcement of the NBCU domestic TV Rights deal. Recently, the stock received a lift when the company announced it finally broke the 1 million subscriber barrier through interest in the Royal Rumble pay-per-view, UK/Ireland launch and new subscribers gained from the #freefreefree campaign in November.
WWE positioned the WWE Network as the engine that would drive the company to never-before-reached heights. However, the slow growth in the subscriber base underscores how much the company overshot on initial projections.
Much like the hysteria over internet stocks in the 1990s, the buzz about the WWE Network is heavy on the possibility and much lighter on the probability.
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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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.