Post a Comment On: Indeed Wrestling

In Wayne Duggan's article, he writes "Citi estimates WWE needs 1.76 million paid subscribers to replace the revenue the company lost when it abandoned its pay-per-view model."

I don't know if that's "the number", but that's what one expert believed.

As Dave Meltzer has noted before, it really depends on what number you're trying to hit.

Here's how I might do the math:

Last year, WWE made $180.9 million on the "Network" segment which is WWE Network + PPV. Of that $180.9m, they made $12.6m on traditional PPV. The OIBDA on the Network Segment in 2016 was $43.0 million. The OIBDA margin percentage in 2016 was 23.7%. That was down from OIBDA percentage of 30.4% in 2015 ($48.4m / $159.4m).

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According to the annual report, there were several reason that the Network OIBDA % dropped in 2016 compared to 2015:

1) "In 2016, WWE incurred $13.1 million of additional programming related costs in the Network segment". The company said it was "in support of our focus on adding original programming to WWE Network and additional pay-per-view events."

2) Pay-per-view revenue (which is usually at a higher OIBDA margin) dropped from $20.6 million in 2015 (12.9% of Network revenue) to $12.6m in 2016 (7.0% of Network revenue).

3) Most importantly, there was a shift of "shared costs that WWE now allocate to the Network segment from our Television segment." That impacted the 2016 Network OIBDA by $15.4 million. (A non-trivial number!)

So, if WWE hadn't moved those shared costs, the 2016 Network OIBDA would have presumably been 32.2% which would have been higher than 2015. It's probably more accurate to look at it the other way around - the 2015 Network OIBDA should have been lower because WWE was allocating a lot of shared costs to the very profitable TV Rights segment instead of the not-so-profitable Network segment.

Should we assume that the WWE Network segment is finally carrying it's fair share and generates about 24% OIBDA? (Keep in mind that we're looking at 2016 which didn't have a full year of dual PPV events. That Network OIBDA percentage could be even lower in 2017.)

The next question is how does that compare to the PPV model? WWE used to generate between low of $70 million (2010) and high of $94 million (2006-2007) in PPV revenue. Even as late as 2012-2013, the PPV segment still generated $83 million annually.

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Of course, WWE doesn't make it easy to compare total's company to the old company because they're always using different accounting measures (cost of revenues, OIBDA, adjusted OIBDA, profit contribution, EBITDA, etc.) in one period versus another period.

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The "profit contribution" of the PPV revenue varied between a low of $40 million (2010) and high of $52 million (2006) during 2006-2012. The average profit contribution percentage was 54%.

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We have a shorter time-period where we got PPV OIBDA. The average OIBDA for PPV was $40 million (average of 2011-2013), which would be OIBDA percentage of 48%.

(Again, this OIBDA % for PPV is probably artificially low because by 2011-2012 WWE had already investing money in what would become the WWE Network. And this included the WWE Classics on Demand/VOD service for a period.)

So, the simple comparison would be that since the PPV segment was twice as profitable as the WWE Network segment is today, they would need approximately twice as much WWE Network revenue to achieve the same PPV profitability.
That's about $165 million in WWE Network revenue if you want to replicate the profitability they achieved under the PPV model in the years prior to the WWE Network launch.

From that comparison, you could say they are about break-even (in terms of annual profit) to where they were prior to launching the WWE Network. There was 2014 where they had a OIBDA of -1.8 million on the Network segment, which means there's at least $40 million that WWE never earned because they blew up their PPV model. If you include those costs, WWE is still way behind.

How far behind? Imagine that WWE had earned $40 million OIBDA from PPV from 2014-2017. That's $160 million.
So far, 2014-2016, WWE is at $91 million OIBDA for the WWE Network segment. That leaves a $69 million gap. At current rates, that would require having annual average subscribers of 2.4 million ($289 million revenue = $69 million OIBDA). They're not going to do that.

So, how far do you stretch out the model? 5 years? 7 years? 10 years?

Let's say that this year maybe WWE will average 1.6 million paid subs. I'd guess that would generate only $46 million in OIBDA. It will take a long time to recapture that $40 million in OIBDA they gave up in 2014.

Based on what we know about PPV from UFC and Boxing, it's hard to say that we should discount the medium as dead for the big events like WrestleMania or Royal Rumble.

(Note: this ignores the other segments that were cannibalized by the WWE Network launch.)