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    Tuesday, November 3, 2015

    Best For Business (11/3/15): What We Learned From The WWE's Third Quarter Financials

    What's happening, Henroonies? Welcome to another edition of "Best For Business," the longest-running semi-regular column written exclusively for the Filipino wrestling fan focusing on the numbers and metrics behind the wild and wooly world of professional wrestling.

    Before everything else, we wanted to pull out this little tidbit we can't believe we missed a while back. We know how the WWE used to pull out lame bits of trivia for its "Did You Know?" segments on RAW, but we thought this was something worth talking about: Forbes.com has declared that "WrestleMania" is the eighth most valuable sports brand in the world, ahead of such pop culture tentpoles as the Daytona 500 and the Kentucky Derby.

    That's an amazing feat for something like pro wrestling, which is so often considered such a low-brow form of entertainment. So kudos to the Connecticut crew; those dudes know what they're doing.

    More importantly, the WWE recently released their third quarter financials, and we've spent the last couple of days poring through the numbers and trying to make sense of how their latest performance could be affecting the product in the near future.

    There's tons to cover, but this time around, we're going to focus on the top three things that interested us the most about their most recent business report.

    Let's get to it.


    1. The WWE is on pace for a record-setting year

    In their 2014 full-year performance report, the WWE was Mojo-hyped to report a record-setting $540 million dollars in revenue. But the way that 2015 is going, it seems that's going to be a short-lived record, as with just nine months elapsed, the company has already nearly hit the $500 million threshold on a year-to-date (YTD) basis.

    All numbers are in millions of dollars (millions of dollars!).
    With $492.6 million already earned from the period spanning January 1 to September 30, 2015, the WWE is ahead of last year's record-setting pace by roughly 23%, which means if they keep up the pace for the rest of the year, we're looking at the McMahon empire to end the year with anywhere in between $650-670 million in total revenues.

    Just so we all understand what a momentous feat that would be, if the WWE were its own country, it would outrank the Dominican Republic in gross domestic product (GDP), based on the latest-available World Bank computations.

    This growth isn't coming out of nowhere—while Live Events and Consumer Products (meaning shirts, games, and other merchandise) are a $166 million dollar combined business for WWE, it's been their media division that's been their growth engine thus far, growing nearly 30% year-to-date to create almost $320 million for the WWE on its own.

    All numbers are in millions of dollars.

    This massive growth by the Media Division means that nearly two-thirds of total company revenue now comes from this arm, with Live Events dropping to just 19% contribution and Consumer Products as the only other division that grew its total contribution to the company at 15%.

    Despite the recent run of dismal TV ratings for RAW, the fact of the matter is that these ratings don't affect company financials on a meaningfully immediate basis; as we've detailed in past columns, the WWE does not earn money from weekly ratings, but by selling rights to TV networks to air their programming—and these are deals which are locked in until 2019 at relatively fixed rates, so we don't expect this particular division's contribution to the WWE's success to change any day soon.


    2. The Network Is The Future, And The Future Is Here

    We saw in the preceding section that the Media Division has been driving the WWE's growth so far in 2015, but which specific product groups under the division are driving this success?

    We've broken the division down into its four primary sub-segments, as defined by the WWE in their own financial reporting, and identified how each one has been performing versus last year.

    All numbers are in millions of dollars.

    Here, we see the continued effect of the new TV deal the WWE negotiated last year in further improving the overall business performance. TV rights are the single biggest line item in the WWE's financials, and the company has already earned nearly $50 million more from them than they did over the same period last year.

    But, gee whiz, check out the revenues from the WWE Network. In eighteen months, it's a product that has grown to nearly $120 million dollars on the backbone of over 1.3 million subscribers as of September 30th, with nearly a million coming from the United States alone. It doesn't even matter than the Home Entertainment sub-group, which produces DVDs and the like, dropped in revenues by nearly half—the WWE recognized that the future is in over-the-top digital content, and in a world like that, physical media like DVDs don't even matter.

    All numbers are in thousands of subscribers.
    What really excites us is the strong growth from international paying subscribers; the chart above shows us that as of the end of the third quarter, the WWE enjoyed nearly a quarter of a million happy subscribers from overseas. This should give the 'E even more confidence in pushing availability of its service into other markets, as its long proclaimed that its break-even point for the WWE Network would be a base of a million subscribers; they've achieved that, and more. It would appear that everything else from this point onwards would just be gravy.

    But the WWE has been very savvy about how to reinvest profits back into the Network to make it more palatable for its subscribers, whether current or projected. In the third quarter alone, they've invested into 85 hours of exclusive, original content—not just special events like Live From Madison Square Garden (which holds the all-time record for the most-viewed non-PPV show on the Network) or Beast From The East, but such diverse fare as Swerved, The Stone Cold Podcast, Table For 3, WWE 24, or the recently-premiered Breaking Ground.

    In fact, if we break down each division of the WWE into its individual product groups, we see that the WWE Network already contributes nearly one-fourth of total company revenues, and at $118.6 million dollars in YTD earnings, it has generated more money for the company than Live Events has been doing in total, continuing a trend started in 2014.

    WWE showed it had balls the size of grapefruits when it bet big on the Network, and it looks like that gamble is paying off. Consider this: What the WWE has earned from the WWE Network in 2015 thus far is nearly as much as they earned from TV rights for the same period in 2014.

    Even more excitingly, it's finally proven to be a viable offering to completely replace the concept of pay-per-views as a WWE consumption format. Between 2012 and 2013, the average revenues from pay-per-view was in the neighborhood of $83 million per year; the WWE is getting 50% more than that through the Network in 2015, and the year isn't even done yet. Good job by you, WWE.

    It takes a special kind of visionary to build a viable business offering that can grow to such an integral part of the company's finances in less than two years' time, and that's precisely what Vince McMahon has been: A big-balled gambler who stuck to his guns and made the vision pay off.

    Just keep #Bolieving, guys. With the way the WWE is going and growing, that seems like incredibly smart advice.

    So speaks Bo Dallas.


    3. The WWE Network Is Putting The "World" In "World Wrestling Entertainment"

    And on that note, the optimism behind the WWE Network is through the roof. We understand why Vince McMahon wanted to pilot solely in the U.S. market while they work out annoying niggles behind their system, and have been waiting with bated breath for when it will finally be accessible from the Philippines.

    And ladies and gentlemen, it looks like that day is here. The WWE announced its most ambitious expansion plan for the WWE Network to date, with a fourth wave set to cover the Indian subcontinent (India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, Maldives and Afghanistan) on November 2nd, as well as Germany and Japan in January 2016, and ongoing development plans for geographic expansion to China, Thailand and the Philippines.

    We're not concerned about the number of countries per se, it's the implications in absolute potential headcount that excite us. Based on the existing coverage of the WWE Network, it's only actually available to approximately 10% of the world population of seven billion. Once it gets China and India onboard however, do you realise that the WWE Network will be available to over 50% of everyone in the world? That is a truly global achievement no other wrestling promotion can claim.

    Y-axis represents millions of homes with access to the WWE Network.

    We're not even going to get into a discussion on spending power and high-speed Internet access across markets—that's a highly-specialized discussion that doesn't seem relevant at the moment—but the fact of the matter is that if the WWE pulls this off, they will have direct reach into nearly four billion homes all over the world regardless of TV distribution deals or the like. This is a mind-breaking possibility, folks; nobody—not ESPN, not HBO, not the NBA, not Netflix, not Apple—has achieved anything on this level. If Vince McMahon pulls this off, he's not just a wrestling legend, he's an entertainment legend on a scale like no other. Period.

    Various sources are reporting in fact that the Network is ready to go in India, which presents a potential audience of 1.25 billion people—roughly triple the size of today's current universe. That's obviously a big deal. There are a lot of catches so far; all content will only be available in English, and live pay-per-view streaming won't be ready until 2017.

    Those aren't necessarily deal breakers. But we do think the WWE needs to be ultra-hands-on with how it manages the Network in India. With English literacy below 20% and just 12% having Internet access, they'll need to be patient with their ambitions. Either way, this is a gem in the making for them. Here's a fearless prediction though: we bet the Great Khali will be brought back either as a special ambassador or a part-time performer in the next six months to spike Network uptake in India.


    For financial projections, the WWE is using Netflix as a benchmark, pegging its 22% annual growth as a rough indicator for their own flight path. But based on their own geographic expansion plans, we think this is an overly understated benchmark; with the WWE's world-class talent and leadership team, compounded by ever-migrating consumers into the digital media space, the ceiling for growth seems virtually unlimited.

    Even Bill Simmons approves.

    At this point, the international market only contributes about 25% to the WWE's total revenue. The whole Europe/Middle East/Africa (EMEA) market has generated just a little over $75 million for the company this year, with Asia Pacific (APAC) delivering just under $40 million. But as the WWE Network builds a stronger presence in the coming two years, we should see a healthy reshuffling of revenue contribution to show a mix more representative of a truly global World Wrestling Entertainment.

    And a more robust international fanbase can only mean good things for the WWE. The company reports healthy growth in both its licensing and WWE Shop sales. Licensing, of course, covers such things as video games developed by third parties such as the popular WWE Immortals and the hotly-acclaimed WWE 2K series, and the more people there are to spend money on such franchises—such as perhaps the mysterious partnership with Tapout that has yet to be fully revealed?—the better it is for the bottom line.

    We'll keep our eyes out for future developments on the international front, fellow smarks.


    There's tons of momentum behind the WWE as it heads into the home stretch for 2015, and we can't wait to see where they go from here. It seems to be a certainty that the company will establish a new record-high in revenues for the year rivalling even that of a small country, while the WWE Network continues to unlock new growth opportunities as it expands its footprint to cover half of the world's population in the next 18 months or so.

    We have to wonder though where the talents will be left with this influx of money pouring into the corporate coffers? It's been a widely-discussed issue among the WWE roster that the shift to the Network model didn't include an update to the bonuses they earned from pay-per-views, and that still doesn't seem to be the case. We've seen the WWE Network generate more revenue in the first nine months of 2015 than pay-per-view buys did in total—but no concrete policy on what bonuses talents get from it, if any.

    The huge elephant in the room that pops up therefore is this:

    Will a richer WWE make for richer WWE performers?

    This is a massive question we'd love to see directly answered in the future. It's been reported that WWE wrestlers not only have to pay for their own transportation, meals, accommodations, wardrobe, makeup, and gym expenses for regular tours and shows—how much do they really get to save? Should their downside guarantees be adjusted upwards based on a potentially larger revenue flowing in from the WWE Network's expansion? What's the true wealth of your average WWE performer, and what can the WWE do to improve this? For every Rock, who's earned $31.5 million in Hollywood this year alone, you have dozens of other entertainers who have to settle for the median WWE salary, a number Forbes estimates at roughly $500,000 a year.

    These are fascinating questions, and nobody seems to have any answers. But with the WWE in the financial state its in, it's in a unique position to make a positive difference in its talent's lives. Because at the end of the day, pro wrestling is theater that wouldn't exist without world-class athletes to tell the in-ring and out-of-ring stories that fans demand. Let's hope the WWE takes this up in the next few months, and figures out in concrete ways how to take care of its talents.

    Now that's best for business.


    Mark De Joya (@MDJSuperstar) is an advertising professional and brand strategist by day, but dreams of being the Vince McMahon of the Philippines by night. He writes anything to do with numbers for Smark Henry: People Power, our weekly fan survey, and Best For Business, our regular financial report. With 18" arms and a 300-pound squat, he is also the official bouncer of the Smark Henry offices.
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