WWE made headlines again on Friday, though not necessarily the spotlight that Chairman and CEO Vince McMahon was hoping. With fanfare and anticipation from both wrestling fans and industry observers, WWE launched the WWE Network in February. Despite the bumpy start, the service signed up 667,000 subscribers. Despite falling short of the whispered breakeven goal of 1 million subscribers, WWE saw its stock price climb to a 52-week high of $31.98 in March.
Confidence was strong until Friday, when the Street responded with a 43% drop. What was the impetus for this change in confidence -- and what does this mean for OTT?
The core issue at hand was the recent broadcast licensing deal with NBCU. While the financial details weren’t confirmed, the general opinion was that the renewal of the broadcast rights netted significantly less than anticipated, with estimates of a 50% increase rather than earlier expectations of of 2x-3x.
McMahon stated, "The rising value of our content coupled with the global expansion of WWE Network will provide the foundation for long-term growth that continues to transform our business over the coming years." With WWE Network regarded as the future of WWE -- and for many industry observers and programmer peers, a bellwether for the role of the programmer in the Pay Television ecosystem -- the knee-jerk reaction was that the decrease in the expected increase in licensing revenue must be balanced on the ledger by an increase in OTT revenue, effectively raising the target number of subscribers to 1.3MM to 1.4MM to offset the cannibalization.
An interesting point is that this was cannibalization of a separate revenue stream, i.e., licensing. For NBCU to feel that there was value -- but value not as high as WWE hoped -- hints that NBCU couldn’t monetize the content effectively or that WWE Network’s encore viewing would erode viewership (and thus decrease value).
Most importantly, this isn’t a failure of the OTT model.
One can only assume that WWE had more than a reasonable share of quants running numbers and pivot tabling to their hearts’ content to model the business. One article described it succinctly as WWE’s desire to "double-dip". In essence, this is what WWE tried to do: increase both its broadcast and its OTT revenue streams and assume that the friction -- cannibalization -- would be minimized.
What keeps me excited about WWE Network is that, fundamentally, the “product” is well-suited for the OTT model.
WWE’s research indicates that approximately 50% of broadband households -- U.S. and some international markets -- have an affinity for WWE content. This “affinity” is a strong opportunity for WWE. For many sports, the casual or fair weather fan is commonplace. Observe the “fans” that appear out of the woodwork for playoffs or International events like the World Cup. For professional wrestling, it’s binary -- either they know the names of a handful of popular wrestlers (or semi-retired wrestlers like Dwayne Johnson) or they can describe every move, storyline, and quote from their favorites.
WWE should continue to focus on three core areas:
- Growing the sport on a global basis
- Increasing engagement of the existing fanbase
- Leveraging WWE Network as a digital and mobile platform
The last point is crucial. If WWE, or any programmer, simply thinks of OTT as a “digital version” of the antiquated broadcast model, price erosion and cannibalization (from digital to broadcast, or broadcast to digital) are inevitable byproducts. On the other hand, WWE, or any programmer, should think of OTT as a vehicle for engaging with their audience 24/7, not just as a content delivery vehicle, but as a platform for creating bidirectional discussion and making the previous “television” experience a personal, social, mobile, and “local” one. Additionally, digital makes it easier to generate global awareness and presence without the limitations of regional Pay Television providers.
WWE Network is at its infancy. As a platform for the creation of any number of digital experiences -- from personalized content channels to pop-up programming to local live events -- for any customer on every screen, the monetization opportunities grow as well. Hulu Plus will likely not be the last OTT service to “double-dip” with both subscription and advertising. With a core model based on live events, it would be surprising not to see WWE Network revenue derive a significant amount from e-commerce for both merchandise and ticketing.
The decision to bet on digital -- WWE Network as an OTT strategy -- wasn’t an easy one, and no one should have expected a smooth journey along the way. It’s just like the nature of WWE; no champion earns the belt without a few bruises.
Last week, the Street judged WWE by the realities of a Pay Television business model that itself is being challenged. Soon, we’ll hear the ruling from SCOTUS on American Broadcasting Companies, Inc. v. Aereo, Inc. But what everyone should consider is whether a property like WWE would be better off with the status quo -- treading water in a Pay TV ecosystem under siege. Or, whether WWE was taking the digital reins for a future that is reliant on access to “bits” anytime, anywhere, and on any device.
McMahon’s business is all about creating champions. WWE Network is just getting warmed up.