When WWE released its second-quarter results, most analysts were not expecting to hear that WWE had reached its revised goal of a million subscribers for the domestic WWE Network.
The reserved growth through WrestleMania (667,287 subscribers) and lackluster results of the NBCUniversal TV rights negotiations had tempered expectations. Still, many believed that WWE's updated June 30 subscription numbers would likely be in the 740,000-830,000 range.
While those are not thriving numbers, at least it would demonstrate that the service was continuing to accumulate subscribers. That is an important goal for the months following the once-a-year marquee attraction WrestleMania.
However, the number WWE reported in its 10-Q financial filing has stunned many people. WWE had only 699,750 paid subscribers as of June 30.
The details were even more vexing.
In the news release, WWE laid out the math: They attracted “gross additions of 161,000 subscribers since Wrestlemania on April 6th … reflecting a net addition of 33,000 subscribers”. In other words, while WWE has achieved in excess of 825,000 total subscription, more than 128,000 WWE Network subscribers were no longer part of the paid subscription base by the end of the second quarter.
Six-figure losses for a service that isn't even six months old.
On the conference call, WWE was pressed for answers. Everyone wanted to know: How did these subscribers “leave” without completing the six-month commitment term?
WWE confirmed this was the “payment billing driven element of churn." In essence, WWE admitted that during the monthly billing cycle, tens of thousands of households ceased being subscribers due to payment issues.
There's a broad swath of interpretations. "Payment issues" could include subscribers whose bank accounts had insufficient funds, subscribers whose credit cards had been deactivated or subscribers who gave instructions for the transactions to the WWE Network to be blocked. The process is even easier for PayPal subscribers, who can easily go online to their account and deauthorize PayPal from sending reoccurring payments to the WWE Network.
When questioned about timing, WWE chief financial officer George Barrios explained that this was related to what we he called the “lumpiness in the acquisition.” That corporate double-talk implied WWE's belief that the majority of these cancellations were choices by people who wanted to watch WrestleMania 30 on the network for $10, but did not choose to stick around for the rest of the commitment term.
No matter how WWE tries to spin it, losing 128,000 subscribers in less than six months is lousy news. It generates great concern among fans and investors about what is going to happen when the vast majority of subscriptions reach the six-month renewal point. When already more than one in seven users have successfully “gamed the system," how confident can WWE be that subscribers will stick around when it’s time for renewals?
The first large batch will start on Aug. 24. Presumably, many of these first-day subscribers represent the most hard-core of fans. It's likely that a greater-than-normal proportion of them will choose to stick with the WWE Network. They form the base of fans who were buying the B-level pay-per-views regularly and the WWE Network represents a significant cost-savings for them.
During the call, WWE mentioned that they studied other “subscription video services” and found that subscriber churn “can be anywhere between 4% and 8% a month”. Right now, WWE is looking at a number above 15 percent, which even Vince McMahon admitted was “pretty significant turn over.” Unsurprisingly, WWE struck back with two plans: introduce new payment tiers and expand the universe for possible subscribers.
WWE Network Price
They're both smart moves for the WWE.
Among the new pricing tiers is a "one-month commitment” tier that is initially set to cost $19.99. It’s an interesting idea as it gives people the option to buy the WWE Network without a longer commitment. Essentially this becomes the new digital “a la cart” price for a fan who wants to order a live WWE pay-per-view using an over-the-top distribution method.
During the conference call, executives confirmed that the price of the one-month commitment tier may go up. This would be a smart thing to do for the biggest PPV events—notably Royal Rumble and WrestleMania.
Since it is being launched prior to this year's SummerSlam (Aug. 17), we can assume that the price is set at $19.99 currently. So many things are in flux right now.
The WWE Network was originally conceived as a traditional television channel. Going back to February 2010, Vince McMahon mentioned how they were doing a “great deal of due diligence” on the idea of a stand-alone WWE cable network.
However, plans changed. The WWE Network evolved into an over-the-top (OTT) network. Initially, the 2013 business outlook pegged the likely price at “between $12.99 and $14.99.”
It was surprising when WWE launched that they chose to stay below a $10 ceiling (feeling that it would make them more competitive with OTT services such as Netflix). Early on, WWE believed there was an enormous potential universe of subscribers—between 2 million and 4 million at a “steady state.”
It was an audacious goal that excited investors but stretched credibility. Since the domestic service actually launched, the WWE Network has greatly underperformed compared with the original minimum break-even scenario of 1 million subscribers.
It's important to emphasize that WWE was planning on getting a million subscribers for the U.S. version of the service before they even launched a global version.
Global WWE Network
The Global WWE Network expansion is the perfect time to reset consumer expectations. WWE should be setting pricing levels in local currencies that will ensure network sustainability with an eye to WWE Network profitability. When you sell a premium product for a discount price, there's a huge risk of becoming devalued in the eyes of your consumer. It’s a very dangerous precedence to set.
It’s important to emphasize that the global expansion of the WWE Network will not be a financial panacea. Despite the initial optimism, the number of WWE Network subscribers won't be exploding in the near future. Even with the global expansion plans, it’s clear that the subscriber base in the United States (which already can access the domestic service) will represent the lion’s share of the total subscribers.
How do we know that? Look at the modern television product.
Right now, the majority of the WWE Network users are most focused on the new content. (Yes, there are many fans who are interested in older content, but they represent a much smaller group.) When WWE runs down the weekly programs that fans are streaming, it's the new content that always dominates.
It’s clear that growing the WWE Network subscription base, at least based in the current incarnation of the WWE Network, is going to come from people who are already watching WWE programming on their television today.
Therefore, when we're trying to project demand for the WWE Network in global markets, it makes the most sense to focus on who are the active viewers. And the best test for who will be willing to buy the WWE Network is to look at who is willing to buy the WWE pay-per-views right now.
My calculations on the global demand for the WWE Network strongly suggest that no more than 40 percent of the future subscription base will be outside of North America.
It's likely to start off much more sluggish due to the possibility that many international subscribers may already found their way on to the U.S. service. In other words, it's clear that the U.S. service is still going to be the largest piece of the pie.
Right now it’s clear that even at only a monthly cost of $10, the WWE cannot garner the gargantuan audience it originally anticipated for the WWE Network.
So, it’s time for the company to pivot. It needs to focus on creating a profitable service utilizing the base of users it has. There are some fans, especially older audiences, who are limited in their willingness to adopt a streaming solution. So, moving forward with who they have, WWE is trying to turn around the WWE Network by implementing cost reductions and exploring options for additional revenue generation.
In terms of cost reductions, WWE’s strategy involves several pieces. They have laid out a three-pronged cost-cutting strategy (see "Restructuring Plan") that includes:
1. Elimination of the magazine division (shutting down, currently expected to end by October).
2. Shift in gamification strategy ($2.5 million cost; not completely clear what they're aiming to do but it involves "write-down of certain assets associated with our gamification business").
3. Reduction of the head count (7 percent, $2 million in severance packages).
In terms of ways to make more money per subscription, WWE has considered adding advertising to the WWE Network. While this will probably only generate a smidgen of revenue, it’s a smart step where WWE can partner with advertising partners and through its digital platform to deliver targeted ads. Being able to offer companies a level of targeting and personalization is nothing to scoff at.
Ideally, WWE will evolve into being able to execute jargon-heavy tactics such as “cross-platform e-commerce experiences." Imagine a day where a WWE Network viewer can click a button and suddenly an order for a wrestler’s T-shirt would appear in their "basket" at WWEShop.
Still, these sorts of ambitious e-commerce investments clash with WWE's current culture of cost-cutting. They still lack an active executive vice president of digital media (the last one, Perkins Miller, left to join the NFL in April) or one in charge of the WWE Network. While positions like that are vacant, this sort of innovation or investment seems highly unlikely.
WWE also needs to figure out how to better monetize its existing customers. Effectively, the company needs to acknowledge that it is selling a service that is worth a lot more than just $10 per month to most of their customers.
It used to charge more than $45 per household just for a pay-per-view one single time. Now, it is offering a huge on-demand library, live PPVs and other brand-new (and archived) content. There’s no reason it can't charge at least 25 percent more.
WWE shouldn’t be afraid of the artificial $9.99 ceiling. They are a niche product.
WWE was way off the mark when it briefly tried the slogan “It’s like Netflix (for WWE) but better!”. WWE Network is not analogous service to Netflix. Instead, the WWE Network is more akin to a Blockbuster store that rents only football videos.
There's nothing wrong with appealing to a niche audience. But it’s important to recognize that they are different from Netflix or Hulu or Amazon Prime. (From an investor standpoint, they are spending a lot less on content rights because they own their own product!)
WWE needs to think of itself as offering a premium entertainment product for a niche consumer. The WWE Network needs to be retailed at an appropriately fair price—something that is certainly north of $10.
Among my other suggestions, I believe that WWE needs to strongly focus on addressing the monthly price of the service.
There are certainly content issues—they need to deal with the long window before they can rebroadcast current Raw and SmackDown episodes, they need to add more Attitude Era content (particularly Raw and Nitro episodes) and they need to deliver on launch promises and include their Home Video library.
However, the current trends of the subscriber base amplify the fact that WWE is not doing enough to extract enough value from their limited base of subscribers.
The new payment tier and fast ramp-up for the Global WWE Network distribution provides hope, but things remain exceptionally uncertain at this time.
Investors keep shaking the magic financial eight-ball, but the answer keeps being, "Ask again later."