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WWE's Narrow-Minded Focus Is Alienating Fans And Investors

Posted: Nov 20th 2014 By: Edward Vranic

When I was a kid growing up in the 1990s, I was a big fan of World Wrestling Entertainment Inc. (NYSE:WWE) and recall watching Monday Night Raw every week. Investors can get a unique perspective into the company because its product is available for everyone to see. Less interesting and engaging content for fans can be a red flag for investors. The company's narrow-minded push of the WWE Network appears to be alienating fans and investors as story lines are being negatively impacted and aggressive pricing to try to gain scale is cannibalizing revenues.

WWE's Q3 release shows a revenue increase of 6%, but a net income loss of $5.9 million compared to a gain of $2.4 million in Q3 2013 as high margin pay-per-view is being displaced by WWE Network revenues. PPV revenues decreased 56% with the September event Night of Champions PPV buys dropping from 175K last year to just 48K this year. Fans are either heading toward the cheaper route of the WWE Network or are just altogether not buying the PPV due to lack of interest.

In a move to try to stimulate WWE Network subscriber additions, the company announced that it will be offering a free one-month trial in November for new customers in hopes that people will stay on for December when the billing period starts. This plan could backfire on the company in multiple ways. First, customers who have been paying full price since the beginning do not benefit from this deal. Because the company also went exclusively to a month-to-month price plan with no commitment in November, some loyal customers who feel they have been slighted by this move could leave. My guess is that in order to keep these customers on board, WWE will have to match the one month free offer to anyone making that threat and hope that not a significant percentage of the subscriber base ends up doing so.

The most pressing issue that will impact Q4 financials is the decision to essentially offer the Survivor Series PPV event to anyone not already a WWE Network subscriber for free. The Night of Champions PPV saw a 73% decline as the company headed into the Q4 PPV schedule. Last year's Survivor Series had 177K buys. The free WWE Network offering could accelerate the heavy decline, and I would guess Survivor Series buys could decline between 80% to 90%. I expect PPV revenues for Q4 to decline by 75% or more with marginal pickup in WWE Network revenues for those who stay on for December.

The company highlighted WWE Network subscriber growth of 31K for Q3 on gross additions of 286K subscribers, meaning 255K customers ceased to be active by the end of Q3 on a total base of only 731K. The ability to cancel at any time will only accelerate this high churn rate. Going forward, investors should question the integrity of the subscriber numbers reported as the definition of a "new subscriber" and an "active subscriber" needs to be explicitly laid out. For instance, is an active subscriber one who paid for the service through to the end of quarter or one who had the service for some time period during the quarter? Someone who orders the service for March, June, September and December could be counted as an end-of-period subscriber for each quarter but is only a subscriber a third of the time. The network subscription data as presented on Page 3 of the KPI report is pretty meaningless if people can come and go as they please and so far have demonstrated that they do.

Customers could activate once in a while for their favorite PPV and watch any new on-demand content that has been uploaded since their last active month then deactivate once again. This would be of particular concern when targeting former fans like myself whose greatest interest would be in the classic content. Customers on Netflix (NASDAQ:NFLX) don't exhibit such extreme behavior because the content is a lot more varied and the library is larger. WWE's on-demand library rose from 1,500 hours to 2,500 hours since launch, not nearly enough content to keep the majority of customers engaged throughout all times of the year.

Not only is the on-demand content insufficient, WWE cannot control a large portion of content that would be of interest to former fans like me and the content it can control, it doesn't. Over the past year I have viewed interviews and "where are they now" style of documentaries of several former wrestlers and personalities. The problem is WWE may own the wrestling characters but they don't own the wrestlers themselves. I find content produced outside of the WWE's control on the company's former wrestlers to be much more "real" and preferable to watch over anything the company could come up with itself. The company will never defame itself so the best it can do is produce a documentary from Vince McMahon's point of view.

The occasional time I want to see old in-ring content that is owned by WWE, it's available on YouTube or other free sources online. For instance, one of the most memorable wrestling moments of my generation was the revealing of Hulk Hogan as the third NWO member at WCW's Bash at the Beach 1996. It is freely available here, has been up for over four years and has 560K views. The user who put up the video has ads running on it so that person is making money on the content views while the WWE is not. That should be content that is available exclusively on WWE Network.

The push of the WWE Network was a premature and short-sighted move as PPV buys were merely slightly eroding, the network lacked sufficient on-demand content and the company hasn't sufficiently swept the internet for infringements on its copyrighted material. Instead of pulling back and waiting until these glaring issues are solved, the company decided to force-feed the WWE Network on its weekly programming, lower the price points and now offers a free month to new subscribers. These moves either lower the quality of the content or unnecessarily accelerate the cannibalization of higher margin revenues.

Jim Cornette, an experienced promoter who use to work for the WWE and for various independent circuits for decades, shared his cryptic view of wrestling's future. He refers to the UFC as the best pro wrestling company around because the way it hypes its fights was the same way that wrestling use to hype its scripted matches when it was in its prime. Various other forces like the rise of the internet have impacted wrestling, and whether or not investors can agree with the opinion of one industry expert like Cornette regarding the future of wrestling, one quote he mentioned in the interview speaks perfectly to myself and many others. It went: "I use to watch wrestling, but I don't anymore," with a variety of factors being the driving force behind people losing interest.

It will be interesting to see if Vince McMahon and family can turn this company around. I always viewed McMahon as a wrestling industry expert first and a businessman second with failures like the XFL and WBF tarnishing his record. McMahon managed to take a wrestling business already at the top of its game and consolidate it into an international sensation. Since the WCW acquisition, WWE has been more or less a monopoly in the wrestling business and the wrestling business is all that WWE has. The challenge the company has going forward is to take a wrestling industry that has been in decline since the mid-1990s and try to turn it around, or failing that, milk as much profits as possible. So far the company hasn't been able to do that.