WWE COVID-19 Financial Risk Assessment

The following is an attempt to model how COVID-19 related restrictions will impact WWE’s finances. Obviously, it’s uncertain how long WWE will be unable to run live events. This model considers the financial impact to WWE, at monthly and quarterly intervals, through the remainder of 2020.

Ultimately, I concluded that if WWE doesn’t run live events at any point for the rest of the year, WWE’s revenue would be impacted by as much as $218 million and operating income would be impacted by $42 million. In such a scenario, I estimated WWE would still report record-setting profits in 2020, with an operating income of $121 million and total revenue of $927 million — largely supported by continued TV rights fees, which I don’t believe are at risk.

Various parts of WWE’s business are at risk to various degrees.

We can roughly place each of WWE’s revenue segments into one of three risk categories that I’m making up for the sake of this explanation: immediate, moderate, or low.

Immediate risk:

WWE’s entire Live Events division (consisting of segments: North American ticket sales, International ticket sales, Advertising and sponsorship, and Other) is at immediate risk, and is already being impacted. Events can be postponed, but I don’t expect WWE will make up for the number of missed events in this year or the next — the company is already having struggling to make a profit with this division in non-Wrestlemania quarters, so surging the number of events later on doesn’t seem viable.

Venue Merchandise (within the Consumer Products division) is very much a function of live event attendance. As long as there are no live events, there will be no venue merchandise sales.

Moderate risk:

WWE Network may be affected by a few variable factors. Pay-per-view events are by far the strongest driver of Network adds and retention. I believe the longer the crisis goes on, and WWE is forced to deliver either no PPVs events or empty arena versions, the more strongly Network subscribers will cancel their subscriptions. There may be some offsetting effect from a lack of competition from other sports and entertainment, combined with increased time spent at home. However, the associated wider economic decline associated with a long crisis, may motivate some subscribers to consider canceling as incomes become more strained.

Media ads & sponsors may become more difficult to sell in a crisis economy where people are forced to stay home. Largely, this segment is driven by on-screen sponsors that WWE directly promotes (think KFC, Snickers, etc.). A minority of this segment is made up of ad revenue from YouTube. That area seems more secure. WWE had two of its biggest weeks ever for views on YouTube since stay-home orders went into effect.

eCommerce and Product Licensing: Sales of WWE-branded products may wane as the crisis goes on, due to economic strain on consumers and the weakening of WWE programming that promotes the products and the associated personalities and intellectual property. Like the WWE Network, I see these are being increasingly at risk the longer the crisis lasts.

Reality TV and WWE Studios: Production of some WWE reality series (Miz & Mrs., Total Divas, Total Bellas) and the company’s films may see their production schedules delayed, possibly pushing off airings and related payments into later quarters or into 2021.

Low risk:

Core content rights fees: Fortunately for the company, WWE’s largest revenue source is the least at risk and this area will likely allow the company to stay substantially profitable even if the crisis lasts for the remainder of 2020. WWE’s additional deal with Fox Sports, which seems desperate for more content in this sports-fee moment, can only raise revenues further. I don’t believe revenues related to broadcasts of Raw and Smackdown are at risk. Even if WWE is forced to air library content (which it has many thousands of hours worth), as long as the content has never before aired on the relevant networks, their TV rights fees will remain intact. And even if viewership of these programs falls significantly, WWE made clear on the earnings call in February that payments are not tied to viewership performance.

Saudi Arabia events: WWE runs two events per year, worth around $50 million each. One of those events already occurred on February 27. In a normal world, one would expect the next event to be about six months later, maybe in August. With large social gatherings in Saudi Arabia being rare to begin with, it seems likely the venues may not be in high demand and the government may be flexible with WWE about rescheduling the date of the year’s second event, if need be. Only if the crisis continues through November or December does the remaining $50 million WWE stands to collect seem at risk. November is the normal time for WWE’s last international tour, which a Saudi event could be tied into. However, given the large amount of revenue involved, it’s plausible WWE would travel overseas for a single Saudi event alone, as late as December.

Revenue risk assessment

The degree of impact to WWE depends greatly on how long the company is unable to return to normal business. As shown in the earlier “WWE COVID19 Losses Estimate” table, WWE stands to lose as little as $41 million, if normal business returns around April 30. Or if normal business doesn’t return for the remainder of the year, WWE could lose as much as $218 million in expected revenue.

Operating income risk assessment

Even without considering possible cost cutting, WWE remains profitable, even if there are no live events through the rest of 2020. Expected operating income is down from an estimated $163 million for the year (in the event there was no COVID19 crisis) to $121 million — breaking last year’s record operating income of $116.5 million. Again, $121 million is an estimate for the full year of 2020 in the case that there are no live events through December 31.

What about WWE’s PPV rights deal?

The prospect of WWE making a “transformative” deal with a major streaming player for the rights to WWE’s monthly pay-per-view events (currently primarily offered via the WWE Network) seems to have been interrupted. ESPN+ and Peacock seemed like the likeliest buyers. Dave Meltzer reported WWE and ESPN were far apart on a money offer, with WWE asking for more than the $150 million AAV ESPN+ gave UFC for a similar deal.

WWE today announced a deal with Fox Sports to sell Wrestlemania as a standalone PPV for $59.99 through Fox streaming platforms. FITE will also offer the two-day event as a PPV at a similar price point.

Many customers will realize the events can be streamed for far less by subscribing to the WWE Network for $9.99/month. (There’s no limit on canceling right after the event airs.) So this doesn’t seem like a strong offering. Rather this is probably a way for WWE and these partners to weigh how viable Wrestlemania is as a standalone PPV event, should a future deal take PPVs away from the monthly subscription service.

I wouldn’t rule out future bidding for WWE PPV rights after the company is able to run live events, later this year or in 2021. I would expect ESPN+ and Peacock to continue to be interested parties, possibly with the addition of Fox Sports, maybe Amazon as well. I estimated the value of a potential deal last month to be between $105 million and $161 million.

What about AEW?

All Elite Wrestling is a private company, so less is known about the new organization’s financial picture. Suffice to say AEW will be impacted by being unable to sell event tickets and venue merchandise, like WWE, for the duration of limits on public gatherings.

AEW’s TV deal with WarnerMedia, reportedly worth $45 million AAV (through 2023 with an option for 2024), is probably not at risk. Like WWE, as long as AEW can continue to deliver content that hasn’t aired before on “Dynamite” in their Wednesday night timeslot, AEW will likely still receive its expected payments.

AEW has taped some content in advance that will be aired on Dynamite in the coming weeks. Longer term, AEW doesn’t have the benefit of a huge library of past events like WWE has. Still, AEW has six PPV or special events, consisting of 42 matches that haven’t aired before on Dynamite. Additionally, there are 26 mostly one-hour episodes of “Dark”, that have match content and have only been aired on YouTube.

Like the possible impact WWE faces with its WWE Network, AEW revenue may be compromised if the company is unable to conduct what would be bi-monthly pay-per-view events. AEW PPV events of late have attracted around 100,000 buys with a price point of $49.99. AEW could possibly do PPV events with no audience, like WWE is choosing to do with Wrestlemania. Depending on WWE’s results, though, that may not be an attractive offering to fans.

As COVID-19 cases continue to rise in the U.S., there’s risk associated for WWE and AEW in continuing to conduct empty venue matches, if they’re not prevented by government restrictions. While both companies are reportedly giving talent the option of not participating in match tapings, the risk of transmitting the virus among wrestlers could shut down any further match tapings and create bad press for those involved.

EDIT: Post note:

I didn't consider: Media division's operating income margin is higher if for months, say, Raw and SD air library content or interviews or video packages, while still collecting expected rights fees. Normal event content is more expensive: talent pay, production, venues, etc. https://t.co/9GOsfuFKrV
— Wrestlenomics (@wrestlenomics) April 2, 2020

Paul Levesque's New Corporate Title

by Brandon Thurston
bhthurston@gmail.com

I’ve been listening to more discussion lately on whether WWE Executive Vice President Paul “Triple H” Levesque was demoted. That speculation is based on the change to his EVP title, published by WWE in its 2019 proxy statement this month, and a subsequent report in the Observer.

Levesque’s new title, as of February 2020, is “Executive Vice President, Global Talent Strategy & Development”. Before that, since August 2011, his title was, “Executive Vice President, Talent, Live Events, & Creative”.

Levesque’s new title “Executive Vice President, Global Talent Strategy & Development” might reflect the “Global Localization” strategy he introduced at the 2018 WWE Business Partner Summit.

The Wrestling Observer Newsletter reported Levesque is no longer overseeing talent relations; WWE’s proxy statement says the opposite.

WWE’s proxy statement, published March 6:

In his current role, he oversees the Company’s Talent Relations and Talent Development departments.

Wrestling Observer Newsletter, March 16 issue:

Levesque was the head of talent relations, his main job, but also oversaw many other departments in his role as EVP of Talent, Live Events and Creative. So he was moved away from being in charge of talent and his main duties are now NXT, selling NXT TV rights overseas and expanding NXT globally. Brad Blum, Vince McMahon’s Chief of Staff, took over Levesque’s other duties as Executive Vice President of Operations, overseeing the divisions Levesque was formerly overseeing. It’s a change. There are those internally and externally who have called it a quiet demotion. The labeling of his new title gives the impression that he’s the guy negotiating with talent, but that is one of the things he was removed from doing. Mark Carrano no longer reports to Levesque and now reports to Blum. Either way, it is curious that this was kept quiet for nearly four months

Because I see some talk about whether WWE CEO Vince McMahon is worried about ceding control to Levesque, here are some additional notes for background…

Vince owns a plurality, not a majority of WWE shares, but because he owns class B “family stock” he controls the vast majority of voting power. A hostile takeover isn’t possible until Vince sells a lot more stock, to the point that he owns less than 10% of shares, giving him less than 50% voting power. He currently holds about 37% of shares and 80% of voting power.

Despite its improving financial picture due to TV rights fees and Saudi money, there’s plenty of evidence to show that WWE’s popularity with the general public has decreased in recent years.

The economic effect of Vince’s role as head of creative isn’t well-understood by the investment community. I believe investors and their consultants, while they study WWE’s earnings results, in most cases they don’t follow the product closely. McMahon is generally perceived as vital to the company. He’s been the leading decision maker since 1982. Investors don’t know a WWE without Vince.

After the sudden removal of co-presidents George Barrios and Michelle Wilson on January 30, who were WWE’s most investor-facing executives, trust in Vince probably took a hit, evidenced by the stock price fall that followed.

That incident though doesn’t highlight anything about the economic effect of Vince remaining head of creative, although maybe it inspires some to look more closely.

It’s obvious to many of us who follow the TV product that Vince’s creative habits make for constantly jarring shows, within which it’s impossible to develop stars who are economic drivers. His driven personality won’t allow him to leave his role as head of creative while he’s physically able.

Investors would be anxious at the prospect of WWE losing Vince as CEO, but I see no reason why Vince couldn’t step back from creative while continuing to work as CEO: a scenario I never see McMahon willing to choose voluntarily.

Until this era of exploding media rights, the development of exciting stars is basically all that’s driven peaks in wrestling business. At best, modern Vince McMahon leaves money on the table; at worst, WWE is in an unsustainable process of attrition that eventually even drains its TV fees.

In the report I published January 27, I argued that Vince’s role as head of creative is the cause of most declining KPIs. His performance indirectly created the AEW opportunity. Levesque replacing McMahon as head of creative would benefit shareholders long-term.

[T]he continued services of McMahon as WWE’s head of creative is an ongoing problem that adversely affects WWE’s ability to create popular characters and creative storylines, which adversely affects WWE’s operating results and has resulted in the emergence of WWE’s strongest direct competitor in many years. Adverse trends, which I don’t believe can be fully excused by external factors, have been shown in this report. Nor is the problem quite a matter of waiting for the audience to accept a “generational transition” of stars, as Co-President George Barrios stated in a recent interview. The problem is more simply that the main product the company produces has long been of disappointing quality and consumers are turning away from it. There’s no correction in sight. The root cause is the will of the CEO, who is apparently insulated from feedback sufficient to correct the problem.

McMahon may possess experience, industry credibility and business relationships that provide a unique benefit to the company, but his work as head of creative undermines company interests, and there are reasonable alternative candidates for the position.

NXT is WWE’s overachieving developmental brand. Its creative direction is delegated to McMahon’s son-in-law, EVP Paul Levesque. McMahon takes little or no control over the production. NXT’s performance is, within WWE, a counterexample supporting the notion that McMahon’s creative vision is ineffective and that Levesque would be a qualified and more capable head of creative, to the benefit of WWE’s operating results.

On Feb 5, Lightshed published an article where, among other topics, they pondered whether Levesque should replace VKM as head of creative. Lightshed is a research firm that covers WWE stock and participates in earnings calls.

While Paul Heyman continues to write Raw, Eric Bischoff was fired after only four months, suggesting that the moves were more symbolic than impactful. Is it time for a reshuffling of WWE’s creative team that ultimately removes Vince as the final voice? And, if so, should Paul “Triple H” Levesque, who currently runs WWE’s NXT brand, be installed as the Head of Creative? Under Levesque’s leadership, NXT has evolved from a true developmental territory into a fully-fledged third brand. He has long been known as Vince’s protégé, having sat in on creative meetings dating back to the early 2000s. Is it time that he oversees the flagship products?

Other than that I’m not aware of much understanding in the investment community about what’s behind WWE’s popularity decline. Many analysts look to the external media world they’re more familiar with: more entertainment choices, media fragmentation, maybe the inverse increased popularity of MMA makes wrestling uncool.

To be concise: the packaging is great, they can give you an amazing factory tour, but the product in the box is bad. Investors understand how the business makes its money, but don’t know how to evaluate the quality of the product; indeed, they probably rarely sample it.

Anyway, when the world returns to normal and there’s another NXT media call, media should give Levesque the opportunity to clarify what the changes are to his responsibilities. Levesque joked on a recent episode of Smackdown about being demoted. It’s unclear if he was mocking the Observer report or confirming it.

When there’s another earnings call, possibly after learning about the product, analysts may want to ask: Why does some WWE talent seem so eager to leave the company? Why is Vince having trouble developing new stars and what he’s going to do about it?

And if these issues are downplayed, then is there a strategy to turnaround the trajectory of direct-to-consumer revenue that’s now in year-over-year decline?