How will WWE’s Thunderdome production affect the company’s financial outlook?
WWE’s new “Thunderdome” production, which debuted Friday, is the company’s latest response to slumping ratings of Raw and Smackdown. Those two programs, highly valued by NBCUniversal and Fox, respectively, have been challenged for at least a few years, but have been especially hit since the pandemic forced the company to stop running at major arenas before thousands of fans.
From mid-March to mid-August, all of WWE’s in-ring content has been taped at its Performance Center training facility in Orlando. This made TV production much less expensive, while not affecting guaranteed revenues related to contractual escalating rights fees. In the short-term, taping out of the Performance Center increased WWE’s profits.
The TV program is hurt by the lack of a live audience, and that is a component of declining viewership. There were several questions to executives about ratings on the Q2 call on July 30. After providing a number of reasons why viewership and other consumer metrics were in decline pre-pandemic, CEO Vince McMahon’s latest explanation is that it’s because there are no fans in attendance.
Moving out of the Performance Center and into Orlando’s major sports arena, the Amway Center, and working with The Famous Group to create the “Thunderdome” production, will be more expensive. WWE is reportedly paying just $450,000 for 60 days of residency at the Amway Center, but the production costs associated with the “Thunderdome” are probably far higher.
I don’t have a strong sense for what the specific production cost and compensation to The Famous Group will be. I could see the expense being somewhat less than, similar to, or somewhat greater than the normal costs of WWE’s production at an arena. Due to this, I am modeling in an operating expense on WWE’s Core Content and Network lines at a slightly increased rate relative to what I estimate were the operating expenses for those segments in the period immediately before Covid took production out of arenas.
This results in a significantly less profitable 2020 than previously estimated, but my estimated net income for the full year remains within the range of the company’s current inflation-adjusted annual net income record, set in 2018 ($99.6 million).
This estimate assumes there will be no ticketed live events for the remainder of the year, and there will be no second lucrative event in Saudi Arabia.
My current estimate of $100 million in net income for full year 2020, implies earnings per share (EPS) of $1.15 for the year, and an EPS of $0.15 for Q3, and $0.20 for Q4.
These estimates are considerably lower than current analyst estimates. Among 11 analysts, the mean EPS estimate for the year is $1.61, with a low of $1.32. The low EPS analyst estimate for Q3 is $0.19 and $0.20 for Q4. However it appears there hasn’t been a new analyst estimate since July 31, well before WWE’s “Thunderdome” announcement on Monday.
Vince McMahon’s problem is Vince McMahon
WWE has effectively been able to improve television viewership for a week or two with concepts like Raw 25, Smackdown 1000, Raw Reunion, Smackdown’s hyped debut on Fox, and the recent introduction of new concepts “Raw Underground” and the “Thunderdome”.
What WWE hasn’t been able to do is cause any long-lasting improvement to viewership. While Raw and Smackdown remain highly ranked and are the main source of growing revenue for the company, their ratings continue to predictably decline. Smackdown’s viewership is already showing year-over-year declines, despite not yet being through its first full year on Fox, after its move from USA Network in October 2019. Raw doesn’t have the external benefit of having been moved to Fox. It’s lived on the USA Network on Monday nights for many years. Raw is in its 28th consecutive month of year-over-year decline in P2+ and P18-49, as of August.
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Friday’s Smackdown, with the first use of the new production set, coincided with the program’s best viewership in months. I believe this is a result of short-term curiosity. Monday’s Raw may benefit as well, but I expect viewership will revert to its usual pattern within a few weeks.
McMahon’s latest answer, that Raw and Smackdown are hindered by the lack of live crowd, and they’ll turnaround once they get fans back doesn’t hold up to scrutiny.
No amount of special effects or reunion programs address the underlying problem which is WWE’s current creative system, under the leadership of McMahon, cannot create stars or any other sort of interest that will result in a long-term increase in consumer interest.
Before Covid, live event ticket and consumer product sales were in decline. WWE Network subscribers, which are showing signs of stabilizing during Covid, saw year-over-year declines throughout 2019.
WWE’s third brand NXT and new competitor All Elite Wrestling entered the major cable picture last fall. They, along with Raw and Smackdown saw their viewership decline following Covid affecting events beginning in mid-March. But since, NXT and AEW have made a comeback while Raw and Smackdown have not. The key difference there is Vince McMahon. McMahon is the head of creative for the company’s main roster Raw and Smackdown brands, which has been the case for decades. NXT’s creative leadership is delegated to McMahon’s son-in-law, EVP Paul Levesque. AEW is a competing business, headed by Tony Khan.
Before Covid, McMahon claimed engagement including viewership would turnaround after certain talent returned from injury. After talent returned from injury and there was no turnaround, McMahon said there’d be a turnaround after new stars were developed on Raw and Smackdown. McMahon created new executive director positions for each brand in June 2019. Those positions have already fully turned over and been consolidated. Smackdown director Eric Bischoff barely lasted a few months before being fired. Paul Heyman almost lasted a year as director of Raw. The two positions have been merged into one under long-time aide Bruce Prichard. Throughout, the overall vision and the main brand’s inability to develop stars hasn’t changed.
We have a 30-plus year track record of creating compelling characters and engaging a variety of audiences, and we obviously remain confident we can continue that with our collective ability, even in the most challenging environments with no live audience.
WWE CEO & Chairman Vince McMahon, WWE Annual Shareholders’ Meeting (7/16/2020)
Executives’ current talking point in response to questions about star development is that the company has a 35-year track record of creating compelling characters and storylines. That claim is undermined by the company’s failure to create a star who boosted long-term economics for the last 15 years.
Creative leadership seems to have gradually lost its understanding of its consumer base over the last two decades. Rather than realize and address that issue, it’s evident there’s a culture of denial about this within the company.
Until WWE, or really McMahon himself, shows a willingness to reckon with the possibility that the core of WWE’s problems with declining interest lies with the CEO’s performance as head of creative, there’s no reason to expect any internal cause of long-term improvement to consumer metrics — TV ratings or otherwise.
WWE is fortunate it finds itself in a media market where the value of live content like its in-ring programming has exploded. There are opportunities to continue to grow its content value despite these issues. New President and Chief Revenue Officer Nick Khan will likely be tasked with selling the company’s pay-per-view events, currently offered via the direct-to-consumer WWE Network streaming service, to major streaming players. Market circumstances insulate the company from larger financial hardship, but also removes the economic pressure that might be cause for introspection needed to deliver more value to shareholders.
More concerning for the next few years, WWE is on a trajectory where the viewership margin the company’s flagship shows have over rival AEW’s “Dynamite” program is shrinking.
AEW’s TV deal with WarnerMedia expires at the end of 2023, with an option for WarnerMedia to extend through 2024. If the option is picked up, then negotiations for AEW programming and WWE’s Raw and Smackdown will happen around the same time, in mid-2023.
By that point WWE and AEW ratings may be even more comparable than they are now, which could either jeopardize WWE’s content value or may result in the two companies bringing in a similar amount of revenue per hour from the U.S. TV market, and thus contributing to a more competitive environment for WWE, which has been largely unrivaled in the wrestling market since 2001.
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