The mystery of WWE NXT’s rights fees on USA Network

I don’t believe there’s any reliable public report on the average annual value (AAV) for WWE NXT on the USA Network.

There are specific credible reports on the AAV of WWE Raw ($265 million), WWE Smackdown ($205 million), and AEW Dynamite ($43.5 million).

But for NXT, reports and estimates are all over the place:

I believe the MKM and JPMorgan numbers are estimates modeled by stock analysts, and not based on human sourcing. Those firms’ estimates might be based on revenue per viewer hour rates of Raw and Smackdown, and consider estimates of what NXT might deliver, based on the 2017 one-off 7pm airing on USA.

I don’t endorse these results, but you can see here how such estimates might’ve played out, allowing analysts to surmise NXT was getting as much as $50 million or $70 million AAV:

P18-49 viewership numbers are estimates based on actual P18-49 rating (from Showbuzzdaily) multiplied by 1295.

I believe the Observer report is based on human sourcing, but it’s not clear whether the information was from someone with direct knowledge.

However, the Observer’s valuation ($30 million to $50 million) does overlap with the Guggenheim estimate (about $30 million), which is also apparently based on a human source.

Guggenheim analyst Curry Baker wrote in a related stock analysis: “After speaking with [WWE], we believe that the NXT deal struck with USA is for one or two years at ~$30 million a year.”

If WWE was getting a great deal — of say, $50 million annually or more — from USA for NXT, one would think that fact would be celebrated in the following earnings report. But there was no such bragging in the Q3 2019 report.

To make things more opaque, the timing of WWE’s new deals for Raw and Smackdown makes it impossible to make a meaningful estimate based on the company’s revenue reporting. The increase in rights fees for the flagship shows went into effect in the same first full quarter that NXT appeared on USA Network (Q4 2019), so it’s not clear what a “normal” quarter would look like without NXT money for the “core content rights fees” line, within which all domestic and international rights fees for the three programs are reported.

However, it’s not clear the NXT deal is so valuable that it’s actually a profit contributor.

WWE co-president George Barrios (before his termination) was asked on the earnings call on October 31, 2019 if NXT (which debuted on USA the month prior) was now an EBITDA contributor. He declined to answer and deflected to emphasizing the long-term opportunity of monetizing NXT.

From WWE’s earnings call, 10/31/2019:
Ben Swinburne — Morgan Stanley — Analyst
Okay. And I don’t know if you’ll answer this but is NXT a material — a contributor to EBITDA? Or a material contributor to EBITDA? A material impact to EBITDA, in the fourth quarter, either good or bad?
George A. Barrios — Co-President and Director
Yeah, we haven’t talked about the economics of NXT. I think if you remember the release when we announced it, we said that we were doing this for the long term.

The relevant statement in the August 20, 2019 press release Barrios referenced is a quote attributed to Chairman and CEO Vince McMahon.

“The move to USA Network provides an opportunity to deepen our relationship with NBCUniversal and further build the NXT brand,” said Vince McMahon, WWE Chairman & CEO. “Over the long term our goal is to develop a following that can be monetized to the same level as our flagship programs, Raw and SmackDown.”

Again, one would think if the NXT deal were on the upper end of some analysts’ estimates, the company would be showing more pride when asked and wouldn’t so emphasize the long-term opportunity.

It’s possible NXT could be getting as much as $30 million a year while not being a profit contributor, depending on the cost of production. I believe the pre-Covid cost to produce one live Raw or Smackdown was about $1 million. It seems reasonable to imagine a pre-Covid live NXT with its smaller set and regular venue at Full Sail University would cost substantially less. If the weekly cost of a live NXT was as much as $600,000, the annual cost comes to just over $30 million. If so, that would explain Barrios’ unwillingness to affirm NXT’s contribution to EBITDA. Still, I lean toward thinking the notion of $600,000 in weekly production costs for NXT is higher than the reality.

To consider the value of the NXT deal, let’s think too about what motivated the decision to move NXT from being a one-hour program (usually taped in advance in four-episode sessions) exclusive to the WWE Network to being a two-hour program airing live each week on USA.

I believe there was an urgent desire from WWE and NBCUniversal to protect the value of Raw by directly competing with AEW head-to-head on Wednesday. Despite public comments from EVP Paul Levesque that he’s not that concerned with the competition, I believe that’s the largest motivating factor behind the move. That compulsion to go head-to-head with the strongest wrestling competition in 20 years is probably a greater motivator than any short-term monetary compensation.

Indeed, competing with AEW is apparently an issue NBCUniversal is interested in as well. When AEW was preempted from its normal timeslot in September, replays of the most recent NXT episode were suddenly scheduled on Syfy (another NBCU channel), ensuring Dynamite was still opposed head-to-head by NXT in some form.

Why would NBCU care so much?

Raw is USA Network’s most-viewed show. It delivers weekly live first-run three-hour episodes 52 weeks a year. Depending on how you define it, Raw is arguably the most-watched weekly show in the key P18-49 demographic that’s airing year-round anywhere on cable. Really only NBA, NFL, and college football do better consistently, and none of those air year-round.

Raw is a strong enough show that it’s probably associated with specific guarantees called “covenants” within the agreements for transmission fees between NBCUniversal and cable/satellite providers. In other words, Raw is specifically justifying a portion of USA Network’s largest source of revenue, transmission fees. If Raw were to suddenly stop airing on USA, cable providers could go back to NBCU to renegotiate terms. If WWE has a strong wrestling competitor in the media ecosystem, it may make it harder for NBCU to sell those covenants to cable providers at a high price. In sum, the success of AEW may threaten a portion of USA Network’s revenue from transmission fees, and if Raw isn’t driving transmission fees as strongly, then that threatens NBCU’s willingness to contribute highly to WWE’s biggest revenue source, its TV rights fees.

Considering these motivating factors and the inconsistency of the various aforementioned reports and estimates, I don’t have confidence in any particular number on NXT’s compensation. Further, it does seem within the realm of possibility the number is well below $30 million.

That said, there is a long-term opportunity for NXT to be monetized at $50 million to $60 million per year, based on the current revenue per viewer hour compensation of Raw and Smackdown, and the increasing demand for live content on pay TV. NXT’s terms could be renegotiated sooner than later, since, if the agreement with USA was for two years, the deal will be expiring around September 2021.

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