Q4 2020 Estimate: WWE will double its annual net income from 2019

Expect WWE to shatter its annual profit records when the company reports Q4 and full year 2020 results sometime around early February or late January.

Despite a global pandemic that interrupted live events and despite diminished interest in the company’s flagship brands, contractually escalating fees for Raw and Smackdown continue to drive WWE’s finances to heights that outperform its more popular eras.

The external positive impact of TV networks’ need for highly viewed live programming obscures any external negative effects from Covid. Wider media economics too obscure any internal issues, like WWE’s descending CEO-led creative execution of the very core content that’s largely driving revenue growth while turning fans away.

Net income for 2020 I’m estimating at $162 million, breaking the record set in 2018 ($99.6 million) and more than doubling 2019’s result ($77.1 million).

Revenue I expect to be about $997 million, breaking last year’s record of $960 million.

Media revenue and expenses

Expect a sizeable increase in payments for Raw and Smackdown. WWE’s U.S. deals entered Year 2 in October. I’m assuming those deals are due for 10% increase in accordance with contracts that guarantee annual raises in payments. NXT is also entered Year 2 on the USA Network, which may result in a 10% for those fees also.

Media operating expenses will be higher due to the lack of production incentives relative to Q3 and expenses related to a full quarter with Thunderdome and Capital Center production costs.

WWE guided that there would be increased expenses in Q4, largely due to a full quarter of Thunderdome and Capital Center production expenses, and the lack of production incentives present in Q3.

“[M]anagement anticipates $40 million to $45 million in incremental fourth quarter expenses (4Q20 vs. 3Q20) due to $18 million in production incentives (recognized in the third quarter) and due to $22 – $27 million in ongoing incremental production expenses associated with the creation of the WWE Thunderdome and incremental personnel expenses associated with employees returning from furlough, both of which are expected to continue in the coming year.”

WWE earnings press release, 10/29/2020

Therefore I modeled an additional $42.5 million in total expenses for Q4 from Q3 to account for these incremental costs, and bringing Q4 media operating expenses to $118.8 million.

I’m modeling WWE Network paid subscribers for the quarter up (+6%) from Q4 2019 (1,419,000), at 1,506,000. After declines throughout 2019, subs have rebounded in late Q2 and throughout Q3. Consumer interest in streaming video subscriptions seem strengthened generally, coinciding with Covid. And viewership of Raw and Smackdown have stabilized since the summer, possibly reflecting enduring interest in WWE overall.

WWE Q4 and full year 2020 estimate table

Longer-term outlook: 2021 and 2022 estimates

Guaranteed escalating rights fees for Raw and Smackdown should keep the company increasingly profitable for at least the next few years.

I believe fees from NBCU and Fox make-up as much as 80% of the Core Content Rights Fees line.

A full estimated breakdown of rights fees for each major market (and within each program for U.S. fees) with estimates on escalators is here, for patrons only.

PPV rights: How do you sell a product with a warped price point?

The biggest unsettled question for company outlook is whether WWE can sell rights for its pay-per-view events, which are currently primarily consumed on the WWE Network.

The WWE Network did not live up to its ambitious subscriber projections of 3 to 4 million subscribers, which would have made the opportunity cost associated with cannibalizing the traditional pay-per-view model, among other revenue sources, well worth it.

The termination of WWE’s co-presidents George Barrios and Michelle Wilson in January seemed to be the result of a conclusion reached by CEO Vince McMahon, that the Network, which launched in February 2014, had its chance and didn’t work out as hoped. Vince seems to think the best to continue to grow revenue associated with the Network content is to sell some portion of that content, principally the monthly pay-per-view events, for guaranteed rights fees to a major streaming player or other distributor.

Vince hinted in February this year that such a deal would be done by as early as March 31, but then Covid hit. It seems possible WWE was close to reaching a deal with a service like ESPN+ until the pandemic threw the business companies like Disney into uncertainty. There have been no further hints of a deal. Leading streaming players to take the PPVs seem to ESPN+, NBCU’s Peacock, and possibly Amazon Prime.

Maybe a major streaming service isn’t the best potential home for WWE PPVs

One of the major obstacles of such a deal is it’s not obvious to me how a streaming player should offer the PPV events to consumers. PPV events have been provided to fans for well below value for almost seven years. On traditional PPV, WWE events were (and still are) sold for $59.99 (or more for Wrestlemania). WWE Network subscribers have been watching PPV events on the service for a $9.99 monthly fee — all while getting access to a lot of other new content and much of the company’s huge video library.

A streaming player who acquires rights to these monthly peak events (where WWE storylines are meant to culminate), acquires a product that had its price point suddenly cut by one-sixth in 2014.

Should PPV events be offered via a monthly subscription fee, as they are currently with WWE Network? If so, at what price point? Keep in mind WWE is signaling they’ll continue to operate the WWE Network if or when PPV rights are sold. Many WWE Network subscribers might cancel if PPVs are taken away from the service but it’s not like WWE fans will necessarily have free WWE-allocated cash to spend.

Or should PPV events be sold a la carte, like ESPN+ currently sells UFC PPV events, for as much as $60 again? That may be the best way to monetize Wrestlemania. I could see fans being willing, however reluctantly, to go through a lot of friction and to part with more cash in exchange for the one annual super event.

For the whole calendar of events, I’m not sure. Consuming WWE PPVs on a different streaming service for an additional charge to the WWE fan while WWE continues to market the Network to its base is a scenario rife with friction, expense, and confusion for the consumer.

The best move for all involved may be to go for a strategy that takes PPVs off of streaming platforms entirely. We’re in the era where the premium on live sports lives primarily on linear TV. Maybe the way to go is to broadcast most of the monthly PPVs on a high-reach broadcast or cable network, then sell Wrestlemania a la carte — and maybe the second-most popular event Royal Rumble, maybe the third, Summerslam — at an individual higher price point exclusively via a streaming platform owned by the rights holder.

An example of such a scenario would be NBCU buying rights, airing monthly PPV events live on NBC or USA Network (or any of its universe of channels), and selling the biggest one to three events via streaming PPV, either through Peacock or not. You can imagine similar fits for ESPN and Fox.

Such an outcome would put most PPV airings on an outlet many fans already have access to, taking some of the stress off of the end-consumer. PPVs happen almost completely on Sunday nights. They would probably be a welcome addition, providing a large and young audience, to one of the weaker nights on a network’s lineup.

Estimates for 2021 and beyond do not have model into them any additional revenue related to a sale of PPV/Network content right. Given the uncertainties discussed, a deal does not seem imminent, nor is the value of such a sale clear right now.

Will WWE run live events in 2021?

Live events generally are not very profitable for WWE. Major events, though, most prominently, Wrestlemania are very lucrative for the company. With stadium capacity, venue merchandise sales, and other in-town arena events on surrounding days, a Wrestlemania weekend likely drives more than $20 million in revenue for WWE. The company missed out on that completely this year due to Covid.

Even in light of hopes of a vaccine, I would not expect WWE to return to normal live events before late 2021, at the earliest.

WWE may be hoping to hold some of its major events like Royal Rumble and Wrestlemania in 2021 with some kind of limited capacity. It seems possible WWE may generate some ticket and venue merchandise revenue as a result.

All Elite Wrestling drew 850 paying fans, paying $60,000 to its latest pay-per-view event this month, according to the Wrestling Observer Newsletter. AEW draws smaller paying audiences for its regular tapings. If AEW can manage that, one would think WWE should be able to, especially if they can secure an outdoor venue.

Knowing the situation with regard to events and Covid is fluid, I modeled just one Saudi Arabia event for the 2021 estimate. Normally there are two of those events per year, generating payments of about $50 million for each visit.

Disclaimer/disclosure: I have no positions in World Wrestling Entertainment, Inc. (NYSE:WWE), and no plans to initiate any positions. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from supporters via Patreon). This article does not constitute investment advice and should not be construed as investment research.