The third quarter for FY 2015 for WWE just ended, however, the quarterly results announcement won’t be held until late October (Google Finance guesses October 28, Yahoo Finance just puts the date somewhere between 10/28 and 11/2).

So, what can be said about Q3?

For one thing, on Monday morning, the WWE posted updated KPIs (Key Performance Indicators). The latest data goes through 8/31/15.

What’s in there?

No update on the WWE Network subscriber numbers

WWE steadfastly only wants to report that metric each quarter. (This is something that I would love to see some investors pressure the company on. They already report PPV buys each month. Yet, I completely understand WWE’s reluctance since they’ve placed such a heavy weight number of paid subs as the sole determinant of the financial health of the company.)

Reports of the death of Pay-per-view have been greatly exaggerated

Q3’15 PPV buys seem likely to surpass Q3’14 PPV buys. Last quarter, WWE earned $3.5 million in PPV revenue off of 263,600 buys. With just July/August in the books and not including September’s Night of Champions event, WWE already has 279,000 buys. Oddly though, the buys for both Battleground and SummerSlam in the KPI chart on page 4 seem lower in 2015 than 2014 yet total buys for Q3’15 is higher. Weird. I suspect that strong main events such as SummerSlam with Brock Lesnar and The Undertaker along with NOC with the return of Sting against Seth Rollins should help on the total PPV revenue for Q3. Overall in 2015 I believe that PPV will probably generate almost $20 million. For a revenue stream that originally expected to go to zero, that’s quite a life-after-predicted-death.

We’re getting closer to the “new normal” for Home Entertainment

Last year was the step change for WWE’s Home Entertainment division. In 2013, WWE shipped nearly four million units and generated $24M in revenue with $9M in OIBDA for their Home Entertainment division. In 2014, unit shipments fell by a third to 2.7 million. Ouch. Interestingly, revenue didn’t tumble nearly as much due to a big Q1’14 payment (business jargon alert: “increased sell through rates at retail and the recognition of a $2.5 million minimum guarantee from our home video distribution and a $2.2 million adjustment for higher current sell-through rates than anticipated for our fourth quarter 2013 releases“). What’s changed?

In 2015, WWE switched to Warner Bros Home Entertainment for distribution. It’s a less acrimonious deal than how things ended with Cinedigm (where the CEO was publicly trashing WWE in their conference calls by end.) The recent average over the past year has been about a half a million units shipped each quarter. We don’t know exactly how the rest of 2015 will play out with new WB deal, but I’d guess that WWE will probably book between $16M and $19M in Home Entertainment revenue for the year. It’s a small piece of the empire compared to juggernauts like the Live Event and WWE Network revenue streams, but still a profitable business. Also, the Home Entertainment deal is a key ingredient for maintaining a fruitful relationship with the kid-friendly WB properties such as Scooby Doo and the Flintstones

WWE Digital Media footprint continues to grow

While the division hasn’t been generating blockbuster revenue (only about $4M per quarter – and keep in mind that older figures include the now defunct Magazine Publishing business), Social Media dominance remains WWE’s favorite talking point. One important takeaway from Q2’s conference call was that WWE will participate in the ad-supported video test on Facebook. For the company who believes they’re heeding the “clarion call” to own the online space, this is an important development. Still, in the wake of WWE’s declining television rating, is there any evidence that their increased social media presence will ever be monetized in a meaningful way – such as will it translate to more WWE Network subscriptions, more WWE merchandise sales or more WWE superstar endorsement deals? Time will tell. Barrios told investors at the Needham Interconnect Conference in August that he saw Digital the way the company viewed Cable television in the 1980s – it was a neglected space that would eventually reap enormous rewards as it connected their audience with their product and grew to become a huge revenue stream. WWE can make hashtags trend and knows how to garner a lot of YouTube views. No one is contesting that.

North American Live Attendance is slightly up

For July and August 2015, WWE averaged 5,500 fans per North American live event compared to only 5,100 fans per NA live event in Q3’2014. Overall, it looks like live attendance is flat to slightly up (when you remove WrestleMania distortion from the mix). Still, the enormously successful weekend at the Barclay’s Center in Brooklyn led one writer to proclaim it’s currently a “high point of mainstream acceptance and popularity“. What’s more interesting is how WWE has managed to squeeze more revenue per person out in the live event segment. Meanwhile, September, which isn’t part of this data set, wasn’t a great month for WWE live events.

Overall, I consider it a good sign that WWE has found new ways to generate more revenue and more profit for the company. This includes more “luxury” travel packages and fan experiences.

Before the Attitude era, there was a swell in domestic attendance which preceded the growth in PPV buys/event. I think this is an important trend. With the over-the-top WWE Network model, the company is trying to hook subscribers for an entire year (or at least majority of the year). It’s unclear how quickly WWE can ween their fans away from the come for WrestleMania & go away for Football mindset. Certainly, Churn remains high (284k in Q1’15, 508k in Q2’15). There’s still significant progress left to make on this topic.

While the drop in WWE ratings hasn’t yet correlated with a huge drop in WWE Network subscriptions (that we know of), I believe that a growth in average North American live event attendance would correlate with growth in WWE Network subscriptions. Attendance, best that I can tell, is essentially flat. When it starts trending upwards significantly, I’d grow more optimistic on the ability of the WWE Network to break past the 1.5 million paid subscribers level for a non-WrestleMania quarter.

What’s going to happen with the WWE Network subscriber number?

One of the most surprising comments in the Q2’15 results was WWE providing an estimate for where Q3’15 would end in terms of WWE Network subscriptions. The company projected that “for the third quarter 2015, the Company expects ending paid network subscribers of approximately 1.2 million“. That was highly unusual (though welcomed by investors) for the WWE to give guidance on the number of paid WWE Network subscribers as of 9/30/15 since we were a full 60 days prior to the end of the quarter (this was all prior to SummerSlam). With hindsight, one can assume that knowing that PPV plans involved matches with Brock Lesnar, the Undertaker and Sting. I’m sure that star power allowed WWE to feel more confident in making this projection.

So, the logical question is: do we have any information that would lead us to anticipate whether the actual WWE Network number will be higher or lower than the 1,200,000 guidance?

Let’s start with WWE Network clearance worldwide.

In July, the company rolled out the service in two new markets (Italy, Malaysia). While this reduces the number of outstanding WWE Network-less countries to a select few (Germany, Japan, India, China, Thailand), these two additions are unlikely (in my opinion) to have any material impact on generating new subscribers for Q3’15.

  • Germany remains the largest opportunity. (Some hate to hear it, but I still believe that a large portion of the hardcore German fanbase is already accessing the WWE Network service using work-arounds).
  • In the long run, China is certainyl the greatest opportunity but it’s also the absolute toughest nut to crack. I have very low confidence that WWE will be making progress on that front in the next 18 months.
  • Japan is probably the greatest false-positive as it’s questionable whether the WWE Network would really be highly consumed in that culture. There are certainly some learnings for WWE from NJ World’s experience, but historically PPV was not a major factor in the Japanese media market.
  • The revenue that WWE is receiving from new India TV deals (rumored through 2019) makes it unlikely that WWE will want to rush WWE Network roll-out if it may endanger the relationship they have with the major media players. Furthermore, the unique characteristics of the Indian marketplace have already pushed other online content providers (such as YouTube) to pursue alternative distribution methods (Mobile download VOD, for instance) in that country.
  • Lastly, WWE is actually suing their broadcast partner in Thailand (CTH) over non-payment of television rights. While this may actually encourage WWE to launch the OTT service in Thailand sooner (since angering their international partner is a lesser concern), undoubtedly the company is most concerned with outstanding $4M in TV rights fees they are already owed. In short, it doesn’t seem like international expansions should be having a large effect on the WWE in Q3. If they announce plans for Germany (or India or China), that would be a meaningful target for Q4, but I haven’t heard any rumbling of that at this time.

How much does the declining WWE Raw and Smackdown ratings hurt the company’s ability to grow WWE Network subscriptions?

I certainly believe that ratings are a barometer of interest in the WWE’s premium content. If you consider the function of WWE Network to be centered around delivering premium WWE content (i.e. what were the monthly pay-per-views), then declining ratings are not a good sign. Furthermore, I think of Raw and SmackDown as the gateways to funneling new fans into investing (both emotionally and monetarily) in the WWE product. If you have fewer people coming in, there’s less conversions happening downstream. When Raw is at risk of slipping below three million viewers, that means even less households are watching (recall – WWE Network subscriptions are driven by unique broadband households). It’s still not a good sign.

Yet, when we look at WWE Network subscriber levels during second half of last year, what happened? There was a general malaise from July 2014 through December 2014 where the overall paid WWE Network inched up (helped by the international roll-out in August 2015) but lacked any explosive growth. It appears the general model is acquire lots of subscribers from January to April, retain as much as you can, slowly convert free trials into new users for the remainder of the year. It makes sense that WWE predicted they were barely grow from end of Q2’15 to end of Q3’15. Last year taught us that. Does a more-severe-than-expected ratings decline mean that WWE Network subscribership is eroding faster than expected? We all wish we knew. My gut still says no. It just suggests (to me) that it’s folly to expect better-than-expected growth of ending Q3 around 1.2M paid WWE Network subscribers.

Who is left to convert? Excluding the already discussed untapped international markets, who is left for WWE to convert from WWE fan to paid WWE Network subscriber? WWE’s own demographics (from their most recent investor presentation) notes that more than a third of their audience is over the age of fifty and 3/5th of the audience is over the age of 35. It seems rational to believe that the earlier adopters for over-the-top technology were younger consumers, though the marketplace for OTT-acceptance among older folks has been growing by leaps and bounds each year.

WWE has been investing a lot of time into reaching out to fans via consumer surveys. Have they cracked the formula of what’s keeping some people from shelling out $9.99 each month? Do they want more library/archival footage? Is it all about the new content? Are they frustrated that Hulu provides same-week access to Raw while the WWE Network is weeks and weeks behind? (Tangential point – why does WWE receive so little revenue from Hulu in their Digital Media segment when these rights are clearly worth so much? Is it just part of the bundled TV Rights fees they’re getting from NBCU which is a partial owner of Hulu?)

Lastly, I’ve harped on this point before but I still wonder – who is in charge of the WWE Network? I know that George Barrios is the Chief Financial Officer and the Chief Strategy Officer. I know that Michelle Wilson is the Chief Revenue Officer and the Chief Marketing Officer. I know that Stephanie McMahon is the Chief Brand Officer and Paul Levesque is EVP of Talent, Live Events and Creative. I know that Vince McMahon is the Chairman and CEO of WWE (along with still playing an enormous role in directing the WWE creative process). What I don’t know is who is in charge of shaping the vision, direction, strategy, content of the WWE Network. I especially wonder if the person or people responsible for the WWE Network have extensive online streaming service backgrounds.

They’ve run through a gamut of people from Perkins Miller (EVP Digital Media, left in in April 2014 for the NFL), Matthew Singerman (EVP Programming for WWE Network, left in May 2014), Lou Schwartz (WWE Chief Digital Officer, left in August 2015) and Lisa Fox Lee (EVP Content, promoted in January 2015 and allegedly fired in July 2015). Considering that WWE considers, “Rate of WWE Network subscriber adoption is a critical determinant of the Company’s projected future financial performance”, it always feels strange that there’s a lack of strong visibility into who is leading this project (specific credentials) and the high-turnover that’s been associated with top management positions.

Meanwhile, TV rights are going to grow. Along with the increased domestic & international deals for Raw and Smackdown, WWE will be receiving revenue for Total Divas and USA’s Tough Enough. It will be a significant quarter the company in the TV Rights fees column. Last year, TV rights were about $177M. WWE will be well north of $210M in FY2015.

WWE’s legal battles continue. The company has been quite successful at consolidating all of the concussion lawsuits into a single Connecticut case (from Texas, Oregon, California, New Jersey) and even putting Konstantine Kyros on the defensive (that he’s not supposed to venue shop and can’t use unnamed John Does). There hasn’t been much movement in the Shareholder lawsuit though WWE had quite a victory by blowing up the confidential witness #1 Brian Maddox testimony. It will be interesting to hear if there is progress in either the patent troll cases or the unpaid international television rights bills. I still believe that WWE won’t move away from the stated 3M to 4M goal of annual steady WWE Network subscribership until they resolve the TV Rights/Shareholder lawsuit.

As for the stock price, I can’t say. It goes up. It goes down. People seem to really struggle to understand the company so they tend to over-react to information. I guess it’s mistimed enthusiasm combined with blind optimism.

WWE is doing some things right – building NXT as a viable touring model for instance.

Lastly, I also think the Q2 announcement that WWE would be introducing “a three-month subscription card at retail, enabling a ‘no credit card required’ payment option” is a great decision. Understanding how historically, WWE fans have skewed lower-income, it’s crucial to provide an avenue for people who might not have clear access to credit cards or checking accounts to become paying WWE Network subscribers.

Your thoughts? Comments? Concerns? Quandaries? Email Chris or tweet me at @mookieghana.