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MR. TITO STRIKES BACK - Did WWE Kill Its Pay Per View Market & Make It Worse with WWE Network?
By Mr. Tito
Jul 14, 2014 - 11:59:58 PM
On January 8th, 2014, the WWE Corporation revealed the final version of the WWE Network and its official launch date. With Triple H, Stephanie McMahon, Shawn Michaels, and Steve Austin on hand, the WWE proudly displayed the new streaming network that would allow fans for only $9.99 per month to allow them to watch every WWE Pay Per View including Wrestlemania. Not only that, the WWE was going to offer original content (NXT, Legends House) and have every WWE/WCW/ECW Pay Per View to watch on-demand. What a great deal, right?
Based on the WWE's declining Pay Per View numbers, besides Wrestlemania, the assumption was made that the Pay Per View market was "dying" as was Cable/Satellite television. If the WWE were to modernize, they would have to create the "Netflix of Wrestling" to tap into many younger fans who were not subscribing to Cable/Satellite services and also streaming WWE Pay Per Views illegally. It sounded great on paper... In fact, many investors bought the hype of WWE "modernizing" and helped push the WWE stock from around $10 per share to slightly above $30 per share. Once investors saw the early WWE Network numbers (667,000, short of the 1,000,000 expectation) and the less-than-expected NBC/Universal deal, lots of shares were unloaded and the WWE stock returned to normal.
As you'll see in today's "Economics of Wrestling" column, the WWE may have killed its own Pay Per View market and not the Pay Per View market becoming obsolete. I am going to argue that the WWE, in addition to struggling to provide fans with quality Pay Per View entertainment, destroyed its Pay Per View cash cow through price hikes. WWE failed to understand the Law of Demand and simple economics when it came to pricing their top monthly shows. Furthermore, the WWE failed to understand how responsive fans were to changes in their prices. Not only was the demand not there to absorb higher prices, but the data shows that WWE fans are very price sensitive.
Before I begin to make my points about WWE Pay Per Views, I would like to briefly explain the Law of Demand in Economics. If you take any introductory Economics class, this should be about the 3rd or 4th chapter. The "Law of Demand" simply states that PRICE and QUANTITY DEMANDED have an inverse, negative, or indirect relationship. What does that mean? Price (P) and Quantity Demanded (Qd) are variables that move in the OPPOSITE directions. In other words, if Tito's Grocery Store increases its prices (P), you, as the consumer, will react by decreasing the quantity of goods purchased there (Qd) because you cannot afford to buy as much as you could before. However, if Tito's Grocery Store has a SALE by reducing prices (P) on many goods, you are able to stretch your income further and thus you'll increase your purchases at my store (Qd). Simply put:
(a) If Prices go up, Quantity Demanded goes down.
(b) If Prices go down, Quantity Demanded goes up.
It's common sense. The PRICE helps determine whether you buy more or less in a store. It would take OTHER factors, which most Economists hold constant (Income, # of Consumers, Tastes/Preferences, Expectations, etc.) that could cause a consumer to be willing to pay more or less for a good or service. For the sake of argument and simplifying our examples, we'll hold those factors constant and specifically analyze PRICE as it could inversely affect QUANTITY. If you've taken Algebra in High School or College, you've plotted linear graphs on the X-Y axis with a formula of y = mx + b. You probably asked yourself: when will I use this crap? Well, in Economics, we utilize linear graphs as models and replace Y with "P" and X with "Q" while remaining in the positive quadrant (can't have negative prices or quantity). The result is what's called a Demand Curve:
As you can see in the above graph, when you move from point "A" to point "B", you can see a reduction in Price (P) from $10 to $6 while Quantity Demanded (Q) increases from 5 units to 11. The Price decrease stimulated an increase in Quantity. What I'll argue is going from REVERSE with WWE Pay Per View price increases... Go from point "B" to "A"instead. By raising the price from $6 to $10, what happens? Well, the quantity now decreases from 11 units to 5. By raising the price, fewer quanitity of a good/service are demanded. Higher prices lead to the inability to stretch your income towards a good/service as you could before. WWE repeatedly increased prices for both Wrestlemania and non-Wrestlemania Pay Per Views since 2000.
Does the WWE Pay Per View market resemble the Demand Curve?
To answer that, you must actually separate Wrestlemania and Non-Wrestlemania Pay Per View numbers. Why? For one, WWE actually prices Wrestlemania differently than the rest of its Pay Per Views. Through 2013, for example, Wrestlemania was priced at $59.95 and non-Wrestlemania shows were priced at $44.95. As I'll argue later, Wrestlemania must be analyzed separately. It's clearly WWE's #1 show and the shows have been doing incredible live gates for the last 10 years even when WWE television viewership and show attendance has been declining in the United States. It legitimately appears to be the 1 show that many casual wrestling fans still watch every year.
Just copying and pasting Non-Wrestlemania Pay Per Views from 2000-2013 in Microsoft Excel along with Prices per year, I was able to construct a scatter plot graph with an amazing result once you applied a statistical trendline. First, I must THANK 2XZone for conveniently tabulating WWE Pay Per View buy numbers for the entire sample size that I used between 2000 and 2013. I took samples of the data and reviewed them from that site and they appear to be reasonably legitimate. Having the data on 1 website coveniently saved me hours of time. Thank you 2XZone! Secondly, I did look up prices on annual WWE Financial Statements (10-K Reports). Non-Wrestlemania Pay Per Views went from $29.95 to $34.95 to $39.95 to $44.95 from 2000-2013. I simply took each Non-Wrestlemania Pay Per View, matched it with the price, and made the following scatter plot graph with a trendline:
Wait a minute? That trendline... It looks like a Demand Curve from above! It would appear that when Prices (P) went up for Non-Wrestlemania Pay Per Views, Quantity Demanded (Q) went down. At least it looks that way...
Let's smooth out the data. For each year, I took the AVERAGE buys for Non-Wrestlemania Pay Per Views per each year and compared it with the Price (P) charged per year. If I take the Average buys of 2000 and it to 2013, I see a massive -50% reduction in purchases of WWE Non-Wrestlemania Pay Per Views! Putting the Average buys versus price with a scatter plot from 2000-2013, the Demand Curve looks quite obvious:
But in addition to just looking at how Prices (P) affect Quantity Demanded (Q), the WWE has to consider the characteristics of their customer base. What they might not understand is that over time and particularly since the WWE's peak years of 1999-2000, WWE fans have felt less of a need to buy WWE Pay Per Views. WWE probably made things worse by introducing RAW and Smackdown exclusive Pay Per Views and then ECW shows. Reduction in quality occurs while having too many shows to purchase, quantity demanded goes down. Wrestling fans have lost an "addiction" to buying Pay Per Views along with other purchases of goods/services.
What I found most significant of all about the Non-Wrestlemania Pay Per Views was the direct reaction to an increase in Pay Per View prices seen by fans. If you go deeper into Economics, you'll learn about a term called "elasticity" or how responsive a consumer is to a change in the Price (P) of a good/service. Economists measure % Change in Quantity divided by a % Change in Price to obtain a coefficient. Wrestling fans seemed to be very responsive to the $29.95 to $34.95 increase during the early 2000's. Between 2002 to 2004, I'm estimating a combined 41% decrease in Non-Wrestlemania Pay Per View buys until 2005 actually saw an increase in buys. The WWE "Attitude Era" quickly fizzled out after 2001 and a price hike for Non-Wrestlemania shows could have made buy numbers much worse. Subsequent increases to $39.95 and $44.95 had some negative reactions at the time of the price increases, but not as painful as the $34.95 increase I found.
But what about Wrestlemania?
This is where the existence of the WWE Network really hurts. Wrestlemania Pay Per Views presents an exception to the rule. Especially when you add Wrestlemanias 27, 28, and 29 to the mix which solidified Wrestlemania as a 1,000,000 buy show (thank you Rock!), Wrestlemania's buys actually trend upward despite the increases in prices. Wrestlemania went from $39.95 to $49.95 to $54.95 to finalizing at $59.95. Just like the Non-Wrestlemania Pay Per View data, the WWE saw a decline in buys during the first half of the 2000's after the peak of the Attitude Era. After the impressive Wrestlemania 17 being above 1 million buys, Wrestlemania 19 during 2003 almost cut that number in half! Wrestlemania 20 seemed to return Wrestlemania as the superhyped event and the show has been close to or above 1 million buys since. The last 3 Wrestlemanias of my sample (2011-2013) were remarkable and actually blunted the downward trend in buys beginning to form after 2007. If you ever doubt that the Rock isn't a serious draw, especially when feuding with John Cena, just look at this graph:
Price goes up yet buys also go up? That quite contrary to the Law of Demand and thanks especially to those 2011-2013 Wrestlemanias, presents a unique good/service which shows that wrestling fans crave Wrestlemania. How on earth can prices increases cause higher buys?
Remember my discussion about factors like income, tastes/preferences, # of consumers, expectations, ect. constant? Simply put, the WWE took Wrestlemania seriously while letting the rest of the Pay Per Views go. The WWE paid the Rock several million to the Rock to host Wrestlemania 27 and then wrestle John Cena at Wrestlemanias 28 and 29. They have pushed "the Streak" of the Undertaker hard while feeding him quality opponents. After the embarrassing Wrestlemania 19 match against Big Show and A-Train (now Lord Tensai), which was the lowest bought Pay Per View analyzed among my 2000-2013 sample, the Undertaker went onto wrestle Kane, Randy Orton, Mark Henry, Batista, Edge, Shawn Michaels (twice), Triple H (twice), and CM Punk. Holy cow! The stuff with Donald Trump and Floyd Mayweather drew serious outside interest as well.
In other words, WWE has clearly invested time and effort into Wrestlemania and it shows. The price increases didn't matter because wrestling fans WANTED to buy Wrestlemania. However, the other events have declined after price increases. See the difference?
Which brings us to the WWE Network... Let's take a look at a loyal WWE fan who buys every Pay Per View. In other words, 11 shows at $44.95 and Wrestlemania at $59.95. That fan would spend $554.40 annually. If a fan only buys the "Big 3", you're looking at 2 shows at $44.95 and Wrestlemania at $59.95, that's $149.85 per year. The WWE Network, however, is priced at $9.99 per month and $119.88 per year. If you take EITHER fan, be it loyal purchaser of ALL WWE events or just the "Big 3", the WWE is actually losing money on these loyal Pay Per View purchasers. But worse yet for the WWE, the WWE Network has significant bandwidth costs that the Pay Per View market did not present. WWE just gave Cable/Satellite companies a secured link to the WWE production truck on site and the delivery to the customer was 100% on the Cable/Satellite's end. Now, it's off of a server which the WWE pays for...
Reportedly, it takes 1,000,000 buys for the WWE to BREAK EVEN on the WWE Network. Thus, 1,000,000 * $9.99 equates to $9,990,000 which is a pure wash and no profit. The WWE announced that they were at 667,000 just after Wrestlemania 30. In other words, the WWE is taking LOSSES when being under 1,000,000 buys. With the WWE causing a substitution effect and causing their Pay Per View buys to drop OR Cable/Satellite to outright refuse to carry WWE Pay Per Views with the WWE Network's presence, Pay Per View revenues are gone. Multiplying WWE's total Pay Per View buys (3,838,000) by their reported "average revenue per buy" of $21.41 to get about $82 million per year, you can begin to see serious profit erosion within the WWE. Want to understand why Investors were unhappy about the latest television deal? It was unable to replenish revenues possibly lost on Pay Per View.
You could easily argue that online streaming is the "future" of entertainment. Fair argument... But despite their decline, Cable/Satellite command 100 million households in the United States according to Bloomberg. Of those 100 million households, approximately 4% or 4,000,000 watch Monday Night RAW. If those 4,000,000 households have Cable/Satellite, they could have access to Pay Per View events. However, with Non-Wrestlemania events costing $44.95, do you really want that on top of your Comcast, DirecTV, or Dish bill that arrives monthly? That's quite a lot ot ask for particularly when quality is low. But as seen by Wrestlemania with 1,000,000 buys, that's almost $60 million in guaranteed revenue thanks to those Cable/Satellite outlets (I'm assuming International pays as much as US, but I could be wrong - excuse me if I am). Wrestlemania 30 was proven to have lost about 400,000 buys just from the existence of WWE Network... Ouch! If WWE Network isn't making money and 400,000 buys have evaporated... It's no wonder Wrestlemania 30 payoffs haven't made it to wrestlers yet!
In my opinion, the WWE screwed up its Pay Per View model. In addition to hosting poor quality for non-Big 3 Pay Per Views, the over-saturated the market with excessive shows during the RAW/Smackdown/ECW brand extension era. Consumers between 18-25 are only making so much as they work their way through college and have no job experience to earn a higher paycheck. Yet, that's the majority of fans that the WWE relies on for possible Pay Per View buys. WWE kept raising prices despite the fact that buys were going DOWN, not up. Numbers show that buys went down further with those price hikes, too. Meanwhile, Wrestlemania has attempted to inject quality into those shows and create a "sense of urgency" to make fans want to pay $54.95 or $59.95 per show, and if you're like me and want the High Definition (HD) version, that's $10 more. Ouch! Still, I wanted to see Rock vs. Cena or any of Undertaker's streak matches... I gladly paid.
WWE should have become smart with their shows... Maybe have a "Buy 2, Get 1 Free" sale or something clever like "Buy 11 Pay Per Views, Get Wrestlemania for Free". They could have created Rewards Points for purchases in WWE Shopzone. Maybe even something radical like "Buy All 12 Pay Per Views and get them ALL on DVD for free". Maybe give away the latest WWE Video Game with certain Pay Per View packages. Something that gives incentives WWE fans and does not penalizes them to buy Pay Per Views. WWE completely missed the marketing opportunity to revamp their Pay Per View model and keep it strong for years to come. 100 million households... Seriously.
The largest lost opportunity, however, will remain to be Wrestlemania. As shown by the above graph, buys went UP when Prices (P) went UP. WWE could have seriously got away with selling the WWE Network without Wrestlemania. Simply put, they could say "Wrestlemania Sold Separately" while promoting the other 11 Pay Per Views, older WWE/WCW/ECW Pay Per Views, and exclusive content. Better yet, the $9.99 WWE Network package gets you 11 Pay Per Views but by spending $12.99, we'll include Wrestlemania! Something like that... Tiered pricing can work if you're smart and present an opportunity of value to the customer. "For just $3 more per month, you get Wrestlemania for FREE!".
Financially, the WWE Network is proving to be an expensive venture for the WWE while killing the significant source of revenue they had with Pay Per View opportunities among 100 million households (or 4 million RAW viewers). They foolishly priced their fans out of the Pay Per View market and either lost them as fans or caused them to begin to pirate illegally streamed Pay Per Views instead. Worst of all, Wrestlemania was a cash cow on Pay Per View and the WWE just gave that away for FREE with 6 month purchases at $9.99 per month. And again, bandwidth is not cheap!
^ This is why your stock declines from $31.98 (52 week high) through March 2014 and dropping to just above $11.00 during May 2014 based on WWE Network news and a disappointing television deal that can't replenish lost Pay Per View numbers. Furthermore, this is what causes Investors to question WWE executive staff and even recommend that the McMahons sell the WWE.
Simple economics, too... Supply and Demand.
SO JUST CHILL... 'TIL THE NEXT EPISODE!
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