Rights fees from television, specifically its main deal in the United States, have become the most important revenue stream for World Wrestling Entertainment (NYSE:WWE).
That's a change for the company and the industry it operates in. For decades, companies selling professional wrestling (which WWE calls "sports entertainment") made money from selling tickets to live shows and later pay-per-view (PPV) specials. They either paid for television time or worked on barter deals with local stations where they weren't paid and didn't buy the time but instead got a cut of ad revenue.
WWE built its business on the paid model, buying television in local markets and then using that to build up arena shows and PPVs. That situation has changed, however, and now the company's largest source of revenue is television rights fees, specifically its deal in the United States with Comcast's (NASDAQ:CMCSA) USA Network for its flagship Raw and Smackdown Live shows.
How important is television?
In its most recent quarter, WWE took in $64 million in television rights fees, which beat out its streaming network ($45 million) and live events ($32.1 million) as the top category for the company. All three categories were up year over year, with television rights fees increasing because of contractual bumps in what Comcast pays through the end of its deal in 2019.
Dave Meltzer, arguably the most respected journalist covering pro wrestling, laid out just how important TV rights fees have become to the company is a recent edition of his Wrestling Observer newsletter (paid subscription required).
"They only grossed $5.5 million in the U.S. from television in 1999, which grew to $28 million because of the bidding war between USA and Spike in 2000," he wrote. "Today, WWE's television rights are closer to $160 million, a huge percentage of overall revenue."
The problem for WWE and its shareholders is that cord-cutting, the consumer practice of getting rid of cable in favor of streaming services, may hurt the overall rights market for sports in general. That could be an even bigger issue for WWE, which has seen interest in its shows decline.
What is WWE facing?
Historically, wrestling hasn't earned as much money per viewer watching in advertising revenue as other programming has. In addition, WWE's shows have generally not been a good platform to promote the other shows on USA Network.
"From a cost-effective standpoint, a show that does one-third the audience will do more advertising revenue than WWE," Meltzer wrote.
The draw of WWE has been that sports, even scripted ones, are somewhat immune to time-shifted viewing. That means viewers watch them live and see the commercials. In addition, with Raw attracting around 3 million viewers a week and Smackdown Live bringing in 2.5 million, both shows are generally among the top 10 most watched on cable each week. They raise USA's average-weekly viewers, keeping the channel in the top 10, usually the top five among all cable networks.
That's valuable, but in a market where all major cable channels are slowly losing subscribers and the fees that go with them, budgets may be cut. That may mean in 2019, when the WWE contract with Comcast comes up, the wrestling company may not equal its current deal.
What happens next?
The price for sports rights has steadily escalated, which has led to problems specifically at ESPN, which has been hurt by a declining subscriber base. As deals come due, some properties, such as the National Football League, probably won't be affected because there will be multiple players competing for their rights.
For WWE, though, the situation may not be the same. Comcast/USA may not want to pay as much as they do now, and it's possible that no other viable bidder emerges. It's also possible that another network sees the value of programming with a loyal audience and creates a bidding war.
It only takes two, but WWE and its shareholders don't know if there will be two interested parties. That's a major risk facing the company where cord cutting works against it, but that's not a guarantee of whether the company will see its TV shows sell for more, less, or roughly the same.