What Does the WWE Tell Us About the Future of Over-the-Top Sports?

For several years now many people -- including me, back when I questioned ESPN's long range future back in 2011 -- have argued that the existing sports cable marketplace is in danger of an economic collapse. The reason? Technology's rapid advance which, in theory, made it unnecessary for content providers to ink major partnerships with cable sports networks. After all, the cable sports networks are effectively middlemen in the transaction, paying substantial guarantees to the sports leagues in exchange for more money on the back end through cable subscriber fees. 

Why, I wondered, can't a sports entity simply eliminate the middleman and, by taking advantage of existing technology, take its product directly to the consumer? Instead of allowing the ESPNs of the world and the cable and satellite companies to take a bite out of the profits, why not take all of that money yourself, charging less to consumers in the process? In theory it makes a ton of sense, but when would a sports league see if it made sense?

Well, World Wrestling Entertainment, the WWE, finally did just that, starting its own streaming network online that costs $9.99 a month with a six month commitment. For that price you receive all pay-per-view events and access to an archive of virtually every match the league has ever hosted. The WWE released its subscriber totals on Monday, a day after Wrestlemania 30, 667,287 subscribers had signed up. The WWE said it was on track for one million subscribers by the end of the year. Based on current subscribers, the WWE would make $80 million a year, at one million subscribers, the net turns to $120 million a year. But, while the WWE keeps 100% of the revenue for anyone who signs up online at its site, you have to take a 30% cut out of this number for any subscribers that sign up via Apple or Roku. So even with a direct "over the top" business model there are still middle men cutting into the profits.  

So let's assume that with one million subscribers at least $25 million would come off the top end number, that knocks us down to $95 million in yearly revenue.  

That's a good number, but it's a pittance when you compare it to existing sports television contracts. 

After falling in love with WWE over the past year -- the stock tripled -- Wall Street hammered the WWE on Monday and Tuesday, knocking the stock down 22% as the subscriber numbers became public. It turns out that even Wall Street was expecting this business model to be more immediately popular.

So what's the future of sports on television? Is there any WWE impact for the coming SEC Network or the Big Ten or the NFL or countless other leagues that are now negotiating new television deals? And do we learn anything at all, so far, from the WWE's experiment? 

Let's dive in and see what conclusions we can draw. 

1. The existing cable model is still a better deal for sports leagues.

Why is that?

Because it's easier to get low-cost subscribers in bunches than it is to get high cost subscribers on an individual basis. Let's use the SEC Network as a primary example. Right now the SEC Network has AT&T UVerse and Dish Network signed up as guaranteed carriers at launch on August 14th. Presume that the SEC got near it's $1.30 per subscriber asking price in the 11 state SEC footprint and that the conference is getting .25 outside the footprint. We don't know exactly how many of AT&T and Dish's subscribers are located in the 11 state SEC footprint, but we know that there are right at 30 million cable or satellite subscribers in the SEC states. We also know that satellite service is more popular in the South than it is elsewhere. So we can be fairly comfortable in assuming that these 20 million total subscribers include roughly 6 million total subscribers in the SEC region and 14 million nationwide.

So how does that add up? 

Right now the SEC Network should be doing $93.6 million in the SEC footprint and $42 million in the nation. That's a total of $135.6 million in subscriber revenue just from AT&T UVerse and Dish Network. Toss in another $35 million in advertising and even without DirecTV, Comcast, Time Warner, Charter, or a variety of other cable and satellite subscribers, the SEC Network is already putting in much more revenue than the WWE will at one million subscribers. 

Now, we don't know the exact breakdown of the revenue share agreement, but let's assume that it's 50/50 with ESPN.

That would mean that right now, even with barely a third of the homes that the SEC Network hopes to be in -- the goal is around 75 million households -- the SEC would already net $85 million. 

If the SEC eventually reaches its goal of 75 million subscribers, we're talking about a bonanza of revenue. Off the 30 million subscribers in the SEC states, the conference would bring in $468 million in the 11 state footprint, plus an additional $120 million in the other 39 states, plus around 25% of that total revenue in advertising. That number adds up to $735 million. 

That's before any increases in rights fees occur. 

So the SEC's top-end revenue goal over the next several years is right at $735 million. Again, assume that number is split evenly with ESPN -- which could be too generous, we don't know these exact deal terms -- and you're talking about $367.5 million a year for the SEC. 

2. Could the SEC get to $367.5 million a year using an over-the-top network?

Well, let's do the math.

In order to get there, you'd have to first figure out what to charge subscribers. Let's say they adopted the WWE plan, charging $9.99 a month with a six month required commitment. You'd need to get right at 4 million subscribers to pony up that cost. That adds up to $480 million, but remember that you'd be paying the same kind of affiliate sign-up fees. Plus, you'd have the requisite costs of building out a network like this. So you'd need at least 4 million yearly subscribers to equal the top-end revenue that you can get even with a 50/50 split with ESPN in the SEC Network.  

And here's the real wrinkle, how many SEC fans would want to pay for this network all year around? Sure, it works decently from late-August to the first week of March, but what about after that? Wouldn't most people just sign up for a six month subscription -- to get all the football -- and not pay for the other six months of the year unless they lived in Kentucky and cared about basketball that much? College sports, after all, are a very seasonal business. There isn't that much demand for anything other than football and basketball. Plus, there's nothing actually going on for the entire summer.

Now you could help to defray this by charging, say $100 for a six month subscription or $120 for an entire year, but the seasonal nature of the business does make the pricing strategy a bit more challenging.

At WWE pricing you'd need four million year around subscribers to equal the revenue produced by the SEC Network.  

3. So the question you have to figure out is this -- how many SEC fans would be willing to pay a monthly fee for the SEC Network's programming?

Is it four million? In theory that seems like a very doable number, but there aren't a lot of easy comparables to examine.  The best, and most analogous public numbers I can find are for DirecTV's NFL Sunday Ticket, which the company presently pays the NFL $700 million a year to exclusively carry. Two million subscribers, just 10% of DirecTV's subscriber base, are willing to pay $300 for Sunday Ticket. (That $300 fee is actually a rack rate, meaning the average subscriber pays less. This also means that DirecTV loses at least a hundred million dollars a year carrying the Sunday Ticket.)

The NFL is wildly popular, but many of its best games are carried on television already. While the Sunday Ticket is only available to DirecTV's subscribers, it stands to reason that a decent number of consumers choose DirecTV based on the NFL Sunday Ticket. (That's also why it's hard to determine exactly what DirecTV's "loss" is on NFL Sunday Ticket. If you get a million additional subscribers, who pay for your service all year around and otherwise would pick someone else, are you really losing money here? Basically, the question we need to answer is this: how many people pick DirecTV solely for the NFL option?) While we know that two million people are willing to subscribe to NFL Sunday Ticket, what we also don't know is how many people would subscribe if the package was available to all 100 million cable and satellite subscribers? It's clearly not the same 10% number since we know that many NFL diehards are picking DirecTV for the NFL Sunday Ticket. So we can't just extrapolate the numbers and say there would be 10 million households willing to pay for this.  

Given that DirecTV has about 20% of the overall cable and satellite market, let's assume that the NFL, which squeezes every TV dollar out that it possibly can, isn't stupid when it comes to its potential market here. The NFL and DirecTV's deal ends after next season and the two sides are working on an extension. Presume that the NFL wants around a billion dollars a year. That would suggest that the NFL believes the market for this product is around five to six million consumers nationwide. If the market was much bigger then the NFL could just go the WWE route and take the product direct to consumers, right? But the NFL, significantly, would prefer the guaranteed money without the uncertainty of selling the content itself. (I would love to see the NFL take the Sunday Ticket direct to market and see what the subscriber numbers would look like).   

So if the NFL Sunday Ticket market is five to six million, for the most successful sports product in the country today, then the SEC needing four million subscribers looks pretty optimistic. (The NFL is also charging twice as much for Sunday Ticket, which the SEC could match and only need two million subscribers, but $250 seems pretty high for an awful lot of SEC fans. I think the WWE pricing model is probably more likely.) Remember, you also have to make sure that you don't alienate your customers with your product offering. You want to make your deal seem cheap compared to the alternative. 

If the SEC suddenly charged a ton of money for something that fans presently get for free, it's a potential PR disaster. And that doesn't include the ramifications that come from a non-profit behaving like a for-profit company in the midst of the collegiate athletics siege. 

Plus, the NFL's Sunday Ticket option would be available on TV, it's not being sold to consumers online. .

So what about online streaming revenue? Are there any comparative numbers?

The second best example I can find is Major League Baseball's streaming revenue numbers through Advance Media. In 2012, MLB had 2.2 million subscribers willing to pay $120 a year to stream games online or buy the iPhone apps. 

That's $264 million total. But that's not that many people either. Now regular season baseball isn't exactly comparable to football, but it does suggest that the online streaming model is still a tough sell for many people.  

Which brings me to my next point. 

4. It's still too early for over the top to work. 

Cable and satellite television is necessary for just about everyone. Right now we all subsidize content we don't watch, but the result is amazing television for a fraction of the cost that we'd have to pay if everything stood alone. Sure, you might not watch Lifetime, but your mom or grandma probably does. And they don't watch ESPN, but they subsidize your cost on sports. When you really break it down, most of us are paying about $3 a day for cable or satellite television. 

That's a tremendous bargain. 

I mean, an unbelievable deal, a steal even. It's fashionable to say that cable and satellite television costs too much, but i think it's the opposite, we've never had more and better entertainment options avaliable for virtually nothing. 

Sure, lots of the people reading this right now might understand how to stream a game from online to your television in HD, but would your parents? What about your grandparents? My dad trying to watch Tennessee play Utah State on a computer stream would be a total disaster. What about Joe Bob in a trailer in Slidell, Louisiana who doesn't even have the Internet? Can you imagine if Alabama fans could only watch a football game on the Internet? The state would burn down. Hell, what percentage of Bama fans are even capable of signing up for an online streaming service and actually watching this game? A tiny percentage of the actual fan base, right? It's just not technologically feasible. Not for the SEC, not for the Big Ten, probably not even for the NFL.  

Even the WWE, which is being lauded for making this move, still allows you to buy the matches on pay-per-view television. 

The only way a sports league could make direct streaming possible would be if you offered a hybrid model, you can watch online or you can watch on pay-per-view online. But that's actually more difficult to implement because it kills the pressure that you need to bring on satellite and cable companies to carry your network. If the diehards can just pay for pay-per-view then there's no pressure to carry the networks. So it kills your business model.

For all the talk about over-the-top sports, it's still a pipe dream, probably a decade or more, if ever, from becoming any type of reality.

While leagues might threaten broadcast partners with the idea of cutting them out, it's a non-starter when you compare it to the money that comes from existing cable and satellite channels.  

The WWE's experiment is fascinating, but it doesn't offer many parallels to mainstream sports. As much as I might have believed three years ago that ESPN was in trouble, I was wrong, the deck is still stacked in its favor and the existing sports business model isn't changing anytime soon. What's more, I don't think it should, ESPN and their like actually deliver pretty compelling vaue for sports fans, certainly a more compelling value than any existing market, over the top or otherwise, can provide.