10 Reasons Netflix Should Buy WWE

10 Reasons Why Netflix Should Buy WWE (before The Walt Disney Company, Amazon, Meta or Private Equity Does)

Lessons from Michael Jordan’s Last Dance, Cobra Kai & Formula 1

A Powerhouse Capital Media, Entertainment & Sports Thoughtpiece

TLDR:

The article below will take about 15 minutes to read, so here is a one-page Summary of the Top 10 Reasons Netflix Should buy WWE

In our estimation, Netflix is the strategic buyer that can most benefit (both immediately and well into the future) from the purchase and global integration of WWE’s assets, content, audience, data and IP, and should move aggressively to fend off any interested strategic media buyers (Disney, Facebook, Amazon, Comcast) or financial & industry suitors ( Endeavor -Silver Lake, CAA-TPG, Liberty Media , AEW-Shad Khan, Arctos , Dyal Group, Sixth Street , or sovereign wealth funds like Saudi Arabia Public Investment Fund (PIF) or Temasek ).?

The WWE is riding high, currently valued at $6.5bn with its stock outperforming other media & tech companies significantly over the past 12 months.?The Company has announced that it is open to being acquired, and has recently kicked off a formal sales process by hiring investment bank The Raine Group .

Exactly 10 years ago this month, Netflix pierced the veil by investing in original content, evolving their strategy from being a "renter" (licensing content) to an "owner". Netflix once again has the opportunity to become an "owner" when it comes to sports media rights, instead of jumping into a highly competitive pool of "renters".

This is shaping up to be an “Iger-esque” Marvel, Pixar & Star Wars moment for the new Co-CEO pairing at Netflix, Ted Sarandos and Greg Peters with WWE able to provide immediate benefits while also cultivating tremendous future option value around business models, audience & revenue drivers.

Players on the Chess Board: The Potential Buyer Universe

Before jumping into the Top 10 list and rationale below, above is our projection of the potential bidder universe for the WWE asset.?We believe that the WWE not only provides tangible immediate benefits, but also paves meaningful option value for the right buyer.?

Of the four quadrants of Potential Buyers (see chart above), the Localized Media Platforms do not have the distribution & audience throughput to outbid the strategic synergies or financial firepower of buyers in the other three quadrants. From our analysis, we firmly assert that Netflix stands to generate the most positive synergies and value from an acquisition of WWE.

Executive Summary:

* Over the past 4 decades, WWE has built a top three sports property in every major global media market:

The WWE has quietly established itself a top three “sport” in almost every major country and media market in the world, featuring an actively engaged global fanbase engaged across a variety of high value products and services. It is very rare to find a sport that is as popular in the US as it is in established and emerging global markets, as well as on youth-oriented social platforms. WWE ticks the boxes across geographies and age ranges.

* WWE has an unrivaled asset base & diversified 360? revenue streams:

The WWE is one of the last remaining global sports leagues with a suite of valuable 360? assets including: the triumvirate of content monetization (SVOD, AVOD and TVOD), full IP ownership of all the talent and back catalog, live events, robust broadcast, cable and pay-per-view media rights, streaming platform know-how, merchandise sales, games licensing, sponsorship, leading social media reach & engagement across deep customer fan database

* Data-Driven Global Audience Reach: With the increasing importance of sports media rights, social media, shoulder programming and data-driven direct-to-consumer audience connectivity, no other league (professional or otherwise) has the global reach, first party audience data or connectivity of WWE.?The WWE’s data-driven culture is actually quite a good fit for Netflix’s own data-driven obsession

* WWE is an ideal content & distribution complement for Netflix:

The WWE plugs many holes for Netflix when it comes to live sports and audience demographics, and plays to Netflix’s strengths in global distribution and data.?The Company also generates significant future option value for NFLX

* Defensive & Offensive Chess Move for Netflix:

Netflix can severely dent the global streaming ambitions of competitors by locking up WWE, while also broadening the appeal of the Netflix service and introducing key new revenue streams. Netflix has the opportunity to once again invest in owning content, mirroring their decision a decade ago to also shift to commissioning original content instead of relying on wholly licensed content.

Top 10 reasons why Netflix should acquire WWE

1. Live Sports Content from a Top-Tier Global “Sport”

Sports Drives Tune-in

Sports programming accounted for 94 of the top 100 shows in the United States during 2022, with the NFL accounting for 82 of these top slots.?College football, March Madness College Basketball, two FIFA World Cup soccer matches, and some Olympics events represented the other sporting events. Notably, not a single NBA basketball, MLB baseball or NHL hockey broadcast managed to break into the Top 100 for three years running.?No scripted TV show did either (link).?In the past, Netflix bid on Formula One rights (link), and was even rumored to be interested in licensing WWE content for two particular shows (link)

Networks & Platforms Spend Big $ on Sports Content

All major sports leagues have cashed in on the thirst for sports content, with newbies like Amazon’s $1bn/yr NFL Thursday Night Deal, Apple’s $250mm/yr. MLS Soccer Deal, and Google YouTube’s $2bn/yr. NFL Sunday Ticket deal.?In the news recently is what will Warner Bros Discovery’s TNT do about it’s NBA renewal where the NBA is anchoring the renewal at $8bn per year, up from $2.7bn per annum.?Interestingly, the NFL generates more in annual media rights than all of the other major US sports combined.

Viacom Paramount bid heavily to secure European Soccer’s UEFA Champions League, and Comcast NBCU Peacock also has English Premier League soccer and the WWE.?Fox also has a media rights deal with WWE, and continues to pay hefty annual fees to the NFL along with NBC, CBS and ESPN.?

2. Deep Catalog of Evergreen Content & IP

Quick question – How many more shows does Netflix have on its platform vs. 5 or even 10 years ago?

Well, this is sort of a trick question.?When we ask this question, 9 out of 10 people estimate that Netflix has 2 to 5x more titles on the platform when compared to a few years back. One of our favorite media analysts, Kannan Venkateshwar of Barclays Research highlighted this trend in a report from a few years back (see chart below).?

For a variety of economic and competitive reasons, Netflix has experienced significant declines in the number of titles, and importantly high engagement watch-minute titles on the platform with the loss of shows like Friends, The Office, South Park, and several Disney shows. Netflix may continue to experience withdrawals if competitive streaming services continue to pull catalogs such as Dreamworks Animation from Peacock’s NBC Universal.?These competitive and profitability realities were the driving factors behind Netflix’s push into original content starting with House of Cards in Feb 2013 (link).?Exactly 10 years later, 50% of the content on Netflix US is comprised of Netflix originals (link)

The other reason for the pruning of titles is the economic reality of guaranteeing licensing fees to an increasing number of content owners to rent their catalog, without the ability to capture any additional direct revenue.?This may change with the introduction of AVOD which provides a variable pricing structure, and a revenue sharing scheme that is more aligned with the library owner (more on this in #7 below)

Purchasing such a robust catalog could be similar to How Bob Iger acquired prime assets that involved IP, characters and future pipeline with the purchases of Pixar ($7.4B in January 2006), Marvel ($4B in August 2009) and Star Wars via Lucasfilms ($4B in October 2012), not to mention the Fox assets including X-Men & The Simpsons ($71B completed March 2019). Most people do not realize that the WWE owns the perpetual rights and trademarks for all of the wrestling characters, including The Rock, Hulk Hogan, Iron Sheikh, etc etc. So all the licenses and usage exploitation rights accrue to the Company, and not to the individual.

Netflix has been acquiring assets, notably the purchase of the Roald Dahl catalog (￡500M in September 2021), but they did shy away from purchasing children's entertainment asset Moonbug Entertainment, which Kevin Mayer’s Candle Media snapped up and then in turn licensed the show Cocomelon to Netflix, which was the 3rd most watched show on all of streaming in 2022 (credit to LightShed Ventures ' Rich Greenfield 's note on top streaming shows - link).?Netflix can move with urgency to secure WWE and in the process allow Ted Sarandos, Greg Peters and newly appointed Global Chief Content Officer Bela Bajaria to have their “Iger-esque” moment.

3. Content is King – Netflix's Distribution is “Kingmaker”?

Cobra Kai was a YouTube Original that just did not garner the audience despite the quality of the show. Once that title was imported onto the Netflix platform, it exploded and continues to draw large audiences. Similarly, Michael Jordan's Last Dance was initially released by ESPN in its first window. Only once the show moved to the second window on Netflix did it become a global phenomenon. Netflix has also demonstrated the power of its platform via the Formula 1 series Drive to Survive, a show that singlehandedly sparked a new generation of global fans, especially in the US.

Netflix can turn also-rans into massive global hits due to its unmatched global footprint, built from the ground up over the last 16 years. Looked at another way, Netflix had almost a 13-year head start against every other major streaming platform, which allows it to command the power to supercharge content. Distribution is the Kingmaker (click here to read a one-page Powerhouse Capital discussion on Content is King <> Distribution is Kingmaker)

Netflix leverages platform data advantages, and a direct-to-consumer relationship to personalize, own and compound its last mile advantage. WWE has a similar first party data advantage, but unlike Netflix, they have it across a variety of revenue streams (not just subscription, but also email, events, merch, ticketing, pay per view, gaming, et al)?

4. Geography: Plug Netflix's hole in the Middle America “Heartland” demographic

One gets the audience that they program for, and it can be argued that Netflix's programming over the past decade has increasingly targeted "coastal" populations and more well-heeled demographics. There is a vast "heartland" demographic, sometimes also referred to as the "flyover states", that Netflix could benefit from attracting which could help reinvigorate domestic US subscriber growth, as well as deeper engagement with programming such as WWE. As can be seen below, Netflix's US domestic subs has flatlined, but we believe they have only reached the saturation point for the audience they are targetting. Opening the aperture to the Heartland through programming starting with the WWE, should increase their TAM (total available market) by an estimated 15-20m households. As an extension, we also believe Netflix should look to acquire Roku to solidify their direct to consumer connectivity to this overlooked target demographic (a topic for another thoughtpiece).

5. Geography: WWE is a Global Top 3 sport in every major territory + Dominates Social (Youtube & TikTok)

In 2016, our Powerhouse Capital team started researching the top sports in every geography while we were still working with our former colleagues Creative Artists Agency , and CAA Evolution . Sports such as NFL football, world soccer, cricket showed the expected popularity, but what struck us was how the WWE was in the Top 3 in every major sports media market, including in strategically important growth markets such as India and the Middle East. We then began to see if the global social & video platforms also reflected this trend tracking for over the past 8 years.

We presented these findings in a May 2018 presentation to sports team owners and media executives - For the full deck of our presentation, please click here (WWE relevant slides 31-35). By the numbers, the WWE is the biggest sport based on views, fans and engagement on Youtube. It is very rare to find a sport that is as popular in the US as it is in established and emerging global markets, as well as on youth-oriented social platforms. WWE ticks the boxes across geographies and age ranges.

And based on WWE CEO Nick Khan’s comments from the latest earnings call (Q4 2022 earnings call and Q&A from Feb 2023), WWE has equaled this feat on new social & distribution platforms such as TikTok.

“On TikTok, we have established ourselves as the leading sports league as well. In Q4, we surpassed 20 million followers on our flagship TikTok account, making WWE the first sports league to reach that milestone.” - WWE CEO Nick Khan

6. Ownership: Acquire a Sports Asset and an Entire Global League

Very few opportunities exist to own a league with proven content, audience and monetization.?Given the current environment for premium sports assets, one can purchase the WWE for the price of a single club team, namely Manchester United of the English Premier League, or the Washington Commanders of the NFL, or the Golden State Warriors of the NBA. And the WWE has similar Operating Income when compared to Formula One which was recently bid on for close to $20bn.

To further put the WWE bid in perspective, one can purchase an entire global league with a 40-year heritage, plus all of the IP, back catalog, 200+ live global events, broadcast, cable, streaming and pay-per-view assets, sponsorship, merch and ticketing revenue for less than it will cost Warner Bros. Turner to renew its renter’s agreement with the NBA for one year (estimated renewal at $8bn).?

Given the inflation in sports media rights, Netflix can instead own and lock-in today’s price on WWE (see #1 above) while also capturing the full enterprise asset value of owning a league.?

Barbarians at the Gate

Private equity and financial firms such as Arctos , Dyal Group, Gerry Cardinale’s RedBird Capital Partners Capital and Sixth Street have been buying minority stakes in teams and leagues, and sovereign wealth funds such as the Public Investment Fund (PIF) of Saudi Arabia & Singapore’s Temasek have been bidding up the prices of teams and assets.?PIF reportedly offered Liberty Media $20 billion for Formula One (link), and Arctos recently purchased a minority stake valuing the Golden State Warriors team at $5.5bn (link).?Owning a league like the WWE is very different than owning a team, as I witnessed living in the Bay Area pre-Steph Curry and watching the Warriors draw limited crowds and sponsorship dollars.?

Netflix may want to be aware of these specialized groups above teaming up with the likes of CAA (backed by TPG ), UFC’s owner Endeavor (backed by Silver Lake ), or Shad Khan, owner of the rival AEW (All-Elite Wrestling), joining forces to prepare a bid.?We also do not rule out Liberty Media, owners of Formula One, the Atlanta Braves and Live Nation Entertainment , who could easily see the WWE as the second coming of F1.?Netflix will need to definitely strike hard (if not first), and display no mercy (sir) to fend off the crafty barbarians at the gate.

An NFL Mark Zuckerberg Facebook Cautionary Tale

We don’t think this has been ever publicly reported, but around the time Facebook expressed real media ambitions circa 2018, not only did FB commission and purchase a football series from Tom Brady, and one from Steph Curry, Mark Zuckerberg convened his top brass to discuss their sports strategy.

Always relying on logical first principles, Zuckerberg inquired what was the most popular sport in the US.?His management team quickly informed him that the NFL is the king of both ratings and popularity (apparently Zuckerberg at that point had never watched football).?He quickly asked if Facebook could buy the NFL, which as you can imagine elicited incredulous shock in the room.?After quickly explaining the hurdles, Zuckerberg proposed creating a rival American football sports league, which also was quickly dismissed after informing him of efforts such as the USFL, XFL, etc.?This was right around the time our internal Powerhouse research indicated that WWE was a Top 3 global and online sports property (See #5 above), and we politely suggested to one of FB’s top brass to look at publicly traded WWE which had a market cap at that time of between $800m-$1bn.

FB did not take this option seriously and instead began looking at other global local sports such as cricket (link) where they ultimately gained some carved up rights, but not enough to drive significant audience or make a bold statement.?

Licensing media rights is a tough business for the renters given the increasing competition, steep price increases demanded by leagues each renewal cycle, and slim associated margins.?Netflix can establish itself within the sports realm with a purchase of WWE, and then can begin to ladder on other potential media rights once they have bargaining power & know-how, complemented with strong shoulder content (as demonstrated with F1’s Drive to Survive).?We believe Facebook missed a golden opportunity, and Netflix has a chance to benefit from this opportunity and anecdote. Netflix does not want to be relegated to competitive auctions for carved up sports media rights.

7. New Data-Driven Revenue Levers: AVOD, TVOD (Pay-per-View), SVOD, Sponsorship, Ticketing & Merchandise

Netflix vowed never to waver from its subscription all-you can eat model, until the realities of user behavior, competition and the economics of content caught up with them. As covered in #2 above, Netflix drastically reduced their catalog of titles in order to be economically efficient (adding more titles increased their content costs, while the monthly price remained flat).

Netflix's new ad-supported tier will allow it to generate variable ad revenue that is tied to consumption, thereby better matching user consumption with revenue generation. A better example is something like Pay-per-View (PPV), or Transactional Video on Demand (TVOD). Users are willing to pay for Wrestlemania on a transactional basis, something between $35-100 dollars per stream, which is significantly more than the $15/month Netflix subscription. If the consumer got Wrestlemania at no additional cost, then they would enjoy the consumer surplus at the expense of Netflix.

What Netflix can do with an acquisition of WWE, is significantly drive higher customer ARPU with new revenue streams including PPV, ticketing revenue, merchandise and sponsorship (see Nick Khan's recent earnings call Q&A on the sponsorship opportunity). And like Netflix, the WWE leverage customer data to drive these revenue streams. It is worth noting that WWE historically had a very successful niche SVOD business, and maintains similar platforms in territories such as the UK and Europe. And their content deal with Comcast NBCUniversal 's Peacock has reportedly been wildly successful. At Powerhouse we identify businesses who can benefit from being (i) Platforms, that are (ii) Data-Driven, and (iii) Direct to Consumer (see our discussion here)

8.?Gaming Credibility, IP & Revenues

Gaming has been tough for every non-endemic media & tech company with the likes of NBC Universal, Disney, Amazon and even Google spectacularly failing multiple times in the space.?Gaming is difficult and relies on deep know-how around free-to-play, user acquisition, retention, engagement, monetization and content cadence.

And you need a little bit of luck, along with great management. Netflix hiring of Amir Rahimi (link to article) from FoxNext was a great first step, but adding WWE’s portfolio of games which have an established track record will supercharge Netflix’s gaming efforts.?My colleague Ian Doody and I were fortunate enough to attend board meetings at our gaming investment Scopely during the time the Company licensed WWE (link to game).?The WWE has a portfolio of extremely successful games that Netflix can easily ingest into their gaming strategy.

Gaming's free-to-play is another revenue lever that can significantly increase the ARPU of a Netflix customer, adding more upside to the staid, flat legacy subscription model.

9.?Live Events & Merchandise

As covered in #7 above, WWE instantly adds additional revenue drivers from their live event circuit business, and the know-how on running live events across the globe, including production.?These events leverage the audience data to better personalize audience targeting to maximize ticketing, merchandise, advertising and sponsorship revenue.?Netflix has demonstrated an increasing desire to promote shows via pop-ups, and drive merchandise sales for their IP. Similar to Amazon's strategy for merch, Netflix is exercising this muscle with Stranger Things (link), and now Bridgerton (link)

The WWE's expertise in live events, merchandising and audience targeting appears to be a timely and suitable match for Netflix's growing ambitions in these areas.

10. Management Team Quality & Synergies

The WWE has some wonderfully experienced executives up and down the organization with the global connectivity and know-how that allows them to create such engaging content and events all offer the world.

CEO Nick Khan is supported by the Chief Creative Officer (and former wrestler) Paul Levesque who has been in an executive role for over 8+ years. Mr. Levesque is also married to Stephanie McMahon , and brings connectivity and family heritage to the ongoing content efforts. (link to executive bios). CEO Khan has a wealth of media rights, sports and content experience from his years working with professional sports leagues, collegiate sports leagues, boxing, streaming services and talent both as a lawyer and as an agent Creative Artists Agency and ICM Partners .

Also of note, the WWE recently brought back long-time executives, former Co-Presidents Michelle Difilippantonio Wilson and George Barrios to serve on the Board of WWE. These two executives, who served over 11 years each at WWE before launching their own investment platform Isos Capital Management , have applied their experiences from the WWE to successfully take public the live events bowling recreation and league business Bowlero Corporation (which is one of only a handful of SPACs trading above its SPAC price).

If Netflix were to acquire WWE, the depth of global expertise of the WWE team, and executive suite would be a valuable asset for Netflix's next stage of global growth.

Conclusion

We have laid out the case for how the WWE would be a wonderfully synergistic acquisition for Netflix. The characteristics of the WWE business also make it an exceedingly attractive asset for a whole host of buyers because of the opportunity to own an entire global league and content factory outright, with a 40+ year history of building a direct-to-consumer audience relationship. Netflix has an opportunity to recreate a step change by becoming an owner of an asset, rather than looking to just license content in an increasingly competitive space. At an enterprise value of $170bn (market cap of $160bn), Netflix could easily absorb a WWE asset at even $10bn price. The game is afoot.

Thank you for reading, and please check out our other media thoughtpiece entitled How to Beat Spotify

Salim Mitha?is the Co-Founder and Managing Partner of?Powerhouse Capital, a?highly focused media technology venture capital firm?based in Los Angeles, investing in tech-driven media, specifically:

The Four Pillars of Global Consumer Media & Technology:?Sight?(Visual Content),?Sound?(Audio, Music, Podcasting),?Play?(Gaming, Sports, Interactive and Betting) &?Live?(Experience Economy and Livestreaming).