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LOOKING AT THE BOTTOM LINE AND WHY THE STOCK PRICE IS THE MORE IMPORTANT TO WWE THAN ANYTHING (EVEN THE NETWORK)

There was an interesting question in Dave's Q&A today about whether the recent layoffs at WWE are the answer to improving their business, or if they should focus exclusively on adding subscribers to the WWE Network. The person who wrote that question was of the opinion that WWE should focus on adding subscribers no matter the expense, and didn't seem to understand how letting people go helps if it's not going to lead to additional subscriptions.

I often find myself thinking that questions like these are asked by folks who haven't really been exposed to the business reasons behind why these decisions are made, and that a better understanding of how the business works will help explain a lot of decisions WWE makes that would otherwise leave people scratching their heads. I'm no expert on the stock market, but I do know enough about business to explain why a high stock price is such a supremely important thing for WWE to maintain.

For starters, the person asking the question is right that nobody is going to decide whether or not they sign up for the WWE Network based on the stock price. However, just focusing on the subscriber numbers while leaving everything else by the wayside is irresponsible thinking for a worldwide media company that wants to maintain its future profitability. WWE's stock price isn't just a vanity thing or only for the benefit of the stockholders (though those are considerations as well), it's also important for establishing and maintaining the value of the WWE brand name.

Let's say WWE is negotiating a deal with one of their partners: NBC Universal or Mattel, for example. A higher stock price shows that what WWE does is in demand and puts them on stronger footing to say that WWE's product is worth a certain amount. On the other hand, if the stock price drops, it puts WWE in a weaker bargaining position and opens them up to lowball offers because the partner won't want to throw too much money at a deal if it looks like the demand for it is dropping and they may not turn a profit on it. Declining stock price can also make potential future partners hesitant to work with WWE at all because they want to partner with companies whose business is increasing, not decreasing. Others may still want to work with WWE, but intentionally lowball them because they would know that WWE's options are limited given their declining business.

Now let's look at why they decided to lay employees off instead of fixating solely on the subscriber count. While it's true that adding subscribers to the Network should be the ultimate goal since they've committed to taking their business in that direction, if the Network is underperforming (and I'm sure they have a good idea internally of where the numbers will be over the next 3-6 months regardless of what they say publicly), then WWE needs to figure out a way to make that money up somewhere else and keep Wall Street happy.

What really matters to Wall Street is the bottom line, and in that sense the WWE Network subscriber count means as much to them as the TV rating on Monday nights: nothing. Wall Street's funny like that, because if the Network was exactly where it is now, but house shows, merchandise, PPV and TV deals all shot through the roof, the stock price would have gone up because they're more concerned with what a company's bottom line is than how they get there. Trimming headcount is a quick and effective way of raising the bottom line, and therefore maintaining their stock price.

Let's say the average annual salary of the people who were let go is $50,000, so if WWE cuts 7% of the workforce as they did, you're already saving well into the millions of dollars. Also consider that employees cost a company like WWE more that just what they get in their paycheck: medical, contributions to 401k, bonus, and so on can make people a lot more expensive than the 50 grand on average they get as their base salary. So add that into the total saved on payroll and it adds up to a whole lot more than $9.99 a month.

So how does WWE arrive at the 7% figure? Basically, their target was a million subscribers by the end of 2014, so WWE takes the difference between how many subscribers they wanted by the end of the year and how many subscribers they now realistically expect to have at the end of the year, come up with a dollar value for that difference, and cut enough employees to match that number. They might even want to slightly exceed the difference if they want to play it safe and plan for people who don't renew.

With the headcount reduction made to balance out the shortcoming on Network income, WWE is still able to present a acceptable number in their quarterly investor conference call, maintain their stock price, and ensure the overall health of the company as they continue to work to expand the WWE Network's business. Increasing the subscriber base should be the focus, but building the consumer base for an entirely new product like this is a marathon, not a sprint, they really haven't done all that badly with it so far considering how bad their current product can be, and they'd be making a mistake to either abandon everything else for its sake or declare it a failure for falling short by the end of the year. WWE does desperately want it to succeed (and there are definitely some changes in presentation they can make to help move it ahead), but they do still need to meet their numbers because their stock got killed since the first subscriber numbers and the value of the TV deals were announced, and they really want to keep the gains they've made since then.

I've wanted to write something like this for a while because I think the business behind the wrestling merits more discussion than it sometimes gets, so I hope you all found this at least somewhat interesting and/or educational. Shoot me an email at stupwinsider@gmail.com and let me know what you think and if you'd like to see me do more of these.

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