Drama of sport: Why Netflix is spending $5 billion to buy WWE programming rights

Netflix also seeks to scale up its advertising business and attract more users to its ad-supported tiers.

Netflix's co-CEO Ted Sarandos sees World Wrestling Entertainment's (WWE) blend of professional wrestling and entertainment as a perfect fit for their focus on the 'drama of sport'.

"WWE is sports entertainment. So it's as close to our core as you can get in terms of sports storytelling," Sarandos said during the company's post-earnings interview on January 23.

These remarks come on the heels of the streaming giant's acquisition of exclusive rights to WWE's flagship weekly programme 'Raw' and other programming as part of a long-term deal, starting in January 2025. This marks the company's first big foray into live sports entertainment, after testing the waters by streaming several live events in the past year.

Netflix is paying over $5 billion for an initial term of 10 years, with the company having the option to extend the partnership for another 10 years or opt out of the deal after five years. Sarandos said this deal fits into the company's $17 billion annual programming spend.

"For decades, the WWE has grown this multigenerational fan base that we believe we could serve and grow. We believe that WWE has been historically under-distributed outside of North America. And this is a global deal. So we can help them and they can help us build that fandom around the world," Sarandos said.

Raw will stream on Netflix in the US, Canada, Latin America and other international markets beginning in January 2025, with plans to expand to more countries and regions over time.

The streaming service will also become the exclusive home for all WWE shows and specials outside the US, including its other weekly shows SmackDown and NXT, and its premium monthly live events such as WrestleMania, SummerSlam and Royal Rumble.

WWE's documentaries, original series and forthcoming projects will also be available on Netflix in international markets starting in 2025, the company said.

The announcement sparked questions on whether Netflix would get aggressive on obtaining rights for live sports in the future, thereby entering an intensely competitive market with deeply pocketed rivals.

The move would have meant a reversal in the company's earlier stance, with Sarandos even saying in an industry conference in December 2022 that they have not "seen a profit path to renting big sports" since buying these rights is "dramatically expensive" making live sports a "loss leader".

Read: Netflix's co-CEO Ted Sarandos sees India as a 'big prize'

During the post-earnings interview, Sarandos noted that the WWE deal was a unique one due to its storytelling potential and it is not a signal for any change in their sports strategy.

"The deal has options and the protections that we seek in our general licensing deals and with economics that we're super happy with globally. So I would not look at this as a signal of any other change or any change to our sports strategy," he said.

Rather, Netflix's strategy will be to focus on 'sports-adjacent' programming for the service, similar to shows and documentary series developed on various sports such as Formula 1 (Drive To Survive), golf (Full Swing), cycling (Tour de France: Unchained), tennis (Breakpoint) and NFL (Quarterbacks) among others.

"This is a proven formula for us that we're excited to jump into," Sarandos said.

Scaling up ads business

These moves also come at a time when Netflix seeks to scale up its advertising business and attract more users to its ad-supported tiers.

In a letter to shareholders, Netflix said it expects strong growth in its ad business in 2024, albeit on a small base, and hence is not yet a primary driver of the company's overall revenue growth.

"We aim to make ads a more substantial revenue stream that contributes to sustained, healthy revenue growth in 2025 and beyond. We expect healthy double-digit revenue growth for the full year 2024 on a foreign exchange (F/X) neutral basis driven by continued membership growth as well as improvement in F/X neutral ARM as we adjust prices" it said in the letter.

In the post-earnings interview, Peters, however, said that they have got years of work ahead of them to take the ads business to the point where it has a material impact on the company's general business.

The service's ad-supported offering now has 23 million monthly active users and they see it continuing to grow in the forthcoming quarters, Peters said.

He also mentioned that the membership of its ad-supported tier increased by nearly 70 percent quarter over quarter in Q4-FY23 and now accounts for 40 percent of all sign-ups in 12 markets where it is currently available. The growth was driven by the phasing out of its basic plan for new and returning members and upgrades such as downloads, support for multiple streams and better resolution among others.

To further aid the growth of its advertising business, Netflix plans to entirely retire the basic plan in a few countries where it currently offers the ad-supported tier, starting with Canada and the United Kingdom in Q2 2024.

The company also plans to launch more advertising products, improve measurement, and increasingly build the "capability to be better partners with advertisers and serve their needs", Peters said.

"We're focused on the long-term revenue potential here. It's a huge opportunity, $180 billion of ad spend ex-China and Russia, $25 billion alone on Connected TV. We know ad dollars follow engagement. We've got the most engaged audience. So we believe we're well positioned to capture some of that ad spend that shifts from linear to streaming" he said.

That said, Netflix doesn't seem keen on expanding the ad-supported plan beyond the 12 countries in the near term.

"We got a ton of work ahead of us on just getting to the level of maturity and impact to the business from the countries that we're operating in today. I would say, never say never on expanding beyond that, but it's worth noting that the countries that we are currently operating in represent about 80 percent of global ad spend. So we're already working in the spaces where there's the majority of opportunity" Peters said.

The growth in ad-supported signups along with Netflix's crackdown on password sharing and a strong programming lineup in Q4 2023 helped the company post its highest subscriber addition since the early days of the Covid-19 pandemic. Netflix added 13.1 million paid subscribers during the quarter to take its total subscriber base to 260.28 million.

Revenue increased by 12.5 percent year-on-year (YoY) to $8.8 billion in the quarter from $7.85 billion in the same quarter last year. Net profit rose to $938 million for the quarter, from $55 million profit in the same quarter last year.

The Asia Pacific region, which includes India, added 2.91 million subscribers during the quarter, taking its overall subscriber base to 45.3 million subscribers. Revenue from the region grew to $963 million, up 12.4 percent from $857 million in the same quarter last year.