In announcing that its new network would offer all 12 of its pay-per-view events, including Wrestlemania, for a $9.99 a month fee, World Wrestling Entertainment (NYSE:WWE) has smashed a figurative folding chair across the back of the cable industry.
Currently, WWE's pay-per-views are offered through traditional cable company channels. In this arrangement, the cable company gets a large chunk of the money customers spend (around half, though deals vary among cable systems and satellite companies) without taking any risk. For its 12 PPVs, WWE pays all production costs and all the cable companies do is provide billing and transmit the show.
The arrangement has been good for both parties for years. WWE PPVs averaging around 150,000-200,000 domestic buys for its lesser shows, 300,000-500,000 for its bigger attractions, and a million or more for the group's Super Bowl, Wrestlemania. With prices ranging form $44.99 to $59.99 depending upon the event and whether you order it in HD, both the cable companies and WWE have made a lot of money.
A rake to the eyes of cable
For the WWE, however, this marriage with cable companies has been a necessary evil. Until fairly recently, it was not feasible to assume that the PPV audience would buy the shows on any platform other than traditional television. Efforts to sell traditional PPVs on strictly digital platforms have met with very modest results for WWE and, though many lesser wrestling groups do Internet-only iPPVs, these shows rarely get more than a couple thousand buys from diehard fans.
With its new network, however, WWE is going the Netflix (NASDAQ:NFLX) route and leaving the cable companies behind. For $9.99 a month (with a minimum six-month commitment), network subscribers get all 12 PPVs plus a variety of archival footage, new shows, and a chance to watch thousands of hours of old programs. The network will be available on virtually every platform Netflix is -- Roku, Andorid devices, Apple devices (including Apple TV), Xbox One and Xbox 360, and Google Chromecast, to name a few.
For anyone who was considering spending $59.99 to just get Wrestlemania, buying the network instead makes sense. PPVs will still be offered over traditional channels, but it seems unlikely that anyone except people who lack appropriate devices would opt for the new network. That's likely a tiny percentage of the WWE's fanbase.
Basically, the WWE gets the revenue certainty of having a base of subscribers and the company gets to keep a much larger percentage of the revenue. The cable companies get nothing but scraps.
Not without risks
The WWE's biggest source of revenue comes from selling rights to its flagship RAW and Smackdown programs. In the next year, as both of those deals come due, the company expects to be able to massively increase its rights fees because rights fees for sports have climbed steadily.
WWE, however, has spent years selling itself as a soap opera-style drama and not sports, so it's no guarantee, the company will the multiple suitors required to drive fees higher. In fact, the last time rights to RAW came up for auction, WWE had no suitors and ended up making a worse deal with USA than it previously had with Spike.
The network, however, may be a less risky proposition than it seems. On one hand, PPV has been a major source of revenue for the company, but fans pick and choose which PPVs to buy leaving wild uncertainty in the buy rates and revenue realized. The network not only takes that uncertainty away, it also removes WWE's incentives to spend millions on non-regular performers to spike a buy rate.
For example, in past years the company has given mufti-million dollar, limited-appearance deals to The Rock and Brock Lesnar to spike buy rates. With a fixed audience, those deals would be less necessary as the value of getting all 12 PPVs, plus all the added content, would outweigh any one-time special appearance.
According to WWE's financials, the company took $83.6 million in PPV revenue in 2012. If the company gets 1 million subscribers in year one, it would take in $119.9 million. Even if you assume 30% of that revenue would go to the services distributing and delivering the network, then the WWE would be taking in $83.9 million.
In its press release announcing the launch of the network, WWE said, "based on our market research, we estimate that a fully distributed domestic pay network could ultimately attract between 2 million and 3 million subscribers." If it reaches those numbers, it would potentially add hundreds of millions to the bottom line, while effectively crippling -- or worse -- the cable companies and the current PPV market.
PPV without WWE
The other major player on PPV, UFC, has already taken steps to create a similar network to WWE, albeit in a smaller way. It can be assumed that if a network works for WWE, it would work for UFC and that would leave cable with a couple of major boxing events and little else.
If the WWE Network works, and maybe even if it fails, it likely signals the end of the PPV gravy train for cable.
Fool contributor Daniel Kline has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.