As surely as a Hulk Hogan legdrop will be followed by the referee counting one-two-three, the WWE (NYSE:WWE) Network will not only succeed, it will change the television business.
The network launched last week with some technical problems, questions about whether enough people would sign up, and two publicly angry satellite television providers. Those problems will prove to be bumps on the road for a product that will be as significant for cable and television as the launch of Napster was in music (and it will actually be legal).
The WWE is ahead of the curve
By offering all its pay-per-view content over the network, the WWE essentially cut its cable and satellite TV partners out of the equation. Dish Network (NASDAQ:DISH) and DirecTV (NASDAQ:DTV) immediately showed their anger over the planned inclusion of PPV -- including Wrestlemania which greatly outdraws the rest of the content -- by threatening to not offer any future WWE PPV content to people who want to buy it in the traditional manner.
Cable companies are probably just as angry about the plan, but they can't be as vocal about it because the rights for WWE's television shows are now being negotiated and Comcast (NASDAQ:CMCSK) and maybe Time Warner (NYSE:TWX) are likely to be bidding.
The satellite companies are mad because they are losing a revenue stream. Previously they got half the PPV revenue for doing essentially nothing. That's a pretty good deal that anyone would scream about losing, but they should be happy that a scam that good lasted that long.
The WWE -- like musicians and authors before it -- has learned that you can charge your customers less (and make more money) if you cut out the middleman. The WWE Network allows WWE to deliver PPV content to the people that it wants to keep happy (its customers) and the decision only hurts the companies that were taking a huge undeserved piece of the pie.
To make matters worse for cable and satellite companies, the WWE is showing that if you have a loyal enough audience, you don't need them. The WWE Network customers will pay much less ($9.99 a month) for content that would have cost over $700 under the old model and you have to assume that every boxing organization, the UFC, and anyone else in the PPV business is taking notice.
Much like Napster heralded a huge shift in the music business, the WWE Network means that content owners have put cable and satellite companies on notice that their business is about to change.
How many people does WWE need?
WWE CFO George Barrios told analysts last week that the network could attract as many as 3 million subscribers and it could become a "major source of future earnings growth" with as much as $150 million a year in cash flow, Deadline.com reported. However, the company does not need 3 million subscribers to break even or make money with the network.
According to WWE's most recent annual report, the company took $83.6 million in PPV revenue in 2012. The amount the WWE brings in for each network subscriber varies because if customers sign up through an outside service -- like a Roku player or a Microsoft Xbox -- those companies get a cut (usually around 30%). So if we assume WWE averages $7.50 per customer per month then every 100,000 customers brings the company $750,000 a month and $9 million a year. At 1 million customers the company will take in $90 million a year -- more than it currently gets from PPV.
The WWE agrees with the idea that it will break even at 1 million subscribers.
"Our goal is to get 1 million subscribers this year, and if we get 2 to 4 million, it'll just be transformative to our business," Perkins Miller, executive vice president of digital media for WWE, told AdWeek. "That 1 million number enables us to break even, and we think the 2 million number is very reasonable."
Will the WWE make money?
Currently the WWE Network is only available in the United States and the first PPV it will offer is Wrestlemania -- the biggest show of the year. Last year, Wrestlemania was purchased by 650,000 North American buyers (the company doesn't separate U.S. and Canadian buys in its reporting). You would have to assume that the vast majority of people who are willing to spend $59.99 or so on one PPV broadcast will be willing to spend the same for six (along with all the other network goodies).
Of course, as my colleague Jake Mann will point out in his counterpoint in our about-wrestling match, some of those people won't own the technology required to stream the network to their TV, but most will see the obvious value in the offer. In addition -- because the network is such a great deal -- people who did not buy Wrestlemania due to to the price tag but who wanted to will be likely to subscribe. Because the subscription lasts for a mandatory six months (to avoid people watching Wrestlemania then canceling) these people won't be able to leave.
To give you a small idea of the potential audience, WWE's @WWE Twitter account has 4.1 million followers and the company's Facebook page has over 16 million likes. Those figures just include the people who follow the brand and do not include the millions who follow individual wrestlers. The WWE also said on its corporate website that "WWE programming reaches nearly 15 million viewers in the U.S. each week."
Not all of those people will subscribe to the WWE Network, but at $9.99 a month essentially anyone who has interest in the brand will consider signing up.
The winner and new WWE World Heavyweight champion
WWE PPV broadcasts -- because of their high cost -- are often ordered at one home by a group of friends who watch the broadcast together and share the cost. The network takes price out of the equation. People may still gather to watch PPV broadcasts together but anyone who would have pitched in before is now likely to become a network subscriber.
WWE will likely reach the break-even point just through U.S. subscribers who want to watch Wrestlemania. When the network is offered to the rest of the world the 2 million to 3 million number seems plausible if not likely. The numbers will also grow as more people buy Smart TVs or other devices that make viewing the network on a big screen easier.
The network will be a hit that will force other content providers to consider doing the same thing. To quote the current catchphrase of Paul "Triple H" Levesque (an on-screen performer and a behind-the-scenes executive vice president) it's "good for business."
To read Jake's reasons the WWE Network will fail, click here.
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Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends DirecTV, Facebook, and Twitter. The Motley Fool owns shares of Facebook and Microsoft. 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.