World Wrestling Entertainment (NYSE: WWE ) smashed a chair over the collective heads of its cable and satellite pay-per-view partners -- instead of crumpling to the ground, the aggrieved companies might fight back with a rake to the eyes and a low blow.
In moving from a pay-per-view model where the company holds monthly special events that fans can purchase for a fee through cable and satellite companies to a digital streaming network that cuts those partners out of the loop, WWE may have misjudged the marketplace. While early results for the network were decent -- over 650,000 subscriptions sold in the first 42 days the WWE Network was offered -- that number falls short of the million or so required for the service to break even.
That shortfall was offset when traditional PPV sales for Wrestlemania XXX -- the biggest show of the year -- came in around 400,000 in North America, well ahead of the 295,000 buys the company had budgeted, according to The Wrestling Observer, the leading insider newsletter covering the pro wrestling industry. That's a short-term positive for the company -- the price of a single PPV is roughly equal to the $60 cost of a six-month subscription to the network (though the WWE only gets around a 50% share of PPV sales). But it also shows that customers might not migrate to the network as quickly as the company hoped.
Customer reluctance to make the switch was not a problem for Wrestlemania because of the strong traditional PPV sales, but it could be a major issue going forward as all three major PPV providers mull dropping WWE's events.
A slow transformation
In launching its digital streaming network WWE, essentially told its three major PPV partners -- in Demand (which delivers PPV content to the major cable companies), DirecTV (NASDAQ: DTV ) , and Dish Network (NASDAQ: DISH ) -- thank you and goodbye. In theory the network makes it so WWE no longer needs to share revenue with the PPV providers. Under the old model WWE produced and bore all the expense for its PPV shows while its carrier partners took a 50% or so cut for delivering it to their customers who ordered.
That was a pretty sweet deal for the middleman, which carried none of the risk but claimed half of the proceeds. The WWE Network ends that practice and puts more of the money in WWE's hands. As you might imagine, that angered the cable companies who face the immediate loss of some PPV revenue and the eventual loss of all of it. Faced with that, all three companies have made noise about dropping WWE's future PPVs in retaliation.
This would not have been a major issue if the network revenue was making up for the PPV loss, but it's not. If the PPV companies follow through on the threat, it's potentially a major revenue hit to WWE.
Dish did not carry Elimination Chamber, the PPV that aired before Wrestlemania XXX, but relented and carried the big show along with the other two carriers. That makes sense because Wrestlemania is so much larger than the average WWE PPV that grabbing the money from the big show then dropping the rest of them is a logical strategy for the jilted carriers.
A look at the numbers
WWE knew there would be some customers either unwilling, unable, or reluctant to subscribe to a digital streaming network who would continue to order shows on traditional PPV. The number of customers who ordered Wrestlemania the old-fashioned way shows that total is higher than the company expected. On the network WWE takes in as much as 100% of the $9.99 a month subscriber fee (when customers signup directly) to as little as 70% (when a service like Roku acts as a middleman).
If you assume an average of 85% of the revenue going to WWE, then each monthly subscriber brings in roughly $8.50 but is locked in for a six-month minimum subscription. Since regular PPVs don't draw anywhere near the number of sales as Wrestlemania let's assume that if carriers dropped WWE's PPVs it would cost the company an average of 75,000 buys at $59.99 a month of which the company receives half the revenue or around $2,249,625 a month.
To make that revenue up in network subscribers on a monthly basis the company would need to add 264,661 new network subscribers -- not an unattainable number but one that needs to come on top of the growth WWE built into its revenue projections for the network since the total loss of PPV revenues was not factored into the company's year one planning.
Losing PPV could be a positive
Buying a PPV the old-fashioned way instead of subscribing to the network makes no sense for even casual WWE fans. One PPV costs roughly $60 -- the same price as six months of the network, which gives you access to six PPVs, around 1,300 hours of archived WWE content, and tons of exclusive programming.
Still with 400,000 or so North American homes ordering Wrestlemania -- down from the 650,000 who bought it last year pre-network -- that's 67% of the total audience sticking with the old, familiar format. Of course some of those people likely also subscribed to the network but lacked the technology to port the network to a TV. But most of those 400,000 are either likely network subscribers or lost revenue should the PPV carriers drop WWE.
The loss of traditional PPV may serve as a catalyst that forces reluctant customers into subscribing, but it could also cause them to decide WWE is not worth their time. Clearly WWE's customers are more resistant to change than the company expected.
When/if the PPV carriers pull the plug it will be a defining moment for WWE. Casual fans who watch a PPV or two a year will either become a locked-in revenue stream by subscribing to the network or go away forever if they decide it's not worth it.
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