Will Cable and Satellite Drop WWE Pay Per Views?

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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Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 28, 2014, at 7:24 AM, daveswizard wrote:

    You missed one very important segment of the population that WWE is locking out of their live broadcasts. The rural and outlying area's of the country that do not have access to high speed internet. Yes, there really are people who still do not have access to 20MB cable internet connections as much as it may shock city dwellers like you.

    I will take me for an example. I only live 10 minutes from the biggest city in my state yet I do not have access to traditional cable and use Dish for my TV viewing needs. My maximum internet connection speed available where I live is 1.5MB (though that speed drops to 650k during the day and evening because the system is overloaded) and is only available through the phone company. After numerous talks with them they have no plans to upgrade the system to increase speed or ease the overloaded traffic.

    In my opinion WWE is locking out what I would consider their core viewing audience by going to an online only model. That may explain part of the continued high PPV numbers that they saw as the core audience does not have access to the technology required to watch these programs live over the internet. I personally do not watch WWE but I do know people in my community who do that are now going to be locked out of watching any of the live events.

  • Report this Comment On April 28, 2014, at 10:53 AM, Dankline wrote:

    You are correct. WWE did budget for rural users but did not expect the backlash it has received from the cable/satellite companies.

  • Report this Comment On April 28, 2014, at 4:05 PM, aciddragon wrote:

    keep in mind that while the numbers for the network may be short of the 1,000,000 break even point, the network has only been out for a little over a month and is only available in the US. once they make it available in Canada and England specifically (as they have a huge audience there) and the rest of Europe they could/should hit that number easily. and worse case they start running a few strategically placed commercials to make up the revenue drop.

  • Report this Comment On April 29, 2014, at 12:52 AM, shelly2612 wrote:

    I have satellite internet, my internet has a cap that is only lifted from Midnight til 6am. I would love to be able to subscribe to the WWE network but it's not feasible with our internet connection......left out in the cold.

  • Report this Comment On May 08, 2014, at 5:45 PM, river wrote:

    get out of the stone age. if you can't switch isp companies, then move. you will be left behind if you can't keep up with the times. daveswizard, you don't even watch WWE programming, you are a real "fool". stop pretending you know anything about the business... much less the ISP business, the core audience is high populated areas... internet is everywhere.... and most cities, with a high radius have options that go down to 1.5 mbps for economic homes. no excuses unless you are intentionally living in the 1980's.

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