Sometimes a wrestler can win a match with a quick move out of nowhere. Other times, it takes slowly grinding down an opponent. World Wrestling Entertainment's (NYSE:WWE) over-the-top digital streaming service, WWE Network, looks poised to follow that second road to victory ... if it wins at all.
The company won't update the network's subscriber numbers until August, but there are signs WWE is not on track to reach its goals. WWE spent last week aggressively pushing a free one-week preview of the network that does not require registering a credit card. Previous free trials required a card and forced subscribers to actively cancel when the free period was up.
More concerning is that the company has been slashing expenses. This has involved everything from cutting a number of less-used wrestlers to delaying production of some original content for the network.
"A few different sources have pegged that Vince McMahon was ordering major cuts throughout the company," according to The Wrestling Observer, the leading newsletter covering the industry. "The number being bandied about is cuts that would total $20 million."
The company is also looking at making changes on everything from when executives must fly coach to slowing down spending on its new facility created to train performers. The goal of the cuts is to lower the projected fiscal-year loss of $45 million-$53 million, the newsletter reported.
Making cuts to offset losses makes sense, especially if WWE believes it won't hit the 1.3 million-1.4 million subscribers it needs to break even quickly. The big question is whether adoption will be slower than expected, but still hit the desired numbers, or whether the number of wrestling fans willing to pay $9.99 a month for the service is smaller than forecast.
What is the WWE Network?
WWE Network is essentially Netflix (NASDAQ:NFLX) for wrestling fans. Though the main weekly WWE shows -- "Raw" and "Smackdown" -- remain on Comcast's (NASDAQ:CMCSA) USA and SyFy, respectively, the network hosts tons of other shows. These include original programs, reality shows, and thousands of hours of archival footage. Most important, the network offers fans live access to what used to be pay-per-view, or PPV, events.
Under the PPV model, WWE charged $39.99-$69.99 for a fan to watch its monthly special events. These shows were heavily built up on the regular television programs so fans would be willing to pay up to see what happens. This model worked for years, but there was a huge negative for the content creators, as revenue was split roughly 50/50 with the cable companies that put the show up for sale to their customers.
That's a very good deal for the cable providers and satellite companies, which basically got to sit back and collect their hefty cut. For WWE, the model was flawed in two ways. It took all the risk for only half of the reward, and the PPV revenues were hard to predict.
A major show like Wrestlemania could easily top 1 million buys globally, while a lesser show would struggle to 175,000. Add a major attraction to a show -- perhaps a return of a former star like Dwayne "The Rock" Johnson -- and the numbers could vary by hundreds of thousands over previous years.
It's very hard to budget for a business with a wildly fluctuating and tough-to-predict major revenue stream. In creating the network, WWE sought to remove that volatility. Fans would pay $9.99 a month and get every PPV. That's essentially six for the price of one, plus access to the tremendous amount of content offered on the network.
In exchange, WWE would get guaranteed six-month subscriptions and a much steadier stream of revenue on a month-to-month basis. The company would also be able to mostly cut out the middlemen and keep a much larger share of revenue.
On the surface, it seemed like a no-brainer. Over the course of a year, more than a million American homes shell out for a WWE PPV. Why wouldn't those same people spend the same amount of money to get much more from the network? Add in the hundreds of thousands -- if not millions -- of people who had done the same globally, and the 1.3 million to 1.4 million subscribers needed to offset the lost PPV revenue should be relatively easy to obtain.
In reality, WWE has had trouble selling its fans on the concept.
Why is the company having problems?
WWE did a bad job explaining the network to its fans and waited too long to correct course. The original ads for the service pushed content and access to PPVs without really explaining how it worked. That left many fans thinking the service was computer-based and not viewable on a TV.
Eventually, the company started comparing the network to Netflix, which most people know can be watched on TVs without too much trouble.
Subscribing to the network and bringing it to your TV might scare the non-tech savvy away. Those concerns should lessen as more TVs become connected devices and the idea of watching an over-the-top network becomes as common as using a DVR. The recent addition of Amazon's (NASDAQ:AMZN) Fire TV should also open up millions of new users.
Will it ultimately succeed?
When WWE announced the network had 667,287 subscribers 42 days after launch, the numbers seemed better than they were. That period included "WrestleMania," the biggest-drawing show of the year. There are other big shows and there are always new people buying the technology needed to get the network. But the biggest fans should see the value of spending roughly the cost of buying "WrestleMania" for five additional PPVs, plus all sorts of other content.
The next hurdle for WWE comes in August, when the company announces how many subscribers it has. If the number is not above 850,000, reaching 1 million by the end of the year may be a challenge, especially when some of the original subscribers will not renew after six months. The number of non-renewals, however, may be low. WWE this week was touting a survey on "Raw" that showed the network had a 90% satisfaction rating from subscribers.
WWE has enough fans globally to make this work, and the confusion as to how the network works should fade with time. Reaching break-even seems likely, and eventually hitting 2 million subscribers seems possible.
It just appears those goals are going to take longer to reach. Problems with people understanding what the network is and how to bring it to a television screen will correct themselves in time, and WWE should be able to grind out a victory.
Daniel Kline has no position in any stocks mentioned. He is a WWE Network subscriber even though he had not bought a PPV in over 10 years. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. 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.