World Wrestling Entertainment (NYSE:WWE) made a huge bet that its over-the-top streaming network would replace the revenue from its slowly dying pay-per-view business.

On the surface, the move seemed sound. WWE would cut out the cable companies and sell its network directly to consumers for around the price of buying two pay-per-view, or PPV, events a year. For $9.99 a month, fans would get all the year's big events, plus original programming and thousands of hours of archived shows. Logically, it made nothing but sense for fans and the business.

Unfortunately for WWE, logic and reality have not matched up -- the number of paid users for the network, which the company announced Thursday, is stunningly disappointing.

How bad was it?
When the network launched, WWE forecast that it would have 1 million subscribers in the United States by the end of the year. In April, just 42 days after launching, it had 667,287. In reality, however, the total was disappointing -- the period covered included the largest PPV event of the year, Wrestlemania.

Ordering Wrestlemania alone on traditional PPV costs roughly the same as a six-month subscription to WWE Network. The pricing should have made the hundreds of thousands of casual fans who buy only Wrestlemania sign up for the network. Instead, nearly 400,000 customers ordered Wrestlemania through their cable providers. That would be OK for WWE if those customers kept buying PPVs in the old way, but that has not been the case.

The company last week did not break down PPV sales between the U.S., where the network is available, and the rest of the world, where it isn't. But it did provide worldwide totals. Globally, WrestleMania did 690,000 buys, Extreme Rules did 108,000, Payback did 67,000, and Money in the Bank did 122,000. Those are huge drops from 2013, when WrestleMania did 1.1 million buys, Extreme Rules did 245,000, Payback did 198,000, and Money in the Bank did 223,000. 

Those drops would be fine if the network was making up the difference, but it's not. During the same July 31 call, the company said it had 700,000 subscribers at the end of June. That's an increase of only 33,000 subscribers since April. While the original 667,000 subscribers more than made up for the revenue drop due to losing 410,000 Mania buys, the added 33,000 customers does not begin to cover the revenue drop from losing roughly 370,000 buys on the next three PPVs.

It's actually worse than that
The 700,000 number makes it very unlikely the company will reach 1 million U.S. subscribers by January. WWE first reported numbers on April 7, so the new number covers a little under three months, making the growth rate around 10,000 new customers a month. That would leave the company at 760,000 come January, but the actual number could be far worse.

Network subscriptions are supposed to be for a six-month minimum. That was enacted to stop people from singing up for a month to watch a certain PPV, then canceling. But people have found a way around that. Between April 7 and June 30, the network added 161,000 subscribers, but had 128,000 cancellations.

That should theoretically have been impossible, but customers found creative ways to skirt the rules, like stopping PayPal payments or canceling their credit cards. If people are willing to go to that length to get out of their commitment, what will happen in September when it comes time for people to renew?

With no major drawing card like Wrestlemania to keep casual fans interested, cancellations could lead to lower subscriber numbers come Jan. 1. That would be extremely bad news, as WWE has admitted there is no going back. During the call, the company said it expects the PPV business go to away in 2015. That means the network has to either make up the roughly $90 million the company made on PPV, or WWE has to make major changes to its operating model.

Can this be saved?
WWE knows it has a problem -- at least in the short term. It has already started making cuts, announcing a 7% workforce reduction and promised savings of $10 million in 2014 and $30 million in 2015. 

"The cutbacks are so significant that they now feel they can break even on 500,000 subscribers in 2015 as opposed to 1.4 million subscribers," wrote Dave Meltzer of the Wrestling Observer newsletter. 

There are some other signs for at least mild optimism. The company will begin rolling out the network to the rest of the world on Aug. 12, starting with 170 countries including Australia, New Zealand, Mexico, Spain, Norway, Sweden, and Finland. A United Kingdom launch is planned for October, and although no date has been set, plans are also under way for Italy, Germany, and Japan, which have traditionally been large wrestling markets.

WWE CFO George Barrios told analysts in February that the network could attract as many as 3 million subscribers and become a "major source of future earnings growth" with as much as $150 million a year in cash flow, reported. That number seems like a dream, and while it may be possible in the long run, it's highly unlikely anytime soon.

It's hard to see the launch of the WWE Network as anything other than a disaster, but it's a disaster the company can recover from. WWE has done a lousy job explaining how the network works to the millions of fans who watch its Raw and Smackdown programs. It has corrected that in recent weeks by comparing it to Netflix, but the messaging must improve. People need to know they can watch the network on their television, and the company must increase the number of devices that stream the network to a TV.

To avoid losing subscribers to cancellations, the company also needs to make more content available on the network. The company owns tens of thousands of hours of its own shows, as well as libraries from countless out-of-business wrestling promotions. Very little of that content is on the network, which has led to even hard-core fans questioning whether it's worth $9.99 a month.

WWE has a good product. The network offers a tremendous value, and it makes sense for even casual fans. Ultimately that should lead to success, but the company will have to travel a very bumpy road to get there.  

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.

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