For most of its history, World Wrestling Entertainment (NYSE:WWE) has relied on its various business partners to succeed.
That included its broadcast television partners -- currently Comcast -- and to a certain extent, the cable companies which sold its pay-per-view (PPV) events. The company also relied on its live-event partners -- the various arenas where it puts on shows -- in order to make money.
Over the last two years, however, since the creation of the WWE Network, the company has become more independent. While Comcast's USA Network and arena shows still have a place in the business, the company now has its own distribution model to serve up content to loyal fans.
It's mostly about TV revenue
When WWE launched its streaming network, the primary goal was to replace PPV revenue. The company has achieved that goal, thus removing one area where it was vulnerable to fickle partners.
In the second quarter, WWE Network accounted for $51.8 million in revenue, making it the third biggest segment behind television ($56.1 million) and live events ($51.9 million). No other parts of the business topped $10 million for the quarter.
If you assume arenas are not going to stop doing business with a company that routinely rents from them, then television rights fees will be the next biggest wild card. Sports rights in general have been going up in value, but uncertainty is building as ESPN experiences significant subscriber losses as a result of cord cutting and trimming.
And on that end, WWE rights have never been as attractive as traditional sports, and the company has struggled to find bidders for its shows despite delivering consistent, strong ratings. Comcast has kept the rights in order to keep USA Network's overall ratings high, but it's possible that when the contract comes due in a few years, a shrinking cable universe will push Comcast to offer less money or sever ties with WWE entirely.
Those same conditions could prevent other networks from bidding. In the past, that might have sunk WWE, but it's now possible that if the Comcast deal is not renewed, WWE can potentially bring all of its shows and content to its own network.
The network can replace TV
WWE Network averaged 1.5 million paid subscribers in the second quarter, and that base has room to grow. Given that WWE puts its PPVs, which used to cost $34.99 to $64.99, on the network as part of the monthly $9.99 subscription charge, the service represents a decent value for any fan who purchased just a couple PPV events each year.
If the company added more programming to the network, including one or both of its network television shows RAW and SmackDown Live, WWE could potentially lose television revenue but make it up with network subscriber growth. It's also worth noting that adding subscribers results in minimal incremental costs per user.
Of course, WWE does not want to be entirely off cable. But it's possible that come its next television deal, if the company can't get the terms it wants for RAW and SmackDown, it could bring them to the network as exclusives, perhaps selling a highlights show -- or even mostly giving one away -- to keep bringing in new subscribers to the network.
It's time to buy WWE shares
WWE has its own programming, a loyal fan base, and a method to maintain its revenue without relying on its television partners for survival.
It's a doomsday scenario to assume that WWE would pull all its programming from cable, not just from Comcast in the U.S. but around the world. In reality, the company could see a rights increase in the U.S. while also seeing network numbers push higher. There could also be a middle ground where it keeps some content for its network -- which would grow the subscriber base -- while selling other programs.
However it plays out, WWE has given itself bargaining leverage. The company still wants cable partners, but in a few years, it will no longer need them. That makes it a growing, sustainable company with a lot less risk than it has had through most of its existence.