Last week, Netflix (NFLX -0.63%) made its first big move into live event programming by striking a deal with TKO Group Holdings (TKO 0.58%) for its subsidiary WWE's Raw distribution rights. The reported 10-year, $5 billion-plus agreement will bring the popular weekly professional wrestling show to the streaming giant in January 2025.
The move, providing WWE access to a broader audience, is a significant step for Netflix, which is behind its competitors Amazon, Apple, and Walt Disney in programming live sports. So, let's look at the deal's reported specifics and what it means for both Netflix and TKO.
The fine print of the deal
The partnership is a little more complicated than the headline suggests. That's because the deal doesn't lay out specific dollar amounts for each year, only that the fee will be in excess of $5 billion over 10 years. That could change, however, as Netflix has the option after the first five years to cancel the agreement -- or extend it for an additional 10 years in 2035.
In addition to worldwide Raw distribution rights, Netflix will gain international distribution rights to WWE's other weekly shows -- Smackdown and NXT -- and the professional wrestling company's premium live events, including its premier annual event, Wrestlemania. These international rights will immediately be available in Canada, the U.K., and Latin America, with additional regions to be added over time.
According to WWE President Nick Khan in an interview on Bloomberg Television, one country that appears to be currently excluded from the deal is India, where professional wrestling is one of the most-watched live event programming. The South Asian country has been a point of emphasis for Netflix management, considering experts estimated the streamer had fewer than 10 million subscribers as of September 2023. Netflix lags behind Disney+ Hotstar and Amazon Prime Video in the geographic market, which have an estimated 40 million and 20 million subscribers, respectively.
Finally, in 2025, Netflix will gain access to WWE's documentaries, original series, and upcoming projects, expanding Netflix's international library offerings.
What it means for Netflix
Netflix aired its first-ever live sports event in October 2023, with The Netflix Cup, a golf event featuring athletes from Formula 1: Drive to Survive and Full Swing. Netflix is late to the game compared to Amazon, which first broadcast an NFL game in 2017, and Apple, which has regularly shown MLB games since 2022. Over the past few years, streaming services have struck exclusive deals with sports leagues, with the most lucrative average annual value being Amazon, paying approximately $1 billion per year to carry Thursday Night Football exclusively.
This agreement with WWE marks Netflix's first serious attempt at prolonged sports entertainment programming. Netflix co-CEO Ted Sarandos noted on the company's fourth-quarter 2023 earnings call: "Think of this as 52 weeks of live programming every week, every year. It feeds our desire to expand our live event programming."
Still, it's reasonable to ask why Netflix is putting resources into live programming, especially WWE's Raw, which currently averages fewer than 2 million live viewers on the USA Network. It becomes more sensible when put in the context that it's the USA Network's top-rated show, driving 17.5 million unique viewers per year. Then there's the international opportunity to expand the WWE brand under Netflix's wing, of course.
Sarandos also believes this deal will boost Netflix's ad revenue, a relatively new revenue stream. He said on the call: "This should also add some fuel to our new and growing ad business. We're very excited about this deal."
In recent years, advertisers have prioritized live events because of real-time engagement and fewer opportunities to skip ads compared to recorded or streamed content.
What it means for TKO
TKO Group is a relatively nascent public company, having formed from the merger of WWE and UFC in September 2023. Even after TKO stock popped on the news of the Netflix deal, it is still down roughly 10% from its first trading day. Despite TKO stock struggling, WWE and UFC offer a unique proposition as the industry leaders in professional wrestling and MMA, respectively.
The reason TKO agreed to the deal is more straightforward: It was a higher price than its current deal, and it provided WWE an opportunity to reach a wider audience. Before the merger, WWE generated $1.3 billion in annual revenue for 2022, with 80% coming from its media rights. Under its current Raw deal with USA Network, the company receives roughly $265 million annually and generates roughly $115 million in non-U.S. media revenue (excluding India), totaling approximately $380 million. That means the deal with Netflix replaces roughly 1.3 times its current annual average revenue.
At the end of 2023, Netflix had 260 million global subscribers, meaning WWE's product will soon be on most of their televisions. This could lead to growing popularity for WWE and snowball into higher advertising and sponsorship deals, more consumer licensing, higher live event ticket prices, and merchandise sold. While investors will have to wait on how this plays out in TKO's financial statements, it's not hard to see the potential that a partnership with Netflix offers.
Are Netflix and TKO worth buying?
Netflix and TKO are leaders in their respective industries, commanding higher-than-average valuations. Specifically, Netflix and WWE trade at forward price-to-earnings (P/E) ratios of 30.8 and 29.6, respectively. For comparison, the average forward P/E ratio of the companies that make up the S&P 500 is 21.7.
Despite the rich valuations, each stock offers a distinct value proposition. Netflix is the only stand-alone streaming service consistently delivering a profit, and in 2023, it grew its paid subscribers an impressive 13% versus 2022. Meanwhile, TKO has a near-monopoly on professional combat sports and has a market-beating track record with WWE. While each stock can be volatile, patient investors might just be rewarded with a championship belt over the long term.
