When World Wrestling Entertainment (NYSE:WWE) announced it would make all of its pay-per-view specials available to subscribers to its new network, the company was essentially throwing its cable TV partners out of the ring.
The network, which is available online and on platforms including Sony's Playstation, Microsoft's Xbox, Google's Chromecast, and Roku players, costs $9.99 a month. For that $9.99, subscribers not only get the monthly PPVs -- which cost between $55 and $70 each -- but original shows and a huge archive of older programs.
This move makes it so that anyone who buys two WWE PPVs a year would be better off subscribing to the network, essentially cutting WWE's cable partners out of the deal. PPV revenue is split 50/50 between WWE and the cable companies, but cable and satellite won't get a cut of network sales. So far, the major cable players have been quiet about this punch to the gut, but satellite companies Dish Network (NASDAQ:DISH) and DirecTV (NASDAQ:DTV) are not.
Is WWE a bad partner?
Even after the network launches, WWE still plans to offer its PPVs through cable and satellite companies. Of course, while there might still be some viewers who buy them, the number is likely to plunge dramatically. For Dish and DirecTV, which made good money doing very little selling WWE PPVs, the WWE network takes cash out of their pockets.
To protest, both Dish and DirecTV are threatening to not carry Sunday's Elimination Chamber PPV, the last one before the network launches.
"Clearly we need to quickly reevaluate the economics and viability of their business with us, as it now appears the WWE feels they do not need their PPV distributors," DirecTV said in a statement, reported by the Los Angeles Times, adding that the audience for its events "has been steadily declining, and this new low-cost competitive offering will only accelerate this trend."
Will this be a trend?
Benjamin Miller, a writer for WrestlingObserver.com, the top newsletter for the pro wrestling industry, told the Fool that he expects the dispute will ultimately work out with concessions made by WWE.
"I believe that DirecTV will continue to air WWE PPVs. My reasoning is that they target sports fans. I expect the PPV price to drop at some point, however."
As for Dish, he wrote on the Wrestling Observer site, "WWE ain't gettin' on Dish unless the pay-per-view price drops to $9.99."
Miller also told the Fool that Comcast (NASDAQ:CMCSK), which currently holds right to WWE's flagship TV programs, "may drop WWE PPVs or demand a price decrease if WWE TV programming leaves NBC/Universal networks. I expect smaller cable networks to continue to offer PPVs."
Dish, DirecTV not the risk for WWE
In announcing and launching the network, the WWE essentially told its fans that it was giving up on the traditional pay-per-view model. That move is risky since PPV revenues, according to the WWE's 2012 annual report, "were $83.6 million, $78.3 million, and $70.2 million, representing 17%, 16%, and 15% of total net revenues in 2012, 2011, and 2010.
Playing chicken with Elimination Chamber with Dish and DirecTV will cost WWE some money if the two satellite companies end up not airing the show and some if they drop future shows. But with its network, the clear goal of WWE is getting its fans to subscribe and watch the PPVs there. The risk of losing revenue for one PPV on two providers pales in comparison to the risk WWE is taking by spiking a key part of its revenue stream on the assumption it will do better using a new model.
A bad precedent for satellite
The real risk for Dish and DirecTV comes if other premium content providers decide to follow the WWE model. What would happen if a premium service like HBO decided to no longer require a cable/satellite subscription for people to access its HBOGo mobile service? Worse yet for satellite and cable, what if Time Warner's (NYSE:TWX) HBO decided to charge less for that service than cable/satellite companies do?
Dish, DirecTV, and the cable world should be concerned by the WWE network. If it works, then any premium TV content with a devoted fanbase might be more valuable sold a la carte rather than through a third party. With Netflix already helping millennials justify cutting the cord, the last thing cable and satellite companies need is HBO, ESPN, or the Disney Channel doing the same.
A Wrestlemania moment
Ultimately, if Dish, DirecTV, and the cable companies drop WWE's, that will only matter if the company fails to get fans to buy its network. The WWE network essentially launches with Wrestlemania -- the company's biggest PPV, which on its own costs around $70.
Last Wrestlemania had, according to the WWE, over 1 million PPV buys. And while not all of those are domestic, $216 million of the company's $276 million in revenue during the second quarter in 2013 (which contained Wrestlemania) came from North America, so let's assume around 75% of them were.
If there is the same interest in the U.S. for this year's Wrestlemania, it makes no sense for any of those buyers to purchase the show through a cable company. If they purchase the network ($9.99 a month with a six-month minimum) they spend less and get five other PPVs plus the rest of the network programming.
1,2,3 pinfall for WWE
The match is already over for DirecTV, Dish, and the cable companies. If the network fails, WWE has likely devalued its PPV product to the point that it won't be able to bring it back to cable at the old prices. If the network succeeds, then the audience for buying PPVs the traditional way will be small enough that it likely won't be worth carrying them.
Daniel Kline is long Microsoft and attended Wrestlemania XX. 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.