With its second-quarter earnings due out next week, it's not so much World Wrestling Entertainment's (NYSE:WWE) financials everyone will be scanning, but rather whether it's making any progress toward its goal of gaining up to 1 million subscribers to its WWE Network by the end of this year. In February the entertainment company launched the new subscription streaming service as a replacement for its current pay-per-view business model.
Because the change creates a gaping hole in its revenue that even Brock Lesnar would find difficult to fill, WWE's stock was thrown hard to the mat, losing almost two-thirds of its value since March. So, key to the wrestling league's future will be showing it can make good on the nonfinancial numbers it promised, and there are some compelling reasons to think it will.
First, the WWE is huge. Not huge like Netflix, to which it's compared the new Network, but to standard entertainment fare. Few if any shows can beat wrestling -- the only sport bigger than wrestling in terms of television viewership is the NFL, with WWE programming being the top-rated shows on USA Network and Syfy. Also, more women watch WWE programming than watch such female-centric channels as TLC, Oxygen, or WE.
WWE is seen in over 150 countries, has 350 million social media followers, is among the top "most talked about" brands on Facebook, has over 4.5 million followers on Twitter, and is currently the sixth most "social" brand globally, according to the Dachis Group Social Business Index. And Forbes says an estimated 50 million U.S. TV households have at least one wrestling fan, though WWE pegs the number higher, at 62 million households, or what it deems is 53% of the addressable market.
So it's certainly got a base to build on, and Netflix started small, too. There's time for the WWE to grow to 48 million subscribers like the streaming movie service has, so investors can't be unrealistic in their assessment of the time it will take for the wrestling league to get there. And it's going to be a loss maker for the immediate future.
According to the WWE, at 1.3 million or 1.4 million network subscribers it would be breakeven with the revenue it generated in 2012 under its old pay-per-view model. So its goal of hitting 1 million subscribers by the end of the year -- it has approximately 670,000 now -- obviously means it will fall short of those revenue numbers. Again, investors shouldn't be shaken out of their belief when pundits start pointing to revenue disparities. As they say, it's the destination that's important, where WWE is heading rather than where it stands at any particular moment.
World Wrestling Entertainment also notes that tripling the subscriber base would increase its operating earnings fivefold. Here's how it can do that.
Of the 116 million TV-viewing households in the U.S., WWE thinks it can count on 13 million being passionate fans, so it's looking for 10% of them to bring it back to where it was in terms of revenue within the next year. That's an attainable goal, but a company can't just be complacent; it needs to grow. The U.S. is its largest market by far, but Mexico actually has a larger "passionate" fan base, a significantly greater "casual" fan cohort, and the smallest "lapsed" fan count than any other market anywhere, according to the chart above. In fact, most of its other international markets have bigger casual fan bases of the sport than does the U.S., so opening the network to global subscribers will allow it to expand its growth exponentially.
International markets will fuel World Wrestling Entertainment beyond simple breakeven status. The U.S. market gets it there; the rest of the world turns it into a growth story. There's a lot to be said for the company's program of making up in volume what it loses in actual dollars from charging less for streaming versus its previous pay-per-view model. I wouldn't worry so much about WWE's financials next week; instead, look at where it's going.