It's hard for people to see World Wrestling Entertainment (NYSE:WWE) as a pioneering technology company.
Perhaps that makes sense because the company's core product involves costumed men and women pretending to fight each other. It also doesn't help that the brand's CEO, Vince McMahon, sometimes plays a character on television who becomes involved in those escapades.
But just because WWE has a product that can look a bit silly (though you try telling that to John Cena or The Rock) doesn't mean the company hasn't set itself up for a very successful future.
Why buy WWE?
While other content providers are dipping their toes in the water of offering streaming services, WWE already has a subscription-based streaming service with over 1 million subscribers. The actual number, 1.22 million at the end of 2015, represents a 49% increase from the fourth quarter 2014. That's good, but it's future potential, not current growth patterns, that make WWE a long-term buy-and-hold stock.
Currently, the WWE network offers archival programming and new shows for the company's fan base. The big draw, however, is what were once known as pay-per-view events. These shows, which used to cost $39 to roughly $59 each month, are now included in the monthly $9.99 network fee. That's a powerful draw for the company's audience, which has been somewhat slow to embrace the change but should come along eventually as they get accustomed to streaming services in general.
Still, it's not the conversion of people who used to pay more money, but only order once or twice a year, into recurring customers that puts WWE atop my list. That's a nice benefit -- and it should keep the network slowly adding numbers over the next few years -- but it's still a distant second to my chief reason for buying and holding WWE.
Ultimately, the current cable world will splinter, and controlling your own distribution network will be incredibly valuable. While other sports and content offerings will be playing catch-up because they clung to the old model for too long, WWE will be ready for the new future.
What's going to happen?
Part of the reason WWE Network exists is that the perception of wrestling among cable networks -- despite its being a consistent TV draw -- is negative. So whenever rights to the company's core television properties, RAW and Smackdown, come up, there's always the threat that there will be limited bids.
Were the company to someday put those rights up for auction and not get the numbers it wants, or not get any takers at all, the network could at least serve as a home for the shows. In the short term that would be devastating, but in the long run, it's going to happen, and it's going to be good for WWE.
Why is this inevitable?
Consumers are moving away from watching programming in real time and into viewing when it's convenient to them. Sports is an exception, and as a pseudo-sport, WWE does have that watch-it-now appeal to its fans and broadcast partners. But going forward, it's very likely TV will no longer operate -- at least on cable -- in a linear fashion.
Aside from live events, news, and sports, there's really no reason for Comcast's (NASDAQ:CMCSA) USA, which currently airs RAW and Smackdown, to air shows at specific times. A fan of Suits or Modern Family reruns doesn't need to watch that show at the same time others do, and it's really just tradition that keeps programs airing in that fashion.
In the somewhat near future, more, if not most, programming will simply be on-demand. Once that happens, and once consumers become accustomed to navigating content in that fashion, the old model will die. And once it does, WWE won't need Comcast or USA as a partner. It will be able to reach its audience without a middleman.
That won't be an easy transition, but WWE has the infrastructure in place, and really the only thing holding the network back from being worth $9.99 a month is that its best regular weekly programming is on Comcast's USA as part of its cable package. Change that and the core 3 million to 4 million people in the United States who diligently watch RAW (and, to a lesser extent, Smackdown) will sign up for the network -- while they get rid of other cable properties they care less about.
Every million subscribers equals roughly $120 million in annual revenue for WWE. If that number climbed to 4 million, the company would take in $480 million just from the network. There are, of course, expenses and partner shares, which come out of that revenue, but on a broad basis, the company would be taking in a number close to or bigger than the $425 million its media division pulled in during 2015.
Since even if the company's U.S. cable deals went away it would probably still have some licensing revenue in foreign markets, the total would likely be higher. That means WWE has done something all of the above-mentioned cable companies have not yet done -- positioned itself to thrive if the current pay-TV system changes.
Cable is changing
And the television market WWE operates in is clearly changing. This is not a short-term shift, and it only makes sense if you believe, as I do, that the notion of what cable is will eventually be very different. Instead of the current channel packages, I expect the pay-TV model to become a bit more like an app store. Consumers may need to buy some baseline package, but after that everything will be a la carte or in mini-bundles.
The cable companies will essentially market add-ons as they do now with HBO. Frontier Communications has already started that ball rolling by marketing Netflix to its customers and embedding it into its cable platform. That should become the norm in the years to come, and WWE Network will be a very attractive partner for the cable companies because it has a core user base that will seek it out.
There are going to be valleys during some of the conversion points, as this won't be a smooth process. Still, while it may take years, ultimately WWE's strength as a content brand and its relationship with customer base should make its early technological investment pay off.
Daniel Kline owns shares of World Wrestling Entertainment,. He thought Shane McMahon was going to win when he went up top. The Motley Fool owns shares of and recommends Netflix. 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.