No company is taking a bigger gamble on streaming video than World Wrestling Entertainment (NYSE:WWE), the venerable professional wrestling organization run by Vince McMahon. The WWE has staked its future and seemingly sacrificed part of its core business to fund a streaming video operation called the WWE Network.
The WWE’s experiences in the world of streaming video can supply some really good lessons for investors looking at this growing field. The wrestling venue’s successes and failures in streaming video can give us a preview of what other entertainment and sports companies might expect in streaming video.
A few of the basic lessons we can learn from the WWE Network, which went live on Feb. 24, 2014, include:
- Streaming video can increase a company’s revenue. On March 30, 2014, right after WWE Network appeared, World Wrestling Entertainment reported a TTM revenue figure of $509.54 million for the first quarter of 2014. On June 30, 2014, WWE reported a TTM revenue figure of $513.57 million. The company’s revenues grew by $4.3 million.
- Building a stable audience for streaming video is tough. The WWE managed to sign up 700,000 paying subscribers by June 30, 2014. Yet Variety.com reported that it had lost 128,000 subscribers between April 6 and June 30.
- Convincing consumers, even diehard wrestling fans, to spend money on streaming video subscriptions is hard. WWE found its fans balked at paying $9.99 a month (around the cost of a Chipotle dinner) for a six-month subscription. World Wrestling is now trying to lure fans with a no-commitment monthly subscription of $12.99 that is supposed to rise to $19.99 at some point in the future.
- Broadcast, satellite, and cable TV are not dead yet, and they will fight back against streaming video. Satellite TV companies Dish Network (NASDAQ:DISH) and DirecTV Group (DTV) refused to carry WWE’s pay per view events unless it killed WWE Network. The satellite companies did this because wrestling is still one of the highest rated programs on basic cable and satellite.
- Supplying cheap programming through streaming video can hurt your core business. Historically, some of WWE’s biggest revenue generators have been pay per view events—major wrestling shows featuring big matches between top stars that cable and satellite viewers pay extra to watch. Since WWE Network started streaming pay per views live for just $9.99, pay per view revenues and ratings have collapsed. The June 2013 Payback pay per view attracted 186,000 buyers; only 67,000 pay per view fans tuned into the June 2014 Payback event. Overall, WWE’s pay per view revenues have fallen by 39%, according to The Philadelphia Inquirer.
- Streaming video is not automatically profitable. On August 1, 2014, WWE announced that it will cut its workforce by 7%, or 40 to 60 employees, to make up for a $14.5 million net loss. The loss compares to the $5.2 million net profit WWE made last summer. It looks like the TTM revenue increases didn’t translate into automatic profit or cash for WWE.
- Streaming video won’t automatically boost your stock value, even with the experiences of Netflix (NASDAQ:NFLX). A month after WWE Network went live, WWE’s share price shot up to a high of $31.39 on March 21, 2014; by May 21, 2014, it had fallen to $10.85. Over the summer it had inched up to $14.37 a share by August 19, 2014.
- Building a streaming video audience can take a lot of time. World Wrestling executives believe they will need 1.3 to 1.4 million subscriptions for the WWE Network to break even, The Wall Street Journal reported. That means they will need to double the size of their subscriber base just to stay online. The company still has a way to go to achieve that number; its current goal is one million subscribers by January 2015.
- Technical problems can drive subscribers away. The Inquisitir website reported that many WWE Network subscribers had a hard time watching the SummerSlam pay per view even online on August 17, 2014. That’s bad news because SummerSlam is WWE’s second biggest event of the year. Fans were complaining about apps that didn’t work, long load times, crashes, and poor connections. It isn’t clear how much of the problems were WWE’s fault and how much of it was caused by fans’Internet connections. Many fans were ready to cancel subscriptions because of the trouble.
- Warning! GuruFocus has detected 3 Warning Signs with WWE. Click here to check it out.
- WWE 15-Year Financial Data
- The intrinsic value of WWE
- Peter Lynch Chart of WWE
Why the WWE Network Could Be Entertainment’s Future
The WWE Network experiment is an interesting one that bears watching because it is fundamentally different than what Netflix and Amazon.com Inc. (NASDAQ:AMZN) are trying to do. WWE is going after a niche market (albeit a historically profitable and loyal one) and marketing to a largely working class fan base. Netflix’s streaming video service is largely aimed at upper middle class viewers with more disposable income—the kind of people who watch House of Cards—not the working folk who tune into Raw or Smackdown.
World Wrestling Entertainment also lacks the resources available to companies like Netflix. On August 19, 2014, WWE had a market cap of $1.085 billion; the last TTM revenue figure reported for the company was $513.57 million. Netflix reported a TTM revenue figure of $4.892 billion on June 30, 2014; Netflix also had a market capitalization of $27.91 billion on August 19, 2014.
That’s why WWE has to lay off employees just to keep its streaming video operation afloat. Yet there is logic to its strategy because the potential revenues from streaming video are enormous. One million streaming video subscriptions at $9.99 a month translates to $9.99 million a month, or $83.88 million a year. 1.4 million streaming video subscriptions at $9.99 a month—the WWE’s goal—translates to $13.986 million a month, or $167.832 million a year, in additional revenue.
If it is successful, the WWE Network could generate a lot of revenue for those investors willing to stick around. It could also create a successful business model that other entertainment and sports venues, such as the NFL, NASCAR, the NBA, or the Premier League, could imitate.