Is the WWE really making money?

The World Wrestling Entertainment (NYSE: WWE) is both a wrestling venue and an interesting experiment in monetizing digital content.

The WWE is a fascinating company because it is one of the few publicly-traded organizations reliant on digital content for a large percentage of its profits. That means it is possible to partially track the progress of the WWE network digital venue through its financials.

That makes WWE a pretty good metric for other traditional entertainment companies that are trying to transition to digital-content providers. We might be seeing the future of companies as diverse as TV networks like CBS (NYSE: CBS) and movie studios like Lionsgate Entertainment Group (NYSE: LGF.A) at WWE.

Why the WWE matters far more than you think

Another intriguing aspect to WWE is that it is one of the few independent entertainment companies left. Most entertainment brands in today’s world, whether they be comic-book publishers, video game creators, or movie studios have long been subsidiaries of large conglomerates.

That gives those companies resources to survive, and the independence to experiment and lose money. Entertainment is the most experimental business of all, if one is in it he or she must be prepared to lose money.

The WWE is engaged in an effort to preserve a traditional entertainment some people regard as an art form; professional wrestling, by monetizing digital content. Vincent K. McMahon Jr’s little wrestling combine is a far more important company than most observers realize. Vince and his family are attempting to preserve and promote a traditional art form by going digital.

Is the WWE making money?

The question is the WWE making money, is a very important one. The current answer to that question is yes, WWE is making money, but not much money.

During 4th Quarter 2017, WWE reported revenues of $211.60 million, a gross profit of $93.40 million, an operating income of $26.91 million, and a net income of $4.81 million. So yes, it is profitable to make money by digitizing live wrestling matches.

Although it can be a struggle to maintain cash flow from such activities, the WWE reported a free cash flow of $44.57 million for 4th Quarter 2017. That provided cash and short-term investments of $297.44 million on December 31, 2017.

So yes, traditional entertainment venues can make some money by adding a digital channel. Yet, they still face the same struggle to pay traditional expenses, wrestler’s salaries, production costs for live shows etc., in a new world.

New Digital Entertainment or Old-Fashioned Show Business

The WWE can be seen as an amalgam of new-fangled digital entertainment and old-time show business. Yet it should be noted that there are strong similarities between old-fashioned show business and digital entertainment.

Traditional show business relied on the “gate” the daily receipts from ticket sales for revenue. Digital entertainment relies on subscriptions or purchases of views for revenues.

This is why companies like WWE had such an easy time transitioning to digital entertainment and companies like CBS are struggling with it. TV networks like CBS relied on an advertising-driven business model; in which they gave their product away for free in hopes of generating enough ratings to attract ad revenue.

WWE relied on first sales of tickets to live shows and later pay-for-views to generate revenue. Today it relies on sales of subscriptions to its WWE network to make money. The advantages of this business model are that the WWE can generate cash flow without having to pander to advertisers.

The disadvantage is that the WWE is at the mercy of fans and their tastes. An inherent advantage is that WWE is more receptive to the fans’ wants. It has the freedom to change its programming to what the fans actually want in ways that traditional entertainment companies like Disney (NYSE: DIS) cannot.

WWE Network Losing Subscribers

Retaining subscriptions is hard though, WWE’s subscription volume fell between September 30 and December 2017, Pro Wrestling Net reported.

The WWE Network had 1.471 million subscribers on 31 December 2017, and 1.507 million subscribers three months earlier on 30 September. Tellingly, the WWE’s subscriber base fell between 2016 and 2017. The WWE Network had 1.473 million subscribers on 31 December 2017.

The WWE has discovered that attracting subscribers is easy, retaining them is tough. One reason retaining subscribers is tough, is that WWE gives away large amounts of its product every week through the Smackdown and Raw shows on the USA Network.

Why WWE should Dump Cable

A smart strategy for WWE might be to eliminate one of those shows or cut their airtime. That is to make the WWE Network the one place where fans can find much of its programming.

Such a move would be a smart way to attract younger fans that do not watch traditional TV. One of the WWE’s most important demographics is Generation Z (those under 24 or 25 years of age). In 2017, the average member of Generation Z watched just 14 hours of traditional TV, Visual Capitalist noted. As recently as 2011 the average millennial those between now 24 and 35 watched 25 hours of traditional TV.

Why WWE and Netflix or WWE and Amazon Need Each other

Another Visual Capitalist statistic that Vince McMahon should take note of is this one, 61% of Millennials said Netflix (NASDAQ: NFLX) is their first choice for watching TV. That means WWE should cut back on cable production for Raw and Smackdown and start producing exclusive programs for venues like Netflix, Amazon Prime, and Hulu as well as WWE Network.

A smart move for WWE might be to start producing something like the old WWE in your House that aired in the 1990s or Saturday’s Main Event for Amazon, Netflix, or Hulu. That is a card of four or five big matches that would air only through one of those venues.

One example of this might be a title match every week on Amazon (NASDAQ: AMZN), Netflix, or Hulu. A logical tie-in on Amazon would be an exclusive WWE event linked to an Amazon store selling WWE merchandise, including some exclusive items related to the event. An intriguing possibility would be one-off matches or cards of wrestling built around a popular wrestler or tag team such as the Hardy Boyz, A.J. Styles, or John Cena.

Since Amazon is now selling UFC Fights, WWE should consider joining that platform. WWE certainly has the star power and promotional ability to make money off such a card. It should seriously consider such a move before rivals like New Japan Pro Wrestling or Ring of Honor start doing the same thing.

The opportunities for WWE to make a lot of money if it goes beyond the WWE Network and Cable TV are there. The question investors need to ask is the McMahon family willing to make the move to new digital venues before somebody else does. Joining forces with Hulu, Amazon, or Netflix would be the next logical move for the WWE.