Strangely enough, a decades-old wrestling promotion could be showing us what the future of television might look like. World Wrestling Entertainment (NYSE: WWE) is pioneering the business model other networks might soon follow.
The WWE is claiming that viewership on its subscription online streaming service, WWE Network, exceeds that of every traditional cable TV network, Variety reported. The WWE sold 1.31 million subscriptions in its service during the third quarter of 2015.
That may not sound like much, but it has certainly been very good for WWE’s revenue, which has been growing like a weed over the past year. WWE reported a TTM revenue of $542.62 million in December 2014 that grew to $633.15 million a year later. That means WWE’s revenue grew by $90.53 million in just a year.
Yes, WWE Has Some Float
Naturally, value investors will want to know if WWE’s subscriptions are generating float or extra cash. The answer to that questions is yes; WWE reported a net income of -$36.34 million in September 2014 and $23.64 million in September 2015. That means its income grew by $59.98 million in a year, which is impressive.
The next question value investors will ask is what about the cash? Yes, WWE is generating a lot more cash; the wrestling promotion reported $6.36 million in cash from operations in September 2014 and $91.84 million in cash from operations a year later.
The new service is certainly generating cash, but it is hard to say if it is sustainable. WWE itself admitted that the number of subscribers could drop to 1.28 million during the first quarter of 2015.
That shows us that getting wrestling fans to sign up for the WWE Network at $10 a month is easy. Convincing them to renew their subscriptions could be a lot harder.
What’s truly exciting are WWE network’s growth possibilities. The service is two years old, but it’s only been available outside the U.S. fairly recently. WWE Network only launched in Germany, Austria, Switzerland and Japan in January 2016, and it has only been available on the India subcontinent since November 2015.
How Others Can Use WWE’s Business Model
From the available financial numbers, we can safely conclude that WWE Network is making money. More importantly, it is generating considerable cash flow.
This points the way to a business model for marketing specialized entertainment products such as wrestling via streaming video. WWE actually seems to have a few lessons to teach other television and entertainment companies about subscription streaming video. They include:
- Keep it cheap. Much of the reason why WWE has attracted a lot of subscribers is by offering a low subscription rate of $10 a month, a price that even the poorest wrestling fans can afford.
- Offer a lot of programming for that price. WWE currently offers subscribers more than 1,000 hours of archival content (mostly old wrestling matches) and has plans to add more than 300 hours of original content to the Network.
- Make it commitment free. Give the fans the option to drop the network if they want. This takes away the fear of a long-term contract.
- Use your traditional television channels to aggressively market the new service. WWE CEO Vince McMahon and his employees have been vocally pushing WWE network on their two cable shows, Raw and Smackdown.
The model is simple, and it could work for other networks. One network it could work well for is AMC Networks (NASDAQ: AMCX), which has a library of several popular shows with large cult followings: Mad Men, Breaking Bad, and The Walking Dead.
Another is CBS (NYSE: CBS), which is planning to test out a similar model next year by using it to market a new Star Trek series. Press releases indicate that the new Star Trek will premiere on CBS’s broadcast network before moving to streaming video.
The new Star Trek could be the big test for streaming video by showing us if it can be used to revive a major entertainment brand. It could also provide a model for other series to be marketed online.
Like wrestling, Star Trek has legions of devoted fans willing to shell out big bucks for it. So it could be a perfect test for slowly converting traditional cable channels into streaming services.
Star Trek and Wrestling Could Show the Way to TV’s Future
There are some obvious challenges here, including whether fans will be willing to pay a subscription for something that is traditionally free. The best answer to that question seems to be yes. Cable and satellite TV do prove that people are willing to pay extra for entertainment.
Bigger challenges will be what subscription will they pay, and will those subscriptions generate enough float to sustain a profitable network? Nobody knows the answer to that question, because WWE’s subscription experiment is just too new (only two years old).
Still, its success is pointing the way for new directions for television. TV and cable networks might be able to save themselves from obsolescence by becoming subscription entities. That could transform those entertainment companies into something beyond belief—value investments.?
Naturally, some observers will wonder if WWE is now a value investment. The answer is it is too early to tell. My advice would be to only buy WWE if it generates a lot of sustained float for three years or longer. WWE is proving that streaming subscription TV is a viable business model. The question we need to ask is how viable will it be?