WWE’s Digital Entertainment Gamble Paying Off for Now

The number of subscribers to World Wrestling Entertainments’ WWE Network has exceeded one million for the first time.

 

If each of those subscribers sticks around and pays the $9.99 a month subscription, WWE could earn $9.99 million a month or $119.88 million in additional revenue from the network.

 

WWE’s new multiplayer video game, WWE Immortals, was downloaded 2.7 million times in just two weeks.

WWE’s TTM revenue grew by $35.31 million between March 2014 and September 2014.

 

These numbers show that WWE could be on the verge of transitioning into a successful digital entertainment company.

 

Fan reaction to WWE programming could undermine Vince McMahon’s efforts to transform his promotion into a digital entertainment operation.

World Wrestling Entertainment (NYSE: WWE) has had a lot of success in the world of digital entertainment lately. Variety reported that the venerable wrestling promotions’ streaming video service, the WWE Network, now has one million subscribers.
That’s truly impressive because the network launched just last February; reaching one million subscribers in a year seems to validate that WWE’s risky strategy of giving its premium content pay per view events away for free to network subscribers is paying off.

The number of subscribers grew by 37% in the fourth quarter of 2014, rising from 731,000 in October to 1,000,648 on Jan. 27, 2015, Variety reported. It is not clear if that growth rate can be maintained because much of it was driven by the launch of WWE network in the United Kingdom, where wrestling is extremely popular.

Streaming video is not the only digital success that WWE is enjoying right now. The company’s ambitious freemium online multiplayer video game WWE Immortals was downloaded 2.7 million times in two weeks, according to the Attack of the Fanboy blog.

Digital Equals Float for WWE

It looks as if WWE is not so quietly transforming itself from a wrestling promotion company into a full-fledged digital entertainment company. That should interest value investors because I’ve noted elsewhere that it could give World Wrestling Entertainment a lot of float from subscriptions.

If each of the new WWE Network subscribers pays his bill, the company could earn around $9.99 million a month or $119.88 million a year in additional revenue. It isn’t clear how much the WWE can make off Immortals yet, because the game download is free. The company is hoping to profit by selling players upgrades that will take the player to the next level; each upgrade costs around $10.

Okay, so that’s the plan, but is it actually working? Judging by WWE’s revenue figures, the answer to that question seems to be yes. World Wrestling reported a TTM revenue number of $484.95 million in March 2013, just after the launch of the Network. By September 30, 2014, that figure had grown to $520.46 million, an increase of $35.51 million, which indicates the loss of pay per view subscriptions is not hurting WWE’s revenues.

WWE’s Revenue Has Started to Grow

The problem is that this figure hasn’t yet affected some of the other financial numbers at WWE. The company reported a diluted EPS of -.4851% on Sept. 30 for example. It also reported a free cash flow of -$3.465 million and a net income figure of -$36.34 million on the same day.

The conversion to digital is certainly a risky move, but it’s a risk that WWE needs to take if it wants to turn some of those numbers around. The numbers prove that this company certainly needs some additional cash and fast. It also needs some real float if it is going to survive in today’s world of digital entertainment.

Can the Float Be Sustained?

The question we need to ask ourselves is can WWE’s subscriptions and float be sustained. The answer to that question might be determined by what happens inside the WWE’s ring and the quality of the content it is providing. In recent months, many fans have been condemning the company’s in-ring action as boring and repetitive.

Fan reaction to the company’s last big pay per view event, The Royal Rumble, was incredibly hostile. Fortune’s Chris Smith reported that the hashtag “CancelWWENetwork” was one of the top trends over the weekend of January 24 through 26. Smith also noted that the winner of The Rumble, one of the WWE’s top events, Roman Reigns, was actually booed out of the arena by disappointed fans.

It isn’t clear if the fan revolt is succeeding or not, but WWE was forced to issue this press release shortly after The Rumble:

“UPDATE – A WWE spokesperson denies that the WWE Network’s cancellation page crashed at any point over the weekend, as previously reported in this story and elsewhere. Any service failure experienced by users, including the present author, were not caused by server overload on WWE’s end, according to the company. The WWE spokesperson also clarified that there was no spike in WWE Network cancellations following Royal Rumble.”

The press release shows us that sustaining digital entertainment float might be a tougher challenge than WWE thought. It also poses some challenges for investors because WWE is a fairly unique company; its strengths are in marketing and merchandising rather than production. That could pose some problems because digital entertainment consumers often demand and expect a higher quality of content; i.e., Amazon.com (NASDAQ: AMZN) and Netflix (NASDAQ: NFLX) go out of their way to produce award winning shows.

Smith noted that the poor quality of content has not kept fans from tuning into WWE’s flagship Monday Night Raw cable TV show. Raw, which runs on the USA Network, currently draws around four million viewers a week. Nor has the appeal of WWE pay per views diminished; The Royal Rumble was the fifth most viewed TV event for the week of January 25, according to Forbes.

Only time will tell if WWE can buck this trend or figure out some way to satisfy disappointed fans. WWE has a long history of successfully responding to fans’ demands, so it might be able to dodge this bullet.

Yet recent history does show us that digital entertainment companies can have a hard time sustaining float. A look at one popular digital entertainment company shows us that such float is not guaranteed.

Digital Float Hard to Sustain

Freemium video game company King Digital Entertainment (NYSE: KING) enjoyed a great run similar to the one WWE is having now over the past couple of years. King reported a TTM revenue of $1.88 billion in December 2013; by June 2014 that figure had grown to $2.423 billion. Yet by Sept. 30, 2014, it had fallen to $2.316 billion.

King’s experience shows us that sustaining revenues from digital entertainment float can be difficult. It also demonstrates that such revenues are uncertain. Judging by WWE’s experience, generating initial float is easy but maintaining it can be tough.

WWE needs to demonstrate that it can buck this trend if it wants to be taken seriously as a company with a lot of float. We need to see more than numbers from WWE; we need to see some serious increases in cash flow to justify this new business model.