Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

The Strange, Brave New World of WWE and Digital Entertainment

Some stocks just cannot get any respect from Mr. Market—case in point, World Wrestling Entertainment (NYSE: WWE). Over the past year the McMahon family has successfully transformed its venerable wrestling promotion into a cutting edge digital entertainment company.

In the year since CEO Vince McMahon launched his WWE network video streaming service, the company’s TTM revenue has grown dramatically. In December 2013 WWE reported a TTM revenue of $495.58 million that grew to $542.62 million. That’s truly impressive because WWE’s revenue had been holding steady for a few years. It was $483.92 million in December 2011 and $484.01 million in December 2012.

McMahon’s gamble on digital video subscriptions has certainly paid off and given his network a lot of float. WWE reported a quarterly year to year TTM revenue growth rate of 18.72% on Dec. 31, 2014. If the current numbers are any indication, that number could be higher next year.

Is Vince McMahon a Visionary?

The numbers indicate that WWE CEO Vincent Kennedy McMahon Jr. is some sort of visionary at the cutting edge of entertainment. He seemed to have the insight that wrestling fans would be willing to pay a flat rate of $9.99 a month for just the programming they wanted to watch.

The subscription rate caters to cash-strapped working class wrestling fans that might not be able to come up with $100 a month for cable or satellite but can certainly afford $10 a month (about the cost of dinner for one at Chipotle) to see their favorite wrestlers. It also appeals to a generation of TV viewers used to only paying for their favorite shows on Netflix (NASDAQ: NFLX), Hulu, or (NASDAQ: AMZN).


Not your average digital media tycoon. Vince McMahon flexes his muscle for fans.
Not your average digital media tycoon. Vince McMahon flexes his muscle for fans.

To lure more subscriptions, Vince has adopted an old retail trick: the loss leader. He is giving people who pay the subscription fee free access to wrestling pay per views that normally cost around $50. That makes wrestling fans that pay $9.99 a month think they are getting a bargain. Vince likes the arrangement because his company gets the complete $9.99; he has to share the pay per view revenue with cable companies and satellite operators.

This generates a lot of float and makes WWE look like a classic Warren Buffett value play. Float is a constant stream of cash that a company can tap for a variety of purposes. Vince can use the money to hire more wrestlers, launch more channels, upgrade his programming or simply put it in the back. It also makes it easier for him to borrow money or issue bonds.

McMahon claimed he had 1.3 million subscribers at a March 30, 2015, press conference. At $9.99 apiece, that represents potential revenues of $12.99 million a month, or $155.44 million a year. If it keeps growing, the numbers could be even higher, particularly when WWE moves into other markets, like Europe.

The Future of Entertainment

That means WWE could be the future of the entertainment business. Instead of packages of channels peddled by cable or satellite companies, we’ll see two digital entertainment delivery models in the near future.

The first will be the entertainment retailers like Netflix and Amazon, which sell individual entertainment products like movies and episodes of TV shows on a product per product basis. This business is very successful; Netflix reported that its TTM revenue went from $4.62 billion in March 2014 to $5.8 billion in March 2015. Netflix also reported a quarterly year to year TTM revenue growth rate of 23.86% on March 31, 2015.

The second will be channels like WWE offering a particular kind of entertainment targeted at a specific audience. For example, Paramount or CBS (NYSE: CBS.A) could launch the Star Trek channel featuring all Star Trek all the time for Trekkies. Disney (NYSE: DIS) could launch the Star Wars channel and so on.

This will certainly make the wars for control of entertainment properties even more brutal. Take Star Trek; CBS reportedly owns the TV rights to Star Trek, while Paramount owns the movie rights. Disney owns the movie rights to some of the Marvel Comics superheroes such as Iron Man and Captain America (which is why their movies are getting such a big push right now) but not others like Spiderman and the X-Men.

It will cause more entertainment companies and others to market entertainment directly to fans much as McMahon is doing. Another effect will be that traditional TV and cable networks will be turned into promotional outlets for such channels.


McMahon in earlier simpler times when he was just a wrestling announcer and promoter.
McMahon in earlier simpler times when he was just a wrestling announcer and promoter.


Cable and satellite companies are particularly angry at McMahon because his highly rated wrestling cable TV shows, Monday Night Raw on the USA Network and Smackdown on the SyFi Channel, are little more than infomercials for the WWE network. Yet Comcast, which owns those channels, has to pay for the privilege of airing them.

Verizon Follows WWE’s Lead

One company that seems to have realized this and is trying to head it off is Verizon Communications (NYSE: VZ). The Washington Post reports that TV network operators 21st Century Fox (NYSE: FOX) and Comcast (NYSE: CMCSA) are boiling mad at Verizon’s new Custom TV Service or FiOs.

The service allows customers to pick bundles based on genres. For example, a movie buff can pick a bundle that includes Cinemax and Turner Classic Movies, while a gearhead might pick BBC America (home of Top Gear) and Fox Sports One, which shows NASCAR races.

The idea at Verizon is to keep viewers from fleeing to digital. The only thing that has kept a lot of people buying cable and satellite is that most popular sports, including NFL football, Premier League and Champions League soccer, Formula One and NASCAR racing, NBA baseball, college football and NHL hockey are not streamed on digital yet.

What truly scares the cable companies is that something like the NFL, Major League Baseball or NASCAR might follow WWE’s lead and start streaming programming. The NFL could launch the NFL channel streaming all those old NFL films and this week’s games for example.
Verizon is hoping that it can make money by providing the wire or digital signal that delivers the program. Verizon also sells high speed Internet, which is vital for streaming video. The real threat to digital video’s future is the lack of high speed Internet in much of the U.S.

Google and AT&T are the Real Winners in the Digital Entertainment Explosion

It is the expansion of such Internet service by companies such as Google (NASDAQ: GOOG), Verizon and AT&T (NYSE: T) that provides the real value investment opportunity. It will not matter what kind of entertainment the fan orders because they will provide the infrastructure that delivers it. Google and AT&T, which are planning to hook up high speed Internet all over the country, are in a great position to profit.

The entertainment industry is changing beyond recognition, and a wrestling promotion seems to be leading the way. One has to wonder what will happen next in the world of digital entertainment.