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WWE And The Law Of Large Numbers

Sep. 18, 2014 11:33 AM ETWWE
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The law of large numbers is a 'theorem in probability theory that the number of successes increases as the number of experiments increases and approximates the probability times the number of experiments for a large number of experiments'. Based on this theorem, the success of the WWE Network depends on a small percentage of a large avid worldwide fan base subscribing.

The burning question is how large of a fan base is there and how many are avid fans. These numbers are difficult to measure as data is sparse. As such I used data from a WWE presentation. I also incorporated my conversion ratio from my online Christopher Radko Christmas ornament business. As there are multiple dealers in these ornaments it is more difficult to convert a store visitor into a customer than WWE product were competition is virtually nonexistent. With over 36,000 visitors a year to my store only 1.42% become buyers. This percentage has remained constant over the years when factoring out returning customers.

In planning any business venture you plan for the worst, hope for the best and usually something in between happens. The conversion ratio of site visitors/fans is comparable in that those who become buyers of product are enthusiasts of what they are purchasing. As such, WWE's baseline will be higher than my store. The worse case scenario for WWE will most likely be about 2.5% of the fan base subscribing. The best case would be about 10% with the expected outcome of about 5%. The chart below shows some of the possible conversion ratios based on estimated wrestling fans worldwide. The 11,207,000 is the WWE estimate of avid wrestling fans for key countries and not the total fan base worldwide.

Estimated percent of wrestling fans to subscribe

Wrestling Fans

1.42%

2.5%

5%

10%

11,207,000-Avid

159,251

280,175

560,350

1,120,700

50,000,000

710,500

1,250,000

2,500,000

5,000,000

60,000,000

852,600

1,500,000

3,000,000

6,000,000

70,000,000

994,700

1,750,000

3,500,000

7,000,000

80,000,000

1,136,800

2,000,000

4,000,000

8,000,000

90,000,000

1,278,900

2,250,000

4,500,000

9,000,000

Avid Fans Per WWE

Presentation

% of fan base

USA

6,820,000

11%

Mexico

1,230,000

15%

Canada

434,000

7%

UK

560,000

8%

India

1,222,000

13%

S Korea

475,000

5%

Germany

312,000

6%

Australia

130,000

10%

New Zealand

24,000

6%

Total Avid Fan Base

11,207,000

It's still early in the game and the technological advances made in recent years have made streaming a very profitable business. Netflix being the major example of how streaming combined with content have lead to explosive growth. WWE is one step ahead of Netflix as Netflix had to develop content. WWE already has content with the library of wrestling history and current programs. Also, with consolidation to the network, WWE increases profitability as there are fewer parties to pay distribution fees and revenue is concentrated at the site on a number of fronts including product sales, events and other promotions. Finally, WWE will keep their broadcast television stamp with a revenue stream from distribution based on large numbers of fans who prefer to watch for free on television rather than subscribe to the network. WWE will have the best of both worlds much like Netflix.

It's all in the numbers with the numbers becoming clear over time. I'm betting on WWE hitting it out of the park based on the law of large numbers.

Analyst's Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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