Two years ago impresario Vince McMahon took the bold gamble of turning his venerable wrestling promotion, World Wrestling Entertainment (NYSE: WWE), into a subscription-based digital entertainment platform. Naturally, investors want to know, has McMahon's strategy paid off? Is WWE making money off of its WWE Network?
The financial numbers tell us that the answer appears to be yes. Between third quarter 2014 and third quarter 2015, WWE's net income increased by $59.98 million. In September 2014 World Wrestling reported a loss of -$36.34 million; a year later it reported a net income of $23.64 million. WWE is now making money off of its new subscription-based business model.
Revenues have also grown dramatically under the new regime. In September 2013 WWE reported a TTM revenue of $504.68 million; by September 2014 that number had grown modestly to $520.46 million, but by September 2015 it had shot up to $633.15 million, so WWE's revenue increased by $112.69 million in a year.
Vince McMahon's Cash Cow
The amount of cash available to WWE has increased dramatically under the new regime. In September 2014 WWE reported just $6.363 million in cash from operations. By September 2015 that figure had grown to $91.84 million. It looks as if Vince McMahon has a cash cow on his hands. The amount WWE has in the bank is also increasing; WWE reported $99.57 million in cash and short-term investments on September 30, 2015, up from $68.74 million.
The problem is that cow is not yet making enough cash to cover all of its expenses. WWE reported a free cash flow of -$1.03 million on September 30, 2015. That is an improvement over September 2014, when it reported a free cash flow of -$3.46 million, but still nothing to write home about.
That indicates that WWE has cash, but it does not have float yet. It will need at least a year of substantial revenue increases to reach the point where it is generating float. That means it will have to keep the subscribers it has for its streaming video network and attract more.
How WWE Generates Float
WWE reported that it had around 1.3 million subscribers for the network in third quarter 2015, which translates to around $12.99 million a month in subscription revenue. Currently WWE is selling subscriptions at a flat monthly rate of $9.99.
The number of subscriptions has been growing; the numbers were 79% higher in third quarter 2014 than in third 2015, Motley Fool contributor Daniel B. Kline noted. The number of subscribers also increased by 7% between second quarter 2015 and third quarter 2015.
That means the growth seems to be real and perhaps sustained, although it is difficult to ascertain how permanent it is because the subscriptions are sold on a month-to-month basis. That's a brilliant strategy because the low cost and lack of a long-term commitment means wrestling fans take little or no risk to get WWE and pay a low cost.
Vince clearly understands modern economics and technology. He knows that his working-class fans have less disposable income and that his mostly young male fans are the most likely to cut the cable cord. Instead of fighting those trends, Vince is actually encouraging cord cutting and profiting from it.
He's also figured out some new ways to sell streaming video, including a three-month subscription gift card to WWE Network that sells for $29.97. It is available at WWE.com and at some major retailers, where it can be purchased for cash.
The new business model is clearly better than WWE's old one of relying heavily upon pay per view events sold through cable and satellite networks. That model was flawed because of the high cost of the pay per views, around $49.99 apiece, and the requirement that wrestling fans have a cable or satellite subscription. Vince clearly saw that was no longer sustainable in today's world of streaming video and income inequality.
The WWE's Next Challenge
The risks Vince is taking here are still vast. Wrestling fans are notoriously fickle; they will suddenly stop supporting superstars they've cheered for decades and switch to new promotions. The WWE has other problems, including the lack of new talent; several of its top stars, including John Cena and Brock Lesner, are over 40, and it has not had a major breakout star in a long time. The last one was Duane "the Rock" Johnson, who is well over 40 and more committed to his movie career than wrestling.
The next challenge WWE will face is finding new kinds of programming and developing next generation talent for its streaming video platform. It remains to be seen if that can be done, but I would not bet against Vince McMahon and his family.
They've turned an old fashioned wrestling promotion into a cutting-edge streaming video operation and have made money in the process. Having succeeded at that challenge, they'll probably figure out a way to bring a new generation of wrestlers to a new generation of fans.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.