The WWE Just Gave Investors 1 Million Reasons to Celebrate

By Markets Fool.com

Investors in World Wrestling Entertainment received a jolt of much-needed optimism last week. The company said its WWE Network -- the digital video-on-demand service key to future of the company -- has exceeded 1 million subscribers. According to previous reports, that magic number marks the break-even point for the network.

Continue Reading Below

The stock promptly climbed higher on the news, and deservedly so. It comes after a long stretch lacking in positive developments from the company.

Shoulders on the mat
For WWE, 2014 was an overall lousy year. Beyond growing pains for the WWE Network -- more on this in a moment -- the company posted losses in the first three quarters (fourth quarter results not available yet)and suffered a nasty blow to its stock price after renewing a TV rights deal with Comcast and the NBC network for much less money than many expected.

WWE Chart

WWE data by YCharts

In the middle of this struggle, the company also made a bold shift to one of its key revenue sources, pay-per-view.

Continue Reading Below

Instead of charging $44.95 or $59.95 per special eventand delivering through cable and satellite providers, the company bundled its pay-per-view events with a wealth of other content and offered it for $9.99 per month. This service is delivered via the usual video-on-demand options (TV set-top boxes, PCs, mobile devices, etc.).

WWE Network seemed to be a smash hit when it debuted to much fanfare in late February, with a big initial uptake of over 667,000 subscribers within just a few weeks of rollout ... though, in retrospect, this was likely due tothe WWE signature live event, Wrestlemania, airing soon after launch.

Regardless, the new outlet saw very sluggish growth thereafter. At the end of the second quarter, the subscriber count had yet to reach 700,000. The next quarter was even worse, with only around 31,000 additions. The "churn" (i.e., subscriber defections) was rather high, putting the viability of the company's plans for the future at risk.

Comeback
But if there is one thing the WWE can do, it is hype something up. Late last year, the company began to heavily promote its WWE Network through its two flagship shows (Raw on USA and Smackdown on SyFy), with announcers and even performers talking up the service at an almost irritating rate.

To boost this effort, the company offered the Network free to new subscribers for the entirety of last November, and it dropped the initial requirement that subscribers commit to at least six months of the service. Lastly, WWE rolled the service out internationally, where it is now available in over 170 countries.

Thousands gave in to the sales pitches, deals, and new access. Now, less than a year after its birth, the WWE Network has reached its milestone 1 million subscribers.

That is an admirable achievement given how young the service is, and how much a disruption it represents to the once-cherished business model of pay-per-views.

In this case, disruption means much greater potential. For full-year 2013, WWE brought in $82.5 million in revenue from its pay-per-view events. During the third quarter last year, which ended with approximately 731,000 subscribers on the books, revenue from network subscriptions was $22.4 million.

In other words, even with less than three-quarters of its subscriber goal, the network was well on pace to exceed the tally from pay-per-view for all of 2013. The rewards for going north of 1 million subscribers are clearly significant.

Bet on the scrappy guy
WWE has announced another free month for new subscribers this February. In addition to the potential revenue sacrificed, this raises concerns that the company might still be struggling to add subscribers with no fresh ideas as to how to do so. And churn has been a real problem -- the company obviously has to find a way to make the service more "sticky."

But I believe in WWE's ability to deliver on the network. The company has a vast content library that it is constantly tapping into exclusively for the service, either as archive footage for the nostalgic or features about notable wrestlers/feuds/sports entertainment history. As noted with the Raw and Smackdown promotions late last year, the WWE is clearly determined to put this thing on its feet -- and willing to push relentlessly to get it there.

So look for this to pay off with a higher number of subscribers and less churn going forward. WWE Network has great potential to be a robust revenue generator and reliable profit center. Keep your eyes on that TV set -- or PC, or tablet, or smartphone -- the service should begin notching big wins soon.

The article The WWE Just Gave Investors 1 Million Reasons to Celebrate originally appeared on Fool.com.

Eric Volkman owns shares of World Wrestling Entertainment, Inc. and is one of the army of WWE Network subscribers. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.