Hulu Wrestled this One Away from Netflix

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

All I can say is, Netflix ) you certainly had your chance. A recent announcement by WWE ) confirmed that the entertainment company has signed an agreement with Hulu in which WWE will provide all of its content exclusively to Hulu Plus subscribers.

What's The Big Deal?
I originally found out about this from an article in The Chicago Tribune, and was honestly shocked that Hulu won this business. Netflix has already licensed multiple character-specific series' from WWE, and it seemed like licensing their weekly shows would be a natural continuation of the relationship. If Netflix made this happen, it would have given the online-video provider some much needed current content. However, Hulu has now become the destination for millions of WWE fans. 

If you're not a wrestling fan, maybe this sounds like it isn't that big of a deal. But let me assure you, WWE fans are some of the most loyal among all television viewers. WWE routinely flashes promotions during their shows saying that the previous week's show was watched more than any other show on all the major networks combined. It's not unusual for these shows to attract more viewers than events like the NBA playoffs or NFL games. The company's fans are very socially active, and topics on these television shows begin trending on Twitter within minutes. WWE RAW is also the longest running weekly episodic program in the history of television. RAW has aired over 1,000 episodes, which is nearly double the number of episodes of such classics as Seinfeld, M*A*S*H, and Lassie, just to name a few.

How Does This Change Hulu's Value?
There are many wrestling fans (like myself) that aren't able to sit through 5 hours of programming between Monday and Friday night. My family wants to watch other things, and I understand. In the past I could watch full episodes of WWE Smackdown on Hulu Plus, but the license was only for viewing on a computer. This was extremely frustrating, as I have both an iPad and a PS3 that would have been better options. The new deal with Hulu not only solves this issue, but with the addition of RAW and the company's other shows, makes Hulu Plus a much better value. Hulu is backed by Walt Disney (NYSE: DIS), NBC Universal, and News Corp., and only has about 2 million subscribers, but deals like the WWE contract will help that number grow. The contract is exclusive and also covers a “multi-year” time-frame. 

How Does This Hurt Netflix?
I understand that NBCUniversal backs both Hulu and USA Network (which carries WWE RAW). But I honestly can't believe that Netflix couldn't find a way to make this deal. An expanded relationship with WWE would've been a perfect fit considering that these episodes run year-round, and are televised every Monday and Friday. However, not only will Netflix not have access to the RAW and Smackdown shows, but WWE is also launching a new show called Main Event on Oct. 3 on the independently owned ION channel. This gives Hulu three brand new shows that run year round on an exclusive license. There is no way to refer to this as anything other than a huge loss for Netflix.

Why Is This Good For WWE?
While Netflix is the loser, this deal is a huge step in the right direction for WWE. The company will "share in the upside from growth across the service,” and collect a percentage of advertising and subscription fees based on the popularity of its shows. It seems like WWE finally understands its purpose. This was clearly stated by Michelle Wilson, WWE's chief marketing officer. She said "we are a content creator and what we need to do is figure out where our fans are going to view content and monetize it." This is exactly what I was talking about in a prior post suggesting that WWE look to license its huge content library. For a company that is already paying an attractive dividend at 5.85%, and is expected to grow earnings as much as 15%, this deal should add to the bottom line. One of the concerns that WWE shareholders have had for a while was the company’s unsustainable dividend. This issue seems to have been solved in the last two quarters, with its free cash flow payout ratio at just less than 66%.

WWE Versus Their Competition
Competitors to WWE include companies like Live Nation Entertainment ) and even Walt Disney (NYSE: DIS). However, there are two major differences between Live Nation, Walt Disney, and WWE. First, only WWE runs live programming with new content multiple times a week for a heavily engaged audience. Second, Live Nation and Walt Disney both rely on major hits to make or break their quarter. While WWE does depend heavily on Wrestlemania, the company is expanding its offerings to diversify its revenue stream. The new show on ION television, an expanded presence on YouTube, and the company’s expected 24-hour WWE channel, are all examples of ways they are trying to grow earnings in the future.

From a valuation standpoint, Live Nation really can't compare to WWE. The company is expected to report negative earnings this year and just $0.01 in earnings next year. Walt Disney, on the other hand, could be an attractive option for investors considering the company’s strong lineup of blockbuster movies scheduled over the next few years. In addition, Walt Disney benefits from a slowly improving economy, and its content and cruise-line businesses should continue to improve. However, WWE's potential combination of earnings growth and a high dividend yield offers the best combination of traits to investors. This recent agreement with Hulu just shows that the company is on the right track. Sorry Netflix, but you got counted out on this one.

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