wrestling / Columns
The Hamilton Ave Journal 11.08.08: Volume 1 – Issue 59
THE HAMILTON AVE JOURNAL
By JP Prag
Volume 1 – Issue 59
ABOUT THE JOURNAL
The Hamilton Ave Journal is the only wrestling news report focused solely on the business of wrestling. Here in the Journal we not only look at the stories that are important to the investor and business-minded person, but also delve deeper into stories that most fans of wrestling would overlook. That is because the Journal is about getting the heart of the matters that affect the companies and outlooks of the wrestling world.
And where is Hamilton Ave? That is the location of the WWE Production Studio in Stamford, CT, and thus the most powerful place in the wrestling world. Besides, The East Main Street Journal just does not have the right ring to it.
Who am I? I am JP Prag: consultant, entrepreneur, businessman, journalist, and wrestling fan.
Now, ring the bell because the market is open.
WHAT’S NEWS
The Journal’s front page area known as What’s News isn’t just about telling you what has happened. The stories in this section are about what will have an effect on the wrestling industry, individual federations, and the wallets of the fans.
LEAD STORY: WWE Q3 Results
On Thursday November 6, 2008, the WWE officially release Q3 results to the street and held a conference call around them. While the WWE tried to gloss over issues, the problems that the Journal and other interested parties and investors have been pointing out all year came to light. Despite a slight increase in top line revenue of 0.65% to $108.8 million, costs of revenue, SG&A, and other expenses grew so much that the WWE actually decreased their bottom line by 37.6% to $5.3 million. How did this call come about? Delving deep into the numbers the WWE has released, the Journal will endeavor to show that has happened. There will be several key points, but the ones that will come up the most will be “per unit sales”, “unnecessary rising expenses”, and “cash flow”.
First, though, is an issue right on the top line. As mentioned, revenue grew 0.65%. When dealing with year-over-year calculations, though, one needs to consider the time value of money. Every year there is inflation that currently is roughly 3% on average, but from September 2007 to September 2008 the rate was 4.94%. That means that a dollar today is worth 4.94% less today than it was a year ago. So in 2007 dollars, the WWE made $103.4 million in revenue, representing a 4.3% decrease in adjusted dollars overall. That means that even from the start, the WWE was actually dealing with less real revenue and failed to keep up with inflation in either their sales amount, cost structure, or both.
Now, breaking down the business by segments, we’ll begin with Live Events and Venue Merchandise, which increased 2% to $24.5 million. Margins on Live Events and Merchandise, though, decreased 10% to $6.1 million. That means it cost more to make less money. What’s more is how it breaks down as in this quarter there were 89 total events (12 non-domestic) compared to 78 events (15 non-domestic) last year. So this year the per-event revenue was $0.28 million compared to $0.30 million last year, a decrease of 7% per event overall. So cost significantly increased by going to more events, but the per-event revenue was down so much that only volume made up for it. Overall, there was a loss in the per-unit events.
As noted in previous editions of the Journal and by the WWE during the conference call, events in countries like Spain, Portugal, and Austria saw significant dips in attendance; showing an extreme market burnout that led to a 28% dip in average attendance figures. Couple this with lower attendance in the domestic market and a drop in per-ticket average price (a reason for this was not explained), and the WWE basically took a hit from all directions possible.
Moving on to PPV revenue, that dropped 13% as well to $16.4 million. At the same time, margins on PPVs dropped 31% to $8.3 million. Overall, the margin for PPVs this quarter was 50.6% compared to 63.8% last quarter. In other words, the WWE was able to get more of their revenue from the PPV companies and cut down the cost of producing PPVs, but revenue dipped so much that their net profit still took a significant dive. This, of course, shows that PPV buyrates dropped at a high rate:
As can be seen, only Unforgiven grew this quarter by a small amount while everything else fell, including purchases of prior events. CFO George Barrios stated that PPV buyrates were down because of the Olympics, and there is precedent for this belief. During the 2004 Olympics SummerSlam also saw a dip in buyrates from the prior and next year, but overall that does not explain the other PPVs. Deflecting underlying issues continues to be the game of the WWE as they blame everyone and everything but themselves when the numbers don’t come in as well as expected.
In what should be a bright spot, television rights fees increased 7% to $24.4 million and profit contributions 3% to $6.3 million. Looking at the margin, then, we see that it was 25.8% this year compared to 26.8% last year. Why would it cost so much more to put on the same amount of television? Again, little cost inside each division keep growing out of control. Although in this case the revenue outpaced the costs, the costs are still rising without controls. This is an area of no excuse where there should not have been any rise in costs, and yet there was a near 4% increase in television production costs.
Jumping down to consumer products, Home Videos increased 93% to $11.0 million, led the way by increased unit amount of 35% to 730,000 DVDs (mostly due to increased distribution in France, Australia, Spain, and Germany). But looking at the numbers, there were 7 titles released this quarter compared to 3 in the last quarter. On a per new unit basis, it was $1.8 million per unit this quarter compared to $1.9 million per unit last year, a decrease of 5.3%. So while the video library is increasing sales, the per unit revenue is decreasing. This led way to a margin of 64.6% ($7.1 million) compared to 66.8% ($3.8 million). Costs are again increasing in the another department. Yes, it is a small amount, but all of theses small amounts are adding up fast and you can begin to see how this has ended up with such a large deficit.
Other items followed similar patterns, so there is no need to go into great detail. Though one of the main points of interest was in the increase in revenue in the magazine division of 20.5% to $4.7 million. But the WWE published only 3 issues last year compared to 4 issues of WWE Magazine and 2 issues of WWE Kids Magazine, making the per issue revenue drop from $1.3 million to $0.8 million, a decrease of 40%! As we have seen several times in the past, the WWE tries to cover up lower per unit revenues and rising costs with higher revenue numbers. In this case, the WWE actually claimed higher distribution and more subscriptions and newsstand sales, making this piece even more suspect.
Dropping below the items for sale, SG&A cost increased a staggering 8% to $31.3 million. This has been a continuing trend this year where year-to-date SG&A is already at $101.9 million compared to $80.3 million last year, an increase of 26.9%. WWE CEO Linda McMahon has claimed the WWE has begun a program to cut $20 million in cost, and you can see where the fast majority of those costs lay. But this is a case of too little, too late. As noted in the teaser to the Journal, these rising costs were an issue nine months ago, and yet the WWE denied them. They have only been growing and growing and the WWE continues to deny their existence.
Instead, the WWE blames the economy, blames the Olympics, blames entertainment competition, and blames their partners. When do they become self reflective and realize they are the reasons for their own cost increases? There are factors that will drop revenue, for sure, but costs are completely within the control of the WWE.
And where will the WWE cut $20 million? As expected, this will most likely come by releasing revenue generating wrestlers and lower-paid office employees. The WWE refuses to look at their much larger issue: they are top heavy! There are now dozens of C-level executives, “Executive” Vice Presidents, “Senior” Vice Presidents, and regular Vice Presidents. In a company of 570 employees, why do they need that much hierarchy and control? Why are so many people with giant titles and paychecks sitting around and doing the same jobs?
There is incredible waster and bureaucracy at the top of the organization and that is why they refuse to look internal at their rising costs issue. If they did so, they would have to make the hard decision some of their own jobs were unnecessary. The WWE is now at a point where the corporate executives are so disconnected from the product and how revenue is generated that they do not have respect for sales or costs.
And that is why Operating Income has dropped 41% to $7.9 million with a margin of 7% (compared to 12% last year). Taking out an impairment charge for WWE Films brings the margin up to 9%, but that still means costs are out of control. The Journal is pulling no punches this time as the cost increases are absolutely the fault of the WWE.
More distributing than all of this is what is happening on the balance sheet and cash flow statements. Net cash provided by operating income dropped an astounding 75.8% to $17.7 million. A large portion of this went purchasing feature film assets that will not be reclaimed for some time, but a large amount also transferred to Accounts Receivable.
The WWE’s greatest strength has been the pile of cash they are sitting on. That pile got a bit smaller as cash on hand dropped $16.7 million to $119.1 million. As discussed during the last quarter, the WWE continues to pay out a dividend that is more than they take in, so all they are doing is burning through cash.
Meanwhile, as noted Accounts Receivable jumped to $68.6 million, meaning either the WWE is not collecting their bills fast enough or people are not paying them. Given the current economy, the latter is quite possible and the WWE may start showing write downs of uncollected funds. With that, the WWE will may not be collecting a portion of the revenues they have claimed in the past, and that will only hurt them more down the road.
The good news is that current liabilities remain in the $72 million range, so the quick ratio of 3.95 means they are in no danger of going broke anytime soon.
Despite that bit of good news, the WWE has some serious woes. With a product continuing to shrink in the domestic market and now starting to shrink in some non-domestic markets, a tough economy, increased competition, and out of control costs they refuse to truly address, the WWE is not poised for what is to come ahead. Their stubborn nature and refusal to be self-reflective are going to hurt them again next quarter.
The WWE used this quarter to admit to some problems but not be beholden to them. They are in a reactive mode instead of proactive, but even that reactive mode is without urgency for one simple reason: they are still profitable. Throughout all that has been listed above and despite everything, the WWE is very profitable; one of the most profitable companies out there. They can continue to operate as-is right now and function for decades to come. They don’t actually need to bring back costs, but can just stabilize enough to ride the storm.
What incentive does the WWE have for becoming a better and more efficient company? At the end of the day, The McMahons and close personal friends own the vast majority of shares, super voting shares, and all of the seats on the Board of Directors. As a public company, they do not have the interest of their other stock holders to consider nor do they have to consider their own employees and contractors internally.
Even with everything going wrong, the WWE could go on for a long time with no change. The Journal hopes that they want to become a better organization, but they have yet to show that type of tenacity since before WCW folded.
Newsbites
Some items of note in the rest of the wrestling business world:
Many people are skewed by how high RAW’s ratings are and think most shows on cable do that, but for vast majority of cable stations ratings are in the 0.1 to 0.3 range. There are actually times when stations have 0.0 ratings, it nobody or almost nobody watching. And although broadcast and television ratings are not exactly the same, the number 10 broadcast show last week had a rating of 9.1 and the number 1 cable show had a rating of 7.3. Meanwhile, the number 10 show had a rating of 2.7, showing just how low ratings can be on cable and still be considered excellent.
MARKETPLACE
In the Marketplace we look at the trends in television ratings. This section is less for critical analysis by the Journal but more for the reader to see what is really going on and to draw their own conclusions.
As with stocks, here in the Journal we track the progress of television ratings. If ratings are the barometer by which we judge the product, then over the course of 52 weeks we should be able to see patterns, trends, and anomalies.
For the week ending Thursday November 6, 2008, here are the current standings of our shows:
RAW
Close (This Week’s Rating): 3.0
Open (Last Week’s Rating): 2.9
Percentage Change: ▲ 3.8%
52-Week High: 4.1
52-Week Low: 2.5
All Time High: 8.1
All Time Low: 1.8
SmackDown*
Close (This Week’s Rating): 1.7
Open (Last Week’s Rating): 2.1
Percentage Change: ▼ 19.0%
52-Week High: 2.9
52-Week Low: 1.6
All Time High: 5.8
All Time Low: 1.0
* SmackDown! ratings may include fast overnight if final ratings are not posted. Also, SmackDown! ratings are for the prior week as overnights are not available before this article goes to print.
ECW
Close (This Week’s Rating): 1.0
Open (Last Week’s Rating): 1.2
Percentage Change: ▼ 20.8%
52-Week High: 1.5
52-Week Low: 0.6
All Time High: 2.3
All Time Low: 0.6
TNA iMPACT**
Close (This Week’s Rating): 1.2
Open (Last Week’s Rating): 1.1
Percentage Change: ▲ 6.2%
52-Week High: 1.2
52-Week Low: 0.9
All Time High: 1.2
All Time Low: 0.6
** TNA iMPACT’s are for the prior week as ratings may not be available at the time of the Journal’s posting
Analysis:
While ECW had the excuse of the Presidential Election to say why they dropped nearly 21%, SmackDown was hit even worse by Halloween. Seeing their lowest rating on MyNetworkTV of a 1.7 (a 19% drop), SmackDown had its lowest rating since July 4, 2008 (American Independence Day). In all of 2007 there were no SmackDown ratings below 2.0, but 2008 has already seen 3. There were actually 3 more in 2006, but two of them were due to major preemptions in 10 major markets. Still, all together there have been 7 times when SmackDown has been below a 2.0 and 43% of them happened this year.
Meanwhile, TNA tied their record rating (though not their record total audience) with a 1.2 ratings. The organization has not seen that rating since March 6, 2008, which holds true with their normal growth curve. TNA has been on a major uptick since June lows of 0.86, showing perhaps they do know something about creating a bit of an audience (although at the cost of another audience). Will TNA be able to expand and gain viewers, or will they continue the pattern of alienating one pool of viewers in order to court another?
MONEY AND INVESTING
We all know that wrestling is a business, but we don’t often pay attention to what sells and makes money. Money and Investing looks into the top selling items in the world of wrestling and any interesting figures that may have come out this week.
What are the top ten selling items for the WWE? From WWEShopZone.com:
1. WWE Black Gift Bag ($3)
2. Hardys Purple Logo Pendant ($10)
3. Stone Cold Steve Austin Destroyed That T-Shirt ($25, on sale $20, double sale $9.98)
4. Hardys WWE Shop and Jakks Pacific Exclusive Action Figure ($34.99, on sale $24.99)
5. Stone Cold Steve Austin Since 1989 T-Shirt ($25)
6. Jeff Hardy Green Armbands ($20)
7. Hardys Dream 2 Defy T-Shirt ($25)
8. Triple H Grey Skull Sweatshirt ($40, on sale $12.98)
9. Jeff Hardy Self Portrait T-Shirt ($25)
10. Rey Mysterio Master of 619 YOUTH Sweatshirt ($40, on sale $12.98)
It was a good week to be a Hardy, especially if your name was Jeff. Hardy merchandise not only constituted 50% of the Top Ten, but a large portion of those items were full priced and high margin (specifically #7 and #9). Meanwhile, hanging on for a second week was Stone Cold Steve Austin with a discounted item and a full priced item. One week in the Top Ten was expected from his appearance at Cyber Sunday, but everything since then shows just how underperforming most of the rest of the roster is.
TNA releases a weekly Top Seven list on ShopTNA.com. According to the site the top selling items were:
1. Jeff Jarrett Autographed Laser Engraved Guitar ($299, on sale $199)
2. Autographed Sting Baseball Bat ($149)
3. TNA iMPACT Video Game ($39.99 to $59.99)
4. Knocked Out DVD ($14.99)
5. TNA Global iMPACT DVD ($19.99)
6. Post Yard Sale DVD Special ($29.99)
7. Post Yard Sale T-Shirt Special ($39.99)
TNA has not bothered to update their list again (again) this week, therefore these items cannot be valid.
PERSONAL JOURNAL
Wrestling isn’t just about watching and reading. The best way to be a wrestling fan is to experience it live. Where is wrestling coming to in the next 2 weeks? The Personal Journal answers that question.
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*** Please see the Editorials section for additional information about the event in Belfast
Do you know a wrestling event coming up? Send one in to The Hamilton Ave Journal and we’ll be sure to add it to the list.
EDITORIALS
The Editorials section is designed for you, the readers, to respond to the views presented in the Journal, send an important news item, or talk about another overlooked business related item in wrestling. Just beware: the Journal reserves the right to respond back.
From the commentary section last week, the hot button issue was apparently the status of Belfast, beginning with Iron Knee:
Belfast is part of the UK as well.
And Ignorance said:
Belfast is in the boundaries of the United Kingdom. In future please be more respectful of other peoples’ countries. I suppose you still believe that the USSR, Yugoslavia and British North America still exist. tut tut
To which the Journal will tell you to be more respectful to its journalists and direct your issues with where they really belong… The WWE. Here is a screen capture of the scheduling page at WWE.com:
The Journal literally took these as is and assumed them to be right. There could be another city called Belfast, just as there are over a dozen Springfields in the USA. If the Journal were to give you a map of the United States of America and ask you to point out Springfield, Vermont, would you even be able to point out where Vermont was, nonetheless Springfield? Show some respect if you want some and understand not everyone appreciates your local geography as much as you do. This reporter appreciates your passion for your home area, but does not expect you to be able to explain the issues between people living in Federal Hill, Providence, Rhode Island, USA and those who live in Olneyville, Providence, Rhode Island, USA. Carnivore also sums up the feelings of the Journal as well:
Give it a rest guys with the Belfast shit! He made a mistake, granted a glaring mistake since Belfast is the capital city of Northern Ireland which is a part of the UK but damn give him a break. I wouldn’t get up in arms if one of you accidentally said, “WWE will be running shows all over South Carolina, and they will make a stop in Charleston” It’s not disrespectful, it’s just a mistake.
However I’m sure by pointing out his mistake you feel like more of a man.
Thanks, much appreciated. Moving on to real subjects about wrestling business, theHomewrecker! asks:
Everyone on all the other columns (some writers, mostly posters) claim that Batista is in the spot he’s in because he moves a lot of merchandise, but this is the first time I’ve seen him on the list (I’m sure there’s been more, I just haven’t taken notice). Does he really move that much?
I don’t ask because I hate him, I ask because I want him to turn heel so he’ll be great again. I just think w Austin, Hardy, Cena, Mysterio, HBK, HHH, DX & Hornswoggle moving merchandise, I would think Batista would be way behind. I’ve never even seen what a Batista shirt looks like; I’ve seen plenty of Santino shirts in the crowd; so Batista can turn heel and move merchandise, so what’s going on there?
Well, Batista has shown up in the Top Ten, but it is quite sporadic. He moves more merchandise than, say, Kung Fu Naki, but he does not move the amount as the people you have listed. There are many people in the main event scene who do not move much merchandise but are able to maintain their spot. The Big Show specifically comes to mind in this case. Why the WWE won’t turn him heel is probably because they feel he fits better into storylines as a face and they are looking to keep a large number of faces until Cena’s return. You are right in the fact he could probably turn heel and not hurt his merchandise sales, but Batista himself may prefer to be a face and is pushing that on the booking committee and Mr. McMahon.
On the subject of ROH’s change in management, Stephanie said:
Gabe didn’t resign, he was told to go. Has this not been covered by just about every other article that’s come out since last Sunday?
Perhaps the subtext was lost on you, Stephanie, but the Journal did say that Gabe was most likely asked to resign. That said, that is still speculation and rumor and until the man or ROH confirms it, it is just a rumor and not fact. The Journal endeavors to provide fact and less hearsay whenever possible.
Moving on to the subject of PPV buyrates, Guest#8466 has this to say:
The PPV sales have leveled out since the PPV brand split ended, the lesser PPV figures have increased, and the now less special big PPVs have fallen.
First off, the Brand Split still exists, just not for PPVs. And yes, since then the lesser PPVs figures have increased and the larger ones have started to decrease. This is no different than anything the Journal stated last week. What is a possibility is that lesser PPVs may start to decline, as has been seen by two recently. If that happens, than any leveling out will be for naught as both major and minor PPVs will come in with lesser buyrates. This is a highly likely situation in this economy with the conversion rates the WWE gets on their declining ratings.
Moving on to Mexico, USAUSA1 gives a little insight:
As for CMLL, you have to take into account their top two stars are out and been out for a long time. They’re doing bad, but they will always make money because they own Arena Mexico and gets a 100% profit off ALL THEIR SHOWS. That’s why CMLL been in business for 75 years. CMLL been through worse times. Mistico and Perro return will see an increase in the attendance.
WWE and AAA is neck to neck in the ratings in Mexico and I even think AAA beat WWE in the ratings last week. Don’t believe the hype.
As for TNA, they’re on a network that actually loss homes/cable companies recently (that’s why WWE left the network).
That’s interesting about CMLL and does show they have a lot of legs. At the very least, they will continue to make money from Arena Mexico, but as for worst times this is a bit of a different situation. Now they have to deal with increased foreign competition with deeper pockets, so they are in a real battle. As far as AAA and the ratings, that makes perfect sense. The Journal would believe that AAA is beating the WWE in Mexico and is quite profitable as AAA has recently started expanding into the United States. There is quite a high possibility that AAA could become a contender in the United States, especially as the Latino population grows and grows and the WWE will be slow to react.
And finishing us off this week is APinOz:
Can a company legally own the “history” of a promotion, as described in the article about the AWA?
The Journal did that in a simplistic way, but for all intents and purposes the WWE owns the “history” of the AWA. Should TNA reference an AWA championship match, the WWE would have no grounds to sue over fair use laws. But if they were to describe that match in detail or show pictures from it, there is where the problem lies. The WWE purchased all of the intellectual property of the AWA, and that includes their video library and everything it contains. So the WWE owns anything that has been seen in AWA and therefore is owed for its use. Also, the WWE owns all logos and championship lineage, which is mainly what AWA All Stars was using.
Plenty more was written, so be sure to take a look. And of course, a week would not be complete without a good dose of JP Prag’s own HIDDEN HIGHLIGHTS!!
CLOSING BELL
This concludes Issue #59 (Volume 1) of THE HAMILTON AVE JOURNAL. Join us next week as we get ready to ring the bell again.
Till then!
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