The Hamilton Ave Journal 11.12.09: Volume 2 – Issue 111

Posted by JP Prag on 11.12.2009

Has all the cost cutting led to a profitable third quarter for the WWE? Will raising the prices of PPVs help them next year? Will TNA ever be able to make a video game again? And did their ratings stay up after the Hulk Hogan press conference? All this and more is answered in this week’s edition of the Hamilton Ave Journal!

THE HAMILTON AVE JOURNAL
By JP Prag

Volume 2 – Issue 111

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.






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

The WWE released their third quarter results and first glance would make one believe the WWE is an unstoppable machine. Despite the down economy and many lagging indicators within the business, the company was actually able to boost revenue 2% from the same period last year from $108.8 million to $113.3 million. Couple that with cost reductions that have been surfacing since the second quarter and the WWE actually increased Net income a whopping 84% from $7.9 million to $14.5 million. In other words, each dollar of revenue translated to 13 cents on the bottom line compared to 7 cents last year.

Just how did the WWE do it? Let's break down the numbers and find out.

Live Events and Venue Merchandise was by far the biggest gainer with a 29% top line growth from $24.5 million to $31.5 million. The company held five more events this year than last, all of which were additional international dates. Despite ticket prices being lowered on average to $65.59 due partly to foreign exchange rates, the attendance increase of 38% to an average 9,100 per show more than offset the difference. North America also saw a ticket price decline but coupled with a 9% attendance increase.

Where there were highs from Live Events, there were lows from PPV. Revenue decreased 12% from $16.4 million to $14.5 million. The main driving force was the decrease in buyrates, as seen here:



The good news is that WWE was able to decrease costs 62% so at the end of the day PPV's had the same profit contributions this year as last year. In other words, they made more money on less revenue, so they are more than safe on this one. Still, there are PPV changes coming which will be covered more in depth below.

Television Rights Fees against showed the gain from SuperStars and more international distribution as the top line increased 16% from $24.4 million to $28.3 million. At the same time the cost of producing these shows dropped 11% so the profit contributions from television increased an astonishing 94% from $6.3 million to $12.2 million (a 43% margin).

Home Video remained relatively flat and Digital Media saw a slight decrease of 6% in revenue, but Licensing fees dropped 25% from $10.6 million to $7.9 million. The WWE was vague on the reasoning for this but states:

The decrease primarily reflects the reduction in royalties earned on the sales of toys and videogames, particularly in international markets.

The WWE has been setting up new deals around the world, so either the deals are not panning out or sales have not been as vigorous as hoped. The margin remained the same (no cost saving measures), so the loss of revenue was felt straight to the bottom line.

WWE Studios recorded $3.0 million in revenue as compared to $5.6 million in the prior year, mostly related to already released films. It is important to note that the WWE has not recognized any revenue from "12 Rounds" yet, so that money is yet to be reflected in the P&L. Since most of the costs has already incurred, the profit margin increased from 39% to 57%, yielding $1.7 million in Net Income.

After all of the cost cutting, SG&A still went up to $33.1 million from $31.3 million in the same period last year. SG&A as a percentage of revenue thus increased from 29% to 30%. The WWE claims this increase came "an increase in accrued incentive compensation", but the general expenses of this company remain a large problem area. In the past two quarters we have seen the dollars go down while the percentage of revenue goes up, but this is the first time that we have seen both rise. SG&A will continue to be closely monitored area of the WWE's performance.

Due to showing such high performance, the WWE's effective tax rate was raised from 32% to 42%. So much of the gains the company received this year have already been gobbled by Federal and State budgets.

For the first time in a while, the WWE actually saw a positive net cash change of $33.1 million, bring cash on hand to $152.7 million. While some of the additional cash is due to better operating performance (roughly $7.3 million), the rest came deferring taxes, selling capital, selling pre-paid expenses, and other one-off activities. While these activities have greatly strengthened the company's cash position, the WWE has only mildly shown here they can still support the dividend, which has amounted to $61.6 million this year.

Given that Net Operating Income Before Taxes was $59.3 million, the company would seem to not have enough cash to be able to pay out the dividend from normal activities. When adding back in depreciation, there is another $11 million, but that is a tight margin.


Overall, the WWE has made tremendous strides this quarter. The cost savings that began to be realized in the second quarter came through brightly here. There were some areas for concern—especially around SG&A, lower buyrates and ticket prices, and cash from operations not being enough to pay dividends—but overall the WWE continues to be in a strong position.

Despite what some may have you believe, the WWE is actually in their strongest financial earning capacity right now. While some areas like PPV are down, they have made television rights, home video, and live event numbers soar to dollar amounts not seen 10 years ago. There are definitely areas for improvement, but the WWE has the time and resources to make those improvements happen. The increase in cash this quarter is a sign that the company recognizes some of the issues they have been having and are looking to be proactive about the situation.

Although the WWE may not be the mainstream idol they were 10 years ago, they are a financial idol to those who see what this company is really up to.


PPV Prices on the Rise

Over this year, the Journal has documented several times readers being upset with the number of PPVs the WWE has. Several examples have been given where the WWE would actually be in a worse position if they dropped their PPV number to four, six, or eight simply because the additional buyrates would not make up for lower revenue.

The WWE has however decided that they can drop one PPV a year and have just 13. This, however, will be coupled with a $5 increase per PPV for every event not WrestleMania to a mean price of $44.95 per event. Obviously, there is quite a lot of math going into an equation like this, but let's break it down.

If the 13 non-WrestleMania PPVs did an average buyrate of 200,000 buys per show at $39.95 a piece, then the WWE would be taking in about $104 million in revenue (about $8 million per show). Just to get to that revenue number, at the same price point the WWE would have to increase buyrates to 217,000 per show, an increase of 8.3%. Now, with the increase in price the buyrates could actually decline 3.7% to 193,000 in order to have the same $104 million.

It can be expected, though, that buyrates could drop more than that. How far can they drop? Well, if each PPV costs $2.5 million to put on, the WWE will gain back that cost. From that perspective, the WWE could actually have buyrates drop 8.4% and still make the same Net Income of $19.4 million (50% of revenue immediately goes to the PPV companies). That number is well within reason, so so long as the WWE does not shed more than 8.4% of the PPV audience they will actually come out more profitable in the PPV category than they did the year before.


Newsbites

Some items of note in the rest of the wrestling business world:

In what has to be either a saving grace from embarrassment or a great coup, WWE managed to secure programming rights for SmackDown in the Providence market just before the show taped on last Tuesday night. Three weeks prior, the local FOX affiliate stopped showing MyNetworkTV programming at off hours (of which SmackDown was airing at 11:30pm on Friday nights). Just in time for the television tapings, a new spot was given on Sunday at 2:00pm. This appears to have been a one-shot deal for now, though, as the affiliate is using their digital sub-channel to air a MyNetworkTV seeming station called MyRITV. SmackDown airs at its regularly scheduled Friday 8pm timeslot on this sub-network. Thus far, though, only Verizon FIOS, DirecTV (with HD), Dish Network, and over the air viewers will be able to receive this. For those still on local cable provider COX Communications or DirecTV standard definition the show remains unavailable.

Linda McMahon is now officially gone from the WWE. The WWE filed papers with the SEC to say that she no longer has any functions within the company.

Despite being involved in Dragon Gate USA, Gabe Sapolsy has teamed up with Sal Hamaoui and Davey Richards to start another independent wrestling federation called EVOLVE. According to Mr. Sapolsky, EVOLVE will actually be running during Dragon Gate USA's "off-season", so there should be no conflict of interest.

Although they were granted an extension through the end of December, THQ CEO Brian Farrell already announced on a conference call that they have come to an agreement with the WWE on continuing to develop WWE video games through 2014.

TNA is also hoping that since their video game license was not picked up by Warner Bros. when Time Warner purchased Midway Games that the license will return to the company. At that point, TNA would hope to sell the code and partially completed game to another company. Meanwhile, the license is still part of the estate of the bankrupt Midway and will most likely have to spend another year in court before anything is decided. During this time, TNA will not be able to create a new game.




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 November 11, 2009, here are the current standings of our shows:





RAW
Close (This Week's Rating): 3.1
Open (Last Week's Rating): 3.4
Percentage Change: ▼ 8.8%
52-Week High: 4.5
52-Week Low: 2.9
All Time High: 8.1
All Time Low: 1.8

SmackDown*
Close (This Week's Rating): UNAV
Open (Last Week's Rating): 2.1
Percentage Change: N/A
52-Week High: 2.3
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): 1.0
Percentage Change: UNCH
52-Week High: 1.4
52-Week Low: 0.7
All Time High: 2.3
All Time Low: 0.6

TNA iMPACT**
Close (This Week's Rating): 1.1
Open (Last Week's Rating): 1.3
Percentage Change: ▼ 15.4%
52-Week High: 1.3
52-Week Low: 0.9
All Time High: 1.3
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

SuperStars***
Close (This Week's Rating): 0.8
Open (Last Week's Rating): 0.9
Percentage Change: ▼ 11.1%
52-Week High: 1.0
52-Week Low: 0.7
All Time High: 1.0
All Time Low: 0.7

*** SuperStars ratings may include fast overnight if final ratings are not posted. Also, SuperStars ratings are for the prior week as overnights are not available before this article goes to print.

Analysis:

RAW has returned from whence the came as the peaks and valleys of the guest host program continues to plague the ratings. This week, RAW saw a 3.1 rating, the lowest since September 28, 2009, which in turn was the lowest rating since December 8, 2008 with a 3.0. That show was three hours, so the last two hour RAW to have worse ratings was the November 17, 2008 edition with a 2.9. November 10, 2008 also had a 3.1 rating, showing the ratings for November may have more to do with the audience then anything going on on the show itself. That said, November 2007 had a 3.6 average rating, up from October 2007's 3.2. Given that, if this is a trend it is a relatively new one.

Meanwhile, SmackDown has quietly crept back in the 2.0 range, having their second week in a row with a 2+ number. The last time this happened was April 10 and 17, 2009, showing that perhaps their new home is finally becoming a bit more known.

Meanwhile, TNA was not able to hold on to their gains from the prior week and immediately slipped backed to a 1.1. It will be interesting to see how ratings change after Hogan truly premiers, but for now his impact (pun intended) is quite negligible.




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 selling items for the WWE? WWEShopZone.com releases a list of varying numbers to show what is selling for them:

1. Superstars Reusable Bag ($1.99)
2. Superstars Collectible Cup ($1.99)
3. WWE 2009 Topps Trading Cards ($3.00)
4. John Cena Attitude Adjustment Basics YOUTH T-Shirt ($9.99)
5. John Cena Holiday 2009 Youth T-Shirt Package ($26.99)
6. DX Holiday 2009 T-Shirt Package ($55, on sale $29.99)
7. D Generation X Worlds Biggest Member T-Shirt ($25.00)
8. John Cena Attitude Adjustment Sweatband Set ($12.00)
9. John Cena Holiday 2009 T-Shirt Package ($29.99)
10. DX Holiday 2009 Youth T-Shirt Package ($26.99)
11. D Generation X Camouflage Cowboy Hat ($20.00)
12. John Cena Reader Book ($3.99, on sale $3.98)
13. Are You Ready: The Unauthorized History of D Generation X Paperback Book/DVD Package ($50.95, on sale $19.99)
14. Hardys Green Pendant ($10.00)
15. Are You Ready: The Unauthorized History of D Generation X Paperback Book ($16, on sale $10.53)
16. Triple H & Shawn Michaels Adrenaline Series 24 ($29.99, on sale $24.99)
17. D Generation X Basics YOUTH T-Shirt ($9.99)
18. Hardys WWE Shop and Jakks Pacific Exclusive Action Figure ($34.99, on sale $24.99)
19. Best of SmackDown 10th Anniversary DVD ($34.95, on sale $18.90)
20. John Cena Ruthless Aggression #38 Action Figure ($17.99, on sale $13.99)

For the second week in a row, not only have the low priced items have dominated the list, showing a severe lack of volume again. Of course, this is the lull time right before the holiday rush, so WWE may see a major uptick in just a couple of weeks.


TNA sometimes releases a list of top selling items on ShopTNA.com. According to the site the top selling items were:

1. Don's Insane Brown Bag Special ($20)
2. Velvet Sky Limited Edition Matted Photo With Hand-Signed Autograph ($27.99)
3. Sting Plastic Mask ($4.99)
4. Complete 2008 PPV DVD Set & Autographed Sting Card ($240, on sale $79.99)
5. Sting "Discharge" T-shirt ($19.99)
6. TNA Logo T-Shirt Special ($24.99)
7. Beer Money - Daily Buzz Shirt ($19.99)
8. Christy Hemme Limited Edition Matted Photo With Hand-Signed Autograph ($24.99)
9. TAZ Beat-down Hoodie ($39.99, on sale $34.99)
10. Hard Justice 2009 DVD ($19.99, on sale $14.99)

In one of TNA's updates that is not really an update, the only change was the removal of the Velvet Sky items crossed out about, most likely due to being sold out.




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.

Sunday	Monday	Tuesday	Wednesday	Thursday	Friday	Saturday
15 (Nov) SmackDown / ECW Live (Belfast, N. Ireland, UK)	16 RAW (New York City, NY) TNA iMPACT (Orlando, FL)	17 SmackDown / ECW (Philadelphia, PA) TNA iMPACT (Orlando, FL)	18	19	20	21
22 WWE Survivor Series (Washington, DC)	23 RAW (Hershey, PA)	24 SmackDown / ECW (Bridgeport, CT)	25	26	27	28 RAW Live (Johnson City, TN) SmackDown / ECW Live (Upper Marlboro, MD)

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.




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, True wanted to talk about the changing landscape of WWE Corporate:

Whether a McMahon is on the WWE payroll or not, I am sure they are getting a nice payout.

Absolutely; the family does own 75% of outstanding shares of the WWE. Even with only receiving the $0.24 dividend, that equates to millions of dollars a year. No member of the McMahon family is every truly separated from the company, whatever their ambitions may imply.

On the subject of McMahon outside projects, Eric wants to follow up on Shane McMahon possible getting involved in MMA:

I think there's one more area for growth in MMA, specifically UFC anyway; DVD sales.

I'm not privy to UFC's numbers(it'd be great to have a Hamilton Ave equivalent for MMA!), but I can surmise that they make most of their money from PPV buys and ticket sales, probably followed by TV deals & merchandise respectively. However, of all the things UFC's copied from WWE's business model, I've been wondering for a long time why they have yet to exploit their massive video library aside from their new on-demand service. What I mean is, for instance, WWE puts out DVD sets about one specific person or subject which consists of - more often than not - a 'documentary' and matches, such as the Bret Hart set.

Why couldn't UFC do a Chuck Liddell DVD that had The Iceman documentary on one disc, and his best fights on the second disc? We do see UFC DVDs on 'top 10 sports DVDs' sales charts, but those are most of the "Ultimate Knockouts" variety, so while it does seem events themselves such as UFC 100 are more fleeting (being a PPV rental rather than a DVD sale per se), I think that at least illustrates that UFC fans will buy DVDs of some sort, and I just can't believe we're not seeing some sick comps with them sitting on the Pride & WEC libraries, let alone their own 16-years-worth of shows (also seems like part of the Affliction deal from months ago is access to their footage, as we saw it used during the 104 Countdown show).

So anyway, I think that home video sales are an area that should have been included in your list of areas MMA has yet to exploit. I love the Journal, look forward to reading it every week and am happy someone does a great service to those interested like me!

But you did hit it on the head that with just releasing events on DVD they are hitting a large portion of the top ten selling sports videos each and every week. For them, the cost is extremely low because all they have to do is take an existing event, burn it to disc, run off some packaging, and ship it out. Creating compilations is an expensive proposition and requires a team of researchers to comb through the archives; writers, directors, and editors to put it all together; and a technical staff capable of building these things. For the WWE, it makes sense since they went out and spent money to get archive footage just for that purpose. They already have all the equipment and talent they need to produce such a volume. The UFC, on the other hand, does not have that talent in house.

If they were looking to do that, Shane McMahon is the wrong person to go after. They need someone who can produce slick programming—and that job would be better suited to someone like David Sahadi.

Laving behind the MMA, we move on to TNA and MacDollarz:

I notice TNA doesn't pump out a lot of merchandise either.

Guys like Kiyoshi don't have shirts, there're no suicide Masks for sale, no World Elite shirts, Abyss doesn't have a new shirt, neither does Steiner, etc…

They should be pumping out merchandise constantly on everyone who is on TV regularly.

There is something else to consider and that is carrying costs. One of the larger problems TNA has is that they produce too much inventory and then have to pay the costs of storing the products for long periods of times. If they are producing merchandise for everyone, especially low volume sellers like Kiyoshi, then they will need larger warehouses and longer periods of holding. This will actually cost TNA more money in the long run.

The trick for TNA will be finding the high volume sellers and producing the correct amount, not just producing for the sake of producing. As written above, this has been one of the areas the company needs to get much better at, not worse. Of course, Max has the other side of this equation:

I believe the stupid thing is that they wait too much before releasing marketable items. An example? The first two months of life of the Main Even Mafia, one year ago, I used to take a look to see if they were selling something, if they were making some money off the new stable, two months and no shirt was released, now that's crazy, later they released something but I'm sure some fans would have already bought a nice MEM item, and that was the main stable and angle in the whole company.

True, there are times when TNA needs to be predictive in their trends and actually have runs ready. They do not need everything and can sell out at the beginning, but waiting too long to being a production run does mean missed revenue opportunities.

And finishing off with TNA, Brett is thinking of brand management:

I saw someone mention it in the comments somewhere around this site and it's something we don't give much thought to.

How much is the name TNA hurting TNA? Whenever I say the name to someone who isn't in the know, their mind immediately [goes to the other TNA]. [What is the level of difficulty] for TNA to change there name at this point? It could be as small as TNW, I don't know that there brand is so established that the name change would hurt them too much, they aren't the WWF.

They do have some brand recognition, but now would be a worthwhile time to make the change. With Hulk Hogan coming in, they can literally say the company is going in a new direction and is looking for a new name. There have been a lot of dollars invested in the brand recognition, but the main costs would actually be overseas. In many non-English countries the letters "TNA" do not have the same connotation, so changing the brand there would seem nonsensical.

As far as hurting the company, the name is not among the top issues they have to deal with. People are not saying, "I will not watch this show because of the name." Instead they are saying, "I have never heard of this show!" Marketing, availability, and awareness are going to be TNA's key drivers for audience growth, not just a name change. From that perspective, going through a name change when they are still trying to establish the brand may not be the best use of resources at this time.


Plenty more was written, so be sure to take a look. And if you enjoy the Journal, why not bookmark 411mania.com and make it your home page? You can do that by clicking here.




This concludes Issue #111 (Volume 2) of THE HAMILTON AVE JOURNAL. Join us next week as we get ready to ring the bell again.

Till then!