In Defense Of…8.07.05: Vince Not Buying Out WCW’s Contracts (Part 2 Of 2)
Posted by JP Prag on 08.07.2005
What killed the InVasion was the best decision?
In Defense of…
By JP Prag
Issue #15
VINCE NOT BUYING OUT WCW’S CONTRACTS (Part 2 of 2)
Intro
Hello my dear readers, and thanks for making that oh-so-difficult click onto In Defense Of…! Last week we began another two part series with In Defense of Vince Not Buying Out WCW’s Contracts (Part 1 of 2)! Besides being my longest name for a case yet, this case is also garnering some very interesting reader response. But the real test will be your vote at the end of this very issue!
Still, perhaps you spent too much time at the beach and really can’t find the energy to go read part 1. Plus you see our next section is entitled stenography, so you know you are getting a review of the last issue. Well, if that’s the case, then let me tell you what you have just wandered into:
Certain people, events, organizations, and storylines in wrestling history have gotten a bum wrap. Certain writers have presented overtly critical comments and outright lies as fact, and others have followed suit. Well no more! “In Defense of…” has one reason: to bring the truth to the wrestling fan!
And that’s what I intend to do.
Me? I’m the One and Only JP, and I’m still on vacation, but unfortunately am losing a day of it due to work travel. Nothing ruins the end of a great vacation more then losing the last day!
Stenography
Speaking of people who have to work, let’s here from our resident Stenographer. Stenographer?
…
Ummm… Stenographer, I need you to recap last issue.
I don’t think so, JP. I think you really were trying to replace me!
No, no, of course not. That was all a joke. I was just razzing you.
Really?
Really.
For serious?!
Very serious. And I’m not just saying that because no one wanted to take your job.
Awww, thanks JP. You know how to make a stenographer feel special.
I try. So, can we begin?
Why yes! Well, last time we began to exam why Vince did not but WCW’s top tier contracted wrestlers and why that was the right decision for him and the WWF overall. To do that, we looked at some of those top tier names and why having them or their contacts around would be a detriment. There was Scott Steiner (perpetual injury), Kevin Nash (injuries and free-to-show-up-when-he-wanted clause), Scott Hall (personal problems), Sting (already met contractual obligations and personal convictions against WWF programming), Rey Mysterio (injured, in a bad gimmick, making too much money), Ric Flair (past prime, burnt out), Goldberg (already met contractual obligations, injured), and Hulk Hogan (injured, insanely expensive contact, creative control clause, suing WCW).
We then took a trip back to business school (or forward for many of our readers) and talked about the difference between Normal and Economic Profit. The basic premise was that although something can seemingly make money in the short term, the long term costs and what was given up to make that money far outweigh what is being made. Dealing with those personalities, paying those contacts, and not developing the future of the WWF would hurt the WWF despite any money that could be made, and even that was an extreme best case scenario. More then that, there were these existing talents (Rock, Austin, Undertaker, Kane, Angle, and the Big Show) who would not be too pleased with being pushed aside for WCW guys. Which would you rather support: your troops that took you through the war that you won, or the men who jumped sides afterwards but still get to keep their old benefits?
Thanks Stenographer, but it wasn’t just the people that Vince was trying to support…
The “X” Football League
On February 3, 2000, Vince McMahon announced that the World Wrestling Federation would be branching out again. After having had so much success in professional wrestling, the WWF was sitting on a lot of cash. Investors did not want a dividend, because it would mean the company did not know what to do with money and had no growth prospects. To buck this idea, McMahon and other WWF officials came up with ideas to diversify the WWF’s holdings and to branch out into new businesses. One of those ideas became the XFL.
Over the next several months, McMahon engaged in negotiations with NBC and his new partner for WWF programming Viacom and came up with the final concept. The XFL would be an off-season football league with less rules, more action, more cameras, more sex, and a compensation based on winning the game, not contacts. NBC bought into the idea so much that the two companies (WWF and NBC) formed the joint venture XFL, LLC. NBC would get the first choice prime-time games, and UPN and TNN would get to air other games. Thus, the XFL was born! And remember: the “X” did not stand for extreme. It actually didn’t stand for anything. It was just to let you know that the XFL was different.
One year to the day of the initial announcement (February 3, 2001), the XFL kicked off with a game between the Las Vegas Outlaws and the New York/New Jersey Hitmen, which the former won 19-0. The game was seen by an estimated 54 million people, but that would not last. Ratings would continue to slide on NBC (despite doing well on UPN and TNN) until the Million Dollar Championship Game on April 21, 2001, which drew a paltry 2.1 network rating.
NBC shortly thereafter decided they wanted to pull out of the XFL and would not be renewing the league for television. UPN and TNN were actually ready to renew since the league did well for their networks. But when UPN said they would only do that if the WWF trimmed SmackDown! down to an hour and a half (probably so they could try to re-launch Gary and Mike or pick up the long-cancelled PJs from Fox), Vince would have none of it. So on May 10, 2001 Vince announced the end of the XFL at a cost of $70 million.
A few weeks later, Lance Storm ran into the ring on RAW.
But there are a few things you have to take away from the history of the XFL:
(1) The XFL began before anyone knew that WCW was going to be on sale, and way before AOL-Time-Warner decided to cancel all WCW programming on TNT/TBS.
(2) Vince was extremely focused on making the XFL happen, and much of his development and marketing resources, as well as the resource of himself, were going towards that.
(3) With the falling rating of the XFL, Vince was under pressure from stockholders and NBC to get the XFL to turn around, or at least to bottom out. He was not able to do either.
(4) At the end of the XFL, Vince lost at least $35 million (half the total shutdown costs of the league, of which he might have had to take on more), and thus had taken a huge chunk out of the WWF’s cash reserves.
You can see by all of this why bringing in a lot of those big name wrestlers would not have even been possible with Vince. When WCW was bought out, Vince was in the middle of the XFL season trying to do anything and everything possible to make the league succeed. When was he going to negotiate through the incredible complex contacts of the big name WCW stars and manage them and a new brand and his current roster? How would that even be possible?
By the time the XFL closed down, it had already been two months since the end of WCW. He knew he needed to start getting the guys back on TV and bring back the WCW brand. He could not wait any longer then he had to start the InVasion, so he started it. As the InVasion went on he was able to acquire some big names (notably Booker T and DDP), and that would have to suffice for the time being.
How much more money and time could Vince afford to lose? The answer is none. The XFL had drained so much from everyone. What resources were left for anything else?
You own what?!
Believe it or not, there were quite a few “anything else”s.
The XFL was not the only asset that the WWF owned at the time. Looking over the 10Q (quarterly) report filed on January 26, 2001, it can be seen that the WWF had recently purchased the WWF Entertainment Complex for approximately $23.6 million and was amortizing the costs over ten years. Ok, here is a little story about amortization: it’s fake! Basically, you pay cash for something up front and on your balance sheet assets move from cash to fixed or other assets. That’s fine. But you need to record the cost of the purchases as an operating cost somewhere, so you put it on an income statement. Now, instead of just saying “we spent $23.6 million this quarter and have negative results because of it” you spread the costs over years. That way, it does not look like you have had a really bad quarter or year on the bottom line, and you still get a tax benefit (less profit means less tax you have to pay. Don’t worry, you still pay the tax in the end, it’s just a matter of when). So when you look at the WWFE’s bottom line for the quarter and they look positive, they weren’t. Follow the cash. Cash is king.
Anyway, the WWF sent this out in a press release:
"We want WWF New York to be a showcase for all our brands, including the WWF, XFL and WWF Racing," said Linda McMahon, WWFE President and CEO. "By taking control at this time, we believe we can unlock the potential of this facility. We want to make WWF New York as synonymous with fun and entertainment as our other brands."
The complex features a soundstage for TV production and live entertainment that was technically designed and equipped by WWFE independent of the licensee's investment. The complex also contains an active merchandise store and restaurant. In the first year of operations, the facility is expected to generate approximately $20 million to $25 million in revenue with $4 million to $6 million in EBITDA (earnings before interest, taxes, depreciation and amortization).
Although now we know that WWF New York (or the World, as it was later called) did not even come close to making these projections, it was still a substantial investment by the company at the time. So that is an additional $23.6 million that was being used for other resources and not for wrestling talent, not to mention the actual operating cost of the restaurant and store. Also take away from Linda’s comments that there was a WWF racing team. Though the investment for that was not in the tens of millions, it was still another piece of the puzzle that held Vince’s and the WWF’s focus.
The World, actually, was not the WWF’s first venture into real estate. Take a look at this press release from December 26, 2000:
World Wrestling Federation Entertainment, Inc. (NYSE:WWF) today announced the sale of the WWF Hotel and Casino located in Las Vegas, Nevada. The net proceeds from the sale are approximately $11.2 million and are net of closing costs and other selling expenses.
The property was purchased in the second quarter of fiscal year 1999 and classified as an asset held for sale on the balance sheet. The company expects to record a gain of approximately $1 million.
The WWF was trying to develop a casino in Vegas (can you guess why? ::cough cough:: Nitro Grill ::cough cough::). This was another unsuccessful operation that had the focus of the WWF prior to the WCW purchase. Although they made money on the sale of the land, that press release does not tell you about the amount of money and time they lost trying to create the casino. All of those costs were wrapped up into the SG&A expenses that hardly ever get broken out. But that still isn’t all that was going on!
Remember how I said at the beginning of this piece that the WWF was trying to diversify their properties? Well, another one of those was SmackDown! Records. And look at this press release from March 1, 2001:
SmackDown! Records, a division of World Wrestling Federation Entertainment, Inc. (NYSE: WWF), and KOCH Records have launched WWF The Music: Volume 5 into the #2 spot on the Billboard Top 200*, making it the highest debut of the week. The CD is already Certified Gold in the United States, Canada, and the UK and is on its way to becoming Certified Gold in Australia and Chile.
SmackDown! Records and KOCH Records shipped 1.5 million copies worldwide, including one million units in the US, 100,000 in the UK, and 70,000 in Canada. In addition to its strong showing on the US sales charts, WWF The Music: Volume 5 debuted at #2 and #5 in the UK and Canada, respectively. The CD is a top seller at retail chains such as Tower Records, Best Buy, Kmart and Target and continues to sell well at several other retail outlets.
You see, SmackDown! Records was actually showing success, and so the WWE wanted to move forward with that. Maybe if they had someone like John Cena at the time it could have been more successful. They did sign a few bands to the label, but eventually dropped them when they dropped the whole division. But at the time, it was another part of the WWF becoming a multi-media powerhouse. And again, this is right before they purchased WCW, so yet another piece of what the WWF and Vince were investing in becomes common knowledge.
Stuart Snyder, then President and COO of WWFE had this to say:
We’re extremely pleased with the successful launch of SmackDown! Records. As the company continues to grow and we diversify our entertainment product offerings, we expect the new label to be an integral part of our portfolio of brands.
But while branching out into a portfolio of brands, there was something else lurking behind.
Let’s take it to a higher power!
This came from the WWFE’s 10Q report mentioned above:
On April 17, 2000, the WWF - World Wide Fund for Nature (the "Fund") instituted legal proceedings against the Company in the English High Court seeking injunctive relief and unspecified damages for alleged breaches of an agreement between the Fund and the Company. The Fund alleges that the Company's use of the initials "WWF" in various contexts, including (i) the wwf.com and wwfshopzone.com internet domain names and in the contents of various of the Company's web sites; (ii) the Company's "scratch" logo; and (iii) certain oral uses in the contexts of foreign broadcasts of its programming, violate the agreement between the Fund and the Company. On August 29, 2000, the Company filed its defense and counterclaim. On January 24, 2001, the Fund requested leave of court to amend its complaint to add a count of money damages. Leave has not yet been granted. The Company believes that it has meritorious defenses and intends to defend the action vigorously. The Company believes that an unfavorable outcome of this suit may have a material adverse effect on its financial condition, results of operations or prospects.
But as we know, leave was later granted. And not only that, the “Fund” won and became the WWF. By the way, be sure to check out wwf.com and wwfshopzone.com to see how much the “Fund” has done with the properties they fought so viciously over.
The point being, the WWF was getting sued… a lot. This was the biggest case going on, but not the only one. And all of those lawyer fees and court times had to be paid well before they would recover any damages (IF they ever recovered anything). This was yet another drain on cash, resources, and time that the WWF had to worry about before going into negotiations with some of the biggest names in the industry.
This might also be a good point to mention that the WWF was also fighting in bankruptcy court for the assets of ECW. Do not let anyone fool you, the WWF/E did not acquire the assets of ECW until June 17, 2003, well after the end of the InVasion. Again, this was yet another drain on the focus, time, money, and resources of the WWF.
But shouldn’t they focus on their core business anyway: wrestling?
The Intentions of the Man
And who is to say they weren’t? The WWF was taking the WCW purchase very seriously. In a press release on March 23, 2001, these comments were made:
"This acquisition is the perfect creative and business catalyst for our company," said Linda McMahon, Chief Executive Officer of World Wrestling Federation Entertainment. "This is a dream combination for fans of sports entertainment. The incendiary mix of World Wrestling Federation and WCW personalities potentially creates intriguing storylines that will attract a larger fan base to the benefit of our advertisers and business partners, and propel sports entertainment to new heights."
"The acquisition of the WCW brand is a strategic move for us," said Stuart Snyder, President and Chief Operating Officer for World Wrestling Federation Entertainment. "We are assuming a brand with global distribution and recognition. We are adding thousands of hours to our tape library that can be repurposed for home videos, television, Internet streaming, and broadband applications. The WCW opens new opportunities for growth in our Pay Per View, live events, and consumer products divisions, as well as the opportunity to develop new television programming using new stars. We also will create additional advertising and sponsorship opportunities. In short, it is a perfect fit."
Linda was optimistic about being able to make WCW into a brand like the WWF, but Snyder was being a little more realistic. He saw the potential revenue in the extended tape library, something the WWE has really started to take advantage of in recent years. He, in this situation, was the forward thinker. Do not forget, this was the day of the WCW purchase, so the future was completely uncertain. All we could get then were intentions.
Still, some would have you believe that Vince would never want the WCW guys and he wanted them to fail from the get go. Well, in a financial release on April 23, 2004 we saw this:
World Wrestling Entertainment, Inc. (NYSE:WWE) announced today that it has filed an amended Form 10-K for fiscal 2003 and amended Form 10-Qs for fiscal 2004 with the Securities and Exchange Commission to revise the accounting related to the March 2001 acquisition of certain assets of World Championship Wrestling, Inc. ("WCW"(TM)). These changes principally affect fiscal 2001 and 2002 as follows:
- $6.6 million of costs, which were originally recorded and capitalized as intangible assets, are now recorded as $1.7 million and $4.9 million of selling, general and administrative expense in fiscal 2001 and 2002, respectively. These costs arose from the termination of certain WCW licenses and related agreement assumed in the transaction.
- The remaining $2.5 million of purchase price, which was originally assigned an indefinite life for accounting purposes, is now being amortized over a six-year period. This increases annual amortization expense by approximately $0.4 million in fiscal 2002 through 2007.
- There were no changes to revenue or costs of revenues in any of the periods.
The company has also amended its fiscal 2004 quarterly financial statements to reflect the impact on the opening balance sheet, most significantly a $6.6 million decrease in its gross intangible assets, and additional amortization expense of approximately $0.3 million for the nine months ended January 23, 2004.
I know, I know, that was a lot of jumbled mess in there. Let me put it to you this way: When the WWF purchased WCW, they listed everything as assets (IE, they just shifted the cash on their balance sheet into tangible and intangible assets, they did not record it as a normal operating expenditure). That means that the WWF had every intention to make WCW as much a part of the WWFE umbrella as any of their other brands (XFL, SmackDown! Records, WWF Entertainment Complex, etc…), not the intention of just writing it off. It would not be until two years later, when it was apparent that there was no future for WCW as a separate brand in the WWE did the company write off the costs.
Despite this care for professional wresting, you have to realize that the WWFE was not a wrestling company. It was a mass media company that had wrestling as one of its brands. Take a look at how the company viewed itself according to their own quarterly report:
We are an integrated media and entertainment company principally engaged in the development, production and marketing of television programming, pay-per-view programming and live events; the licensing and sale of branded consumer products featuring our highly successful World Wrestling Federation brand; and the development and start-up of a professional football league, the XFL.
Our operations have been organized around three principal activities:
The creation, marketing and distribution of our live and televised entertainment and pay-per-view programming. Revenues are derived principally from ticket sales to our live events, purchases of our pay-per-view programs, the sale of television advertising time and the receipt of domestic and international television rights fees.
The marketing and promotion of our branded merchandise. Revenues are generated from royalties from the sale by third-party licensees of merchandise, the direct sale by us, including from our internet operations, of merchandise, magazines and home videos, and from our operations at WWF New York entertainment complex.
The Company's professional football league, the XFL, which consisted of costs related to its development and start-up through January 26, 2001.
That says it all. The WWFE was a media company, and wrestling was not the only focus. While important (as it obviously should be for the first two points), the WWFE was branching out in many different directions at once. The sale of WCW was just an additional windfall that they were able to take advantage of. But with so many other projects and concerns going it, the company simply did not have the resources to take advantage of the situation as many fans wished they could have. The cards were laid down, but there were nothing put mixed twos, fives, and sevens.
Sign on the dotted line
Wrestling was a different landscape in 2001, as different as Vince McMahon the person and the World Wrestling Federation Entertainment the company were. When Vince had finally vanquished his foes and gobbled them up, he was unable to execute on the dream WWF vs. WCW matches and events that people wanted to see. He was unable to capitalize on the hopes of WCW fans worldwide that their beloved promotion would live on. He was unable to save the InVasion.
The catalyst of that being he was not able or wanted to acquire the contacts of WCW’s top performers. Much of that has to do with the performers themselves, whose contacts were enormous, filled with creative control clauses, performance bonuses based on just showing up for work, and date appearances that were already filled. Many of them were injured, too, or so burnt out at that point that they would not have been productive members of the organization anyway.
Still, there were many other considerations, from the existing top-tier performers’ feelings, the costs of dealing with such large egos and interesting contracts, and the costs of other existing enterprises, such as the XFL, SmackDown! Records, and WWF New York. All of these were a drain on the time, resources, and cash of the WWF and Vince McMahon; time, resources, and cash that could not be freed up for potentially dangerous contracts.
Vince McMahon had every reason in the world not to buy out WCW’s contracts. And most of all, it was the right decision for the WWFE as a whole.
The defense rests.
Hung Jury
Well everyone, that wraps up our seventh case. So what do you think?
IN THE CASE OF THE IWC VERSUS VINCE NOT BUYING OUT WCW’S CONTRACTS, VINCE HAS BEEN ACCUSED OF DOING THE WORST THING POSSIBLE FOR BUSINESS, DESTROYING ANY HOPE WCW HAD OF BEING A VITAL BRAND, NOT GIVING THE FANS WHAT THEY WANTED IN DREAM MATCHES, AND INTENTIONALLY TRYING TO HURT THE WRESTLERS AND THEIR FAMILIES.
YOU THE JURY FIND VINCE NOT BUYING OUT WCW’S CONTRACTS
Since we started to talk about WCW’s superstars that Vince did not bring in right away, I thought it was only fair to look at a man who found his way over to the WWE at a later date. I’m talking about the enigma, the machine, the unstoppable jackhammer, the man who wants you to know that you are next, and one of my all time favorite wrestlers:
I’m talking about none other then GOLDBERG!
Besides, I needed a much shorter case name after this one.
So tune in next issue for In Defense of…Goldberg (Part 1 of 2)!!
Until then, the next time you read some throwaway line out there presented as fact, challenge it. The truth matters, and you have a right to know.
Know a particular person, event, organization, storyline, etc… in wrestling history that needs a defense? E-mail the One and Only JP at lookforme@mikefine.com, and I’ll be glad to hear your case.
