The Hamilton Ave Journal 11.10.07: Volume 1 Issue 7
Posted by JP Prag on 11.10.2007
The Journal continues an in-depth look at the WWEs Q3 results and manipulative accounting, a reflection on the CNN wrestling documentary, November sweeps and the WGA strike, the return of RAW ratings, and TNAs new Top Ten Sales list.
THE HAMILTON AVE JOURNAL
By JP Prag
Volume 1 Issue 7
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 Third Quarter Results Part II
Last week, the Journal took a brief look at the WWE Third Quarter Results and came up with these observations:
Despite growing revenue by 17% from $93 million to $109 million, the WWE profit margin dropped from 9.9% to 7.7% on Net Income of $9.2 million and $8.4 million respectively. The largest gain to the WWE's top line was the recognition of sales for the Marine totaling $12.8 million in sales. Discounting this, Revenue rose 3.4% to $96.2 million, or relatively above the rate of inflation.
New regional offices will be open in Brazil and Australia. This is amid SG&A costs increasing 21.9% from $23.7 million to $28.9 million. The WWE claims that much of that cost was due to the Chris Benoit tragedy and realignment of the Wellness Initiative.
North American attendance grew 28% from 4,300 to 5,500 on average per event, but revenue from these events dropped from $14 million to $13.5 million. Meanwhile, international events jumped 206% from $3.2 million to $6.6 million, reflecting the WWE's growing focus on international markets. While North American tickets averaged $38.92 per person, international events averaged $77.75.
The Great American Bash, SummerSlam, and purchases of prior events all saw slight buy rate increases. Unforgiven saw a drop in buys from 289,000 to 210,000. Overall, buys in the quarter fell 5.6% from 1,126,000 to 1,063,000.
Cash and Cash Equivalents dropped from $86 million to $67 million while short term investments jumped from $162 million to $202 million. This is an obvious change in the WWE's asset policy, mostly involving their investment in WWE Films that have not reached the books. Total liabilities remain near $62 million, showing the WWE is not leveraged and in no danger of having any cash follies.
All and all, although core businesses saw some declines and struggles, new markets made up the difference. Once again, a more detailed and complete analysis will be completed next week.
The Journal would like to note here that the WWE is no danger whatsoever of going out of business or entering a period of loses. Despite the drop in revenue and lower cash reserves, the WWE's quick ratio (current 90% liquid assets to short term liabilities) remains far above 1, meaning the company could pay off all its debts tomorrow and feel little pain as a result. Right now, the business is in a state of flux, changing revenue streams and product diversification.
Over the past five years, the WWE has changed the way it gets revenue from its programming (selling directly to networks instead of selling advertising time themselves), expanded international touring, and opened other media outlets. Just as when the WWE moved from being a company that gained most of its revenue from live events to one that depended on television ratings, now they are changing to experiments with new mediums and offering other options for wrestlers to work (IE WWE Films).
What is interesting is that instead of announcing these plans to the world (and investors) at large, the WWE has chosen to hide them by manipulating the top line numbers. As seen in the bullet points above, sales are off in many categories, but that is to be expected in a time of restructuring. The WWE is so distrustful of the media, they do not want to show weakness. They do not realize that there is no weakness in short term losses in order to attain future growth. By trying to hide their plans, even a small amount of digging and examination of the numbers can make it look like the WWE is in trouble.
Once again, that is not the truth in any way. But by trying to disguise the truth through financial manipulation the WWE looks suspect. It is time for the WWE to come clean with investors and let them know that there are plans for drops in revenue in certain streams as other new revenue streams are opened. It is perfectly acceptableand perhaps expectedthat this is the future for the WWE. There have been hints to this in several conference calls with Linda McMahon where the CEO said that they expected drops in certain areas (ratings for instance at the beginning of brand split), yet those plans were never given to investors.
Instead, the average investor is going to look at the numbers as the true state of the organization. Yes, there are many visionaries who see what the WWE is trying to do, but those who manage portfolios for others or the individual investor may not see the long term plan. Without that, it only looks like the WWE is trying to retro-actively fix downward trends. The company knows that some areas are going to suffer, yet has neglected to inform anyone about this fact. Instead, once a quarter it is shock to find out what has dropped followed by a spin. There is no need for this spin as honesty will have longer rewards. The WWE does not have announce all future strategy and plans, but a general direction would be beneficial for the stock holders, the employees, and the SEC.
Look at this: The WWE purchased $145 million in short term investments this quarter compared to $48 million in the same period last year. That is more than a 300% change, and yet there is note surrounding this. Obviously the WWE sees sitting on a pile of cash is getting them nothing and they are trying to do something with the money. That decision is fine, but it was not announced to anyone who might be affected by it. Stock holders who get dividends now should know that cash will not be as readily available in the future and therefore the dividend might be less. It is an important consideration.
Meanwhile, the WWE amortized $25 million in film assets. This led to a lower EBIT, which in turn led to a significantly lower amount of tax payments, despite the rise in the tax rate from 37% to 39%. That then led to more cash being available to turn into short term investments. The facts are laid out in the numbers, but the plan is what is lacking.
It is time for the WWE to realize they are a publicly company and not being forthright with stock holders will only hurt them in the long run. There is nothing inherently wrong in their plans except for the fact that no one outside of board room knows what they are.
CNN Documentary opens McMahons to scrutiny
On Wednesday November 7, 2007, CNN aired a "documentary" called "Death Grip: Inside Pro-Wrestling" to a 0.6 rating, a strong rating for the Cable News Network. In a change of strategy from the media moratorium, Vince and Linda McMahon appeared together on CNN, as well as John Cena. The interview segments were heavily edited and did not paint the WWE in a pleasant light, unsurprisingly.
WWE.com has already put up two videos side-by-side. The first has John Cena's edited response to a question about steroids where it appears that Cena is inferring he's never been caught doing steroids and has avoided failing tests. In the unedited version next to it, Cena flat out states that he has not done steroids and then goes into a minute long explanation of the partial statement that ended up airing. The WWE is fighting back at CNN calling the footage incredibly manipulating and possibly illegal.
It is surprising that the WWE agreed to a taped interview in the first place, so this reporter is less inclined to be surprised that the material was diced up to be sensationalized. Still, the WWE has a point that CNN is intentionally misplacing their words and statements to make accusations that they did not agree to. The WWE has hinted at legal action, but any results would take years and by then any impact will have long been dealt with.
Wrestling companies aim for November sweeps and strikes
November is an important time of year for all of television. At this time, ratings are heavily analyzed in order to set advertisement rates for the rest of the year.
As covered in The Journal, the WWE and TNA both receive flat rates for their programming and then the networks sell advertising time. Why then, some have asked, would these companies try to put on their best programming in this month to boost ratings? Why would they blow huge matches, angles, and guest spots to pop 0.1-0.2 rating points?
The answer is not hard to find. Although both companies receive flat fees for their programming, they must prove to their network hosts that they are worth the money. In the month of November if they can push advertising rates high, the companies can negotiate a higher fee for their programs and the networks will be more willing to pay it. If they do not pop higher ratings at this time, there will be a negative financial impact for the rest of the year that cannot be changed.
Let us say that TNA iMPACT scores a 0.8 for the rest of the month of November and then has a 2.0 for the rest of the year. Well, despite having a 2.0, no additional revenue is going to be gained because Spike is forced to use the rates at 0.8. Please note, this is extremely simplified as demographics, time slots, and replays play a factor. The point is, now is the time put your best foot forward, not two months from now.
There will be opportunities to make adjustments later in the year, but November has the most lasting impact overall.
Meanwhile, with the Writers Guild of America going on strike, wrestling companies find themselves in a unique situation. As with game shows and reality television, wrestling companies do not employ union writers. Therefore, the longer the strike goes the more likely wrestling will be asked to fill in holes in the schedule. The WWE could get several prime time specials on NBC, RAW could get a replay on Wednesday, or SmackDown! could move back to Thursday. All of these are possible.
Let us not forget what happened the last time the WGA went on strike in 1988. During that time, 10% of the network television audience left and never came back. Those people moved on to other mediums, which was mostly cable at that time. Flash forward to 2007. If 10-15% of the audience leaves, they are migrating from cable to personal entertainment (internet, video-on-demand, DVDs, YouTube, etc ). Even though wrestling is not going into repeats, several core segments of the audience may grow disinterested with television in general and not see wrestling as reason enough to stick around. A 10% drop for RAW would bring them down to 3.2-3.4 range, but a 10% drop for TNA iMPACT would bring them back to 0.8-0.9 range. This is situation that is completely out of wrestling's hands but will have a result.
As noted above, the WWE is experimenting with new media, and TNA already has a strong online presence (iMPACT for a while was an internet only show). For now the bread and butter is still television ratings, but that may change in ten years and both companies are preparing adequately for that possibility.
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. Please note that gaps in the chart below are due to data not being released/available.
For the week ending Thursday November 8, 2007, here are the current standings of our shows:
RAW
Close (This Week's Rating): 3.8
Open (Last Week's Rating): 3.5
Percentage Change: ▲ 7.1%
52-Week High: 4.3
52-Week Low: 2.5
All Time High: 8.1
All Time Low: 1.8
SmackDown!*
Close (This Week's Rating): 2.8
Open (Last Week's Rating): 2.6
Percentage Change: ▲ 7.7%
52-Week High: 3.3
52-Week Low: 2.2
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): 1.2
Open (Last Week's Rating): 1.6
Percentage Change: ▼ 25.0%
52-Week High: 2.3
52-Week Low: 0.9
All Time High**: 2.3
All Time Low**: 0.6
** ECW's All Time figures include ECW on TNN
TNA iMPACT***
Close (This Week's Rating): 1.0
Open (Last Week's Rating): 1.0 (0.98)
Percentage Change: ▲ 2.0%
52-Week High: 1.2
52-Week Low: 0.6
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:
TNA remained relatively the same this past week, though early word is looking at a 1.1-1.2 close, which could put the show in line with its all-time high. Couple that with the fact that after a momentary shot in the arm, ECW has returned to its previous 1.2 level, the fight for third place may be on. What is interesting about ECW's drop is that both RAW and SmackDown! saw an audience growth of more than 7%. Once again, this shows that the audiences for these shows is different. The WWE would do well to differentiate the brands more and cultivate their different audiences rather then trying to get the same audience to watch three different shows.
On the same note of RAW's rising ratings, the Journal would like to update the five-year chart on RAW's ratings from September through November last seen four weeks ago:
As predicted, viewers have returned and the show should begin to plateau or nudge slightly higher before the end of the year dip. As highlighted above, November sweeps is incredibly important, and therefore that is why you expect to see the biggest boosts in ratings now.
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. Cyber Sunday 07 DVD and T-shirt Package
2. WWE SmackDown! vs. RAW 2008 PS2 Game
3. WWE Action Trading Card Game
4. Triple H the Conqueror T-shirt
5. Stone Cold Steve Austin Destroyed That T-shirt
6. WWE Black Gift Bag
7. WWE 500th Magazine
8. Triple H Grey Skull T-shirts
9. WWE Superstar 2007 Ornament
10. John Cena My Life DVD
Quite a plethora of different items this week by the WWE. There are packages, T-shirts, bags, magazines, DVDs, games, and ornaments. The WWE is showing in this list that they have quite a diversified collection of retail items. They are also showing that there are no blow-away items. With the exception of Triple H, no two items have anything in common. On the same note, Triple H's shirts have fallen 3-5 places, showing that they are reaching the saturation point. A new shirt could be introduced, but the market may already have its supply of any type Triple H shirt for the time being.
TNA requires a little bit more research. Their website does not release Top Ten lists, so the Journal does a general search for a space and sorted by most popular. ADDENDUM: The search is now done on "featured products" as these are the most likely to be selling. They came up in order as:
1. Christian Cage Instant Classic T-shirt
2. TNA Crest Logo T-shirt
3. AJ Styles Blue Roots T-shirt
4. MMG T-shirt
5. TNA Drop Logo T-shirt
6. Genesis 2007 PPV Special Package
7. "Instant Classic" Combo Pack
8. Tomko Tattoo T-Shirt
9. Hard Justice 2007 DVD
10. Instant Classic DVD
The Journal noticed this week that Christian Cage's Instant Classic DVD was in the top ten selling sports DVDs but was not coming up on the original search parameters. This led to the decision that the search must not be wielding reliable results. In order to negate this, the search has been narrowed to "Featured Products", which correctly shows that Christian Cage's DVD holds two spots (one stand alone, one package), which would put this list in line with the Sports DVD sales list. Also of note is that fact that Christian Cage has a T-shirt on the list, giving him three spots, five if you could AJ Styles and Tomko since they are on-screen cohorts of his. The Motor City Machine Guns selling well may pose a continual television push for the duo, though Rey Mysterio never gained any additional wins despite being a top seller.
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.
Sunday
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
11 (Nov)
TNA Genesis Orlando, FL
SmackDown!/ECW Live San Juan, Puerto Rico
12
RAW Topeka, KA
TNA iMPACT Orlando, FL
13
SmackDown!/ECW Wichita, KA
TNA iMPACT Orlando, FL
14
15
16
17
WWE Supershow Fort Myers, FL
18
WWE Survivor Series Miami, FL
19
RAW Ft. Lauderdale, FL
20
SmackDown!/ECW Tampa, FL
21
22
23
24
RAW Live Augusta, GA
SmackDown!/ECW Live Knoxville, TN
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.
No critical pieces were written this issue, so instead worth your read this week is:
