The Hamilton Ave Journal 05.14.09: Volume 2 – Issue 86

THE HAMILTON AVE JOURNAL
By JP Prag

Volume 2 – Issue 86

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: Q1 is done

Last Thursday (9 hours after the Journal was posted), the WWE released their 2009 Q1 results. The numbers were difficult to understand, especially because in 2008 WrestleMania took place in Q1 while in 2009 it took place in Q2. With that in mind, it is hard to compare likes and see where the WWE stands. Let’s break it down to see what is happening.

Excluding WrestleMania 24, revenue from Live and Televised Entertainment decreased 6.4% from $68.5 million to $64.1 million. This was led widely by PPV which saw a decrease of 21.8% from $17.4 million to $13.6 million. The Royal Rumble dropped from 533,000 buys to 450,000 buys and No Way Out dropped from 329,000 buys to 272,000 buys. Buys from prior events decreased from 113,000 to 96,000 buys, making the overall drop in buys 157,000, or 16%. International buys were essentially flat, meaning the drop came from domestic buys. International buys now account for 36% of all buys compared to 30% last year.

Among the remaining sub-areas Live Events decreased 3.7% to $18.0 million, Venue Merchandise increased 7.0% to $4.6 million, and Television Advertising was flat at $1.4 million. The lower revenue for live events was most likely due to having 50% fewer international events which have a much higher average ticket price than the domestic $33.54. Despite this, average domestic attendance decreased 3% to 6,100 and international attendance increased 3% to 9,300. Interestingly enough, WWE 24/7 and other content media decreased 40.7% to $1.6 million, despite there being more availability.

The one really bright spot was Television Rights Fees which increased 3.7% to $24.9 million. According to the WWE’s investors’ presentation, this was due mostly to the right fees with MyNetworkTV. Despite having fewer viewers now, the deal is much more lucrative for the WWE than their deal with the CW and therefore has been beneficial to them.

The other major revenue areas did not fare well. Digital Media dropped 14.8% to $6.9 million, but this was mostly because the WWE released 2 fewer DVD titles this year than last year. WWE Studios also saw a decline of 67.3% to $3.7 million. Last year was the anomaly, though, since the WWE recorded a large amount of the revenue associated with prior films that had not hit the books before.

The one area without an excuse was Consumer Products which dropped as astonishing 23.7% to $33.1 million. The WWE mostly blamed SmackDown vs. RAW 2009 which sold 4.1 million units, a 21% decrease over its predecessor. No reasons were given for why the game performed so relatively poorly, but the WWE assumes they will do better in the future.

Overall, Revenues decreased 17.9% from $131.3 million to $107.8 million. WrestleMania 24 also gave an additional $31.3 million to last year (boosting the total to $162.6 million), meaning the total drop was 33.7%.

Of course, revenue is only one measure. What is more important is profit. A company that can make more profit off of less revenue is in a much better position than a company not making any money off of large revenue. Cash is king, especially in a world of declining customer bases. Given that, how did the WWE do?

Profit contributions for Live and Televised Entertainment increased 13.7% from $22.6 million to $25.7 million. Live and Televised Entertainment as a percentage of revenue increased 7.1% to 40.1%. In order words, the WE managed to cut costs in their production area of creating content and doing live shows resulting in an actual increase of profits despite the drop in revenue.

The other major areas were not as lucky. Consumer Products had a 24.3% drop to $20.9 million (63.1% of revenue, a decrease of 0.5%). Consumer Products therefore did not reap any savings and basically cost a little more to product a little less. With the lower volume, the net drop was relatively exact. Digital Media performed basically the same, having a drop of 23.5% to $2.6 million (37.7% of revenue, a decrease of 4.3%).

WWE Studios despite the lower revenue had a 15.8% increase in profit contribution to $2.2 million (59.5% of revenue, an increase of 42.6%). It looks like whatever revenues the WWE got from their film division, the costs had already happened in the past so there was a much higher margin.

All together, when you include the near pure profit of WWE Studios this quarter with the more efficient Live and Televised Entertainment, total profit contribution decreased just 7.4% to $51.4 million. As a percentage of revenue, margin increased 5.4% to 47.7%. This shows that the WWE is slightly better poised for future growth and that they were successful in their cost cutting measures. When volume increases in the future, the WWE will be well positioned to be more profitable.

One would assume that these savings would translate down to the bottom line, SG&A costs decreased by 6.4% as well to $30.9 million. This would seem to be a good number, but SG&A as a percentage of revenue increased 3.5% to 28.7%. Despite the cost cutting, the SG&A cuts did not equal out to the drop in revenue, meaning more of the WWE’s earnings went straight into administrative, management, and legal functions. The top heavy WWE continues to put large percentage of their dollars towards the cost area of expensive executives and not towards more revenue generation areas.

With all of these changes and in accelerated depreciation charge (non-cash, so it saves cash on the taxes front), Operating Income dropped 16.5% from $20.0 million to $16.7 million. Operating Income as a percentage of revenue increased a measly 0.3% to 15.5%, showing that all of those cost cutting measures have not left the profit contribution area because of SG&A.

At the bottom line, Net Income dropped 30.9% from $14.9 million to $10.3 million. Net Income as a percentage of revenue decreased 1.8% to 9.6%, again highlighting the issues with costs in the SG&A area. WrestleMania 24 also continued an additional $4.6 million to the bottom line last year, making the total drop year over year 47.2%.

Despite these tough numbers, the balance sheet tells a very different story. These numbers are since December 31, 2008, not from last quarter.

Cash and Equivalents increased from $119.7 million to $135.1 million. Despite all of the expenses and the dividend, the WWE has been able to sock away cash (mostly from non-operating activities and non-booked revenue), meaning they are incredibly safe. Their short term investments also increased from $57.7 million to $68.1 million.

On the even more beneficial side, Accounts Receivable decreased from $60.1 million to $53.3 million. Looking a Liabilities, Account Payable increased from $18.3 million to $20.7 million. In other words, the WWE is making people pay them sooner while paying out their bills later. This is great for their cash position, which they can gain additional interest on while they don’t pay.

Prepaid expenses dropped from $37.6 million to $20.3 million, confirming the fewer expenses associated with film division. Retained earnings decreased from $41.0 million to $30.5 million, obviously from the lower net income.

Other than that, most everything else remained the same. There was a slight change in strategy of the balance sheet that seems to put the WWE in a better cash position, which will definitely help out as rough times continue. They still have a long way to go as last year there was $180.7 million in cash and cash equivalents. The WWE burned a lot of money in the middle of last year when costs were out of control and they are only now changing that direction. Still, anyone gaining cash under these conditions is doing something right.

Overall, it was not the best quarter for the WWE but it could have been a lot worse. They benefitted greatly from some old revenue, but their cost cutting last quarter has also begun to pay off. Despite some areas (especially executive pay) still needing cost cutting measure, the WWE put themselves in a much better cash position then many other companies out there.

Even with the drop in buyrates, ratings, attendance, revenue, and profit, the WWE is not really in trouble. Their biggest issue right now is with volume, and if there is more volume they will do better. And even if they do not, they are still profitable, an enviable position. With growing cash reserves and a profitable portfolio, the WWE is safe for quite a long time to come.

Newsbites

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

In a fast update to last week’s lawsuit edition of the Journal, TNA and Konnan have dropped their respective lawsuits against each other. There was no financial settlement, so the result was that both sides must have come to an agreement that it would cost them both too much money to go nowhere. Konnan has been very vocal with his disgust with how he was allegedly treated in TNA and things that were promised him that he did not get, so it will be interesting to see if he changes his tune.

The loftily toted but not nearly heard from TNA Epix (now renamed TNA Epics) has finally found its first home. Despite having signed contracts with a number of countries for the show, the United Kingdom will be the first to see it hit the airwaves starting Friday May 15, 2009.

Also on the international scene, the WWE has decided to go ahead with the tour of Mexico at the end of May. Originally the tour was cancelled due to the Swine Flu scare. Despite there being more cases in Mexico this past week, the WWE does not seem deterred. You can get information on the events in the Personal Journal below.

WWE CEO Linda McMahon will present at the JP Morgan Global Technology, Media, and Telecom Conference on Monday May 18, 2009 in Boston, MA. No details are available from JP Morgan or the WWE what the speech will entail, but judging by past presentations of Mrs. McMahon it will most likely be the WWE’s “Global Media and fan-friendly entertainment” presentation. If anything pertinent is said, the Journal will be sure to present the information.

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 Wednesday May 13, 2009, here are the current standings of our shows:

RAW
Close (This Week’s Rating): 3.3
Open (Last Week’s Rating): 3.3
Percentage Change: UNCH
52-Week High: 4.1
52-Week Low: 2.6
All Time High: 8.1
All Time Low: 1.8

SmackDown*
Close (This Week’s Rating): 1.9
Open (Last Week’s Rating): 1.9
Percentage Change: UNCH
52-Week High: 2.5
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): 0.9
Open (Last Week’s Rating): 1.1
Percentage Change: ▼ 15.5%
52-Week High: 1.5
52-Week Low: 0.9
All Time High: 2.3
All Time Low: 0.6

TNA iMPACT**
Close (This Week’s Rating): 1.2
Open (Last Week’s Rating): 1.2
Percentage Change: UNCH
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): 1.0
Open (Last Week’s Rating): 0.9
Percentage Change: ▲ 7.8%
52-Week High: 1.0
52-Week Low: 0.9
All Time High: 1.0
All Time Low: 0.9

*** 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:

It would appear that all the show were leveling in on their new standards (RAW, SmackDown, and iMPACT remain completely unchanged and SuperStarts increased 0.07, a statistical dead heat) if it were not for ECW. The show dropped another 15.5% this week to settle in on a new 52-week low of a 0.93. The last time ECW scored below a 1.0 rating was a 0.95 on November 4, 2008. The new timeslot has been beneficial to ECW in the short run, but even before the move TNA was on a slightly downward slope. Ratings have been heading down since the March 17, 2009 edition with a 1.4. Since then ratings have dropped 31% for ECW. In other words, a third of the audience has left the program.

Officially, ECW had a lower rating than SuperStars this week. Since network and cable ratings are not exactly the same, the comparison is not apples-to-apples. However, it actually means that SuperStars had even more viewers than ECW, so the margin was bigger.

It has not been a great time for wrestling ratings since after the draft. TNA has been able to hold on to most of their gains, but overall the audience has shrunk.

According to the Wrestling Observer (via the Small-for-All News Report here on 411mania), the WWE is going through a “rebuilding” period and expects ratings to fall as they focus on more development and new talent. Still, the ratings are falling well before that point and were already struggling with the rebuilding of the audience going from an adult-themed programming to a kid-friendly program. Those are two major changes to take on at one time. The WWE will have a tough time managing both initiatives and trying to keep their networks happy. Luckily for them, no contracts are up for at least a couple of years.

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 Reusable Bag ($1.99)
2. Jeff Hardy 3 Armband Package ($60, on sale $20)
3. Hardys Green Pendant ($10)
4. John Cena HLR Academy T-Shirt ($25)
5. Hardys Purple Logo Pendant ($10)
6. Jeff Hardy Immune to Fear T-Shirt ($25)
7. Triple H Eversoris T-Shirt ($28)
8. Legacy Born Better T-Shirt ($25)
9. Evan Bourne Ruthless Aggression #39 Action Figure ($14.99, on sale $12.99)
10. WWE Encyclopedia Hardcover Book ($45, on sale $39)

It looks like the WWE is getting in the 3R’s game with their reusable bag (the second R) taking the top of the list. It appears that the reusable bag is taking the place of the gift bag of being the cheap item that people select to go over the limit for free shipping. Also making his Top Ten debut this week is Evan Bourne. Perhaps Mr. Bourne is starting to show his upside? Considering there are few chances to catch him and he has only been back form injury for a couple of months, cracking the Top Ten is quite an accomplishment.

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

1. Jeff Jarrett – King Of The Mountain ($29.99)
2. Cross The Line Triple Pack 2.0 DVD Set ($24.99)
3. Main Event Mafia – Black T-shirt ($19.99)
4. Best of the X Division Matches DVD ($19.99)

Once again TNA tries to say removing an item from the top selling list (Cross the Line Triple Pack 1) is an update, but the Journal is not convinced. This is especially since the Journal pointed out how embarrassing it was still having this item in the top selling list considering how much quantity it was supposedly moving.

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
17 (May) WWE Judgment Day (Chicago, IL) TNA Live (Fayetteville, NC)	18 RAW (Louisville, KY)	19 SmackDown / ECW (Cincinnati, OH)	20	21 TNA Live (Oklahoma City, OK)	22 RAW Live (Boise, ID) TNA Live (Amarillo, TX)	23 RAW Live (Salt Lake City, UT) SmackDown / ECW Live (Rio Rancho, NM)
24 RAW Live (Loveland, CO) SmackDown / ECW Live (Las Cruces, NM)	25 RAW (Denver, CO) TNA iMPACT (Orlando, FL)	26 SmackDown / ECW (Colorado Springs, CO) TNA iMPACT (Orlando, FL)	27 RAW Live (Monterrey, Mexico)	28 RAW Live (Monterrey, Mexico)	29 ROH on HDNet (Philadelphia, PA) RAW Live (Queretaro, Mexico) TNA Live (Pueblo, CO)	30 ROH on HDNet (Philadelphia, PA) RAW Live (Mexico City, Mexico) SmackDown / ECW Live (Chattanooga, TN) TNA Live (Cheyenne, WY)

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, understanding how ratings work was the main question on the table. Michael asks:

I noticed that on the six year trend graph, you have a graph of the ratings point for Raw and Smackdown, but over the years with more and more people owning a television set, doesn’t a rating point in 2009 count more than it did in 2002?

So for example would a 4.0 now be a lot more viewers than a 4.0 in 2002?

Richard also wanted to add on this question:

To add to Michael’s comment didn’t RAW have a 3.9 with six million viewers for the first time since April 2002?

So like Michael’s question doesn’t a 3.9 today equal close to 5.0 in 2002?

elgrannoche began the explanation:

According to Nielsen, the change in a point is approximately 10-15% more viewers in 2008 than in 2000. But then it also matters how many people tune in to anything across the board in a week also affects the viewer:rating ratio.

Yes, so a ratings point today equals more viewers than a ratings point 8 years ago. However, what really matters is the ratings because the rating equals the ratio. A ratings point is a percentage of possible viewers watching at that moment. The population of the United States has increased to over 300 million over the past decade, so there are more potential people watching. That said, of all of those new potential people, the WWE is getting a lower percentage. Hyperstorm continues:

I personally don’t think there is much point in saying stuff like “a 3.9 today is equivalent to a 5.0 seven years ago” (sorry Richard, using what you said as an example.)

After all, it may be true to say that a rating of 3.0 now equates to more individual viewers than it did a few years ago, but it is still the SAME PERCENTAGE OF THE TOTAL AUDIENCE, and that is what matters.

Lets say, for example, WWE, or any TV program, had slipped from a high of 8.0 to 3.5 over a decade. That shows a significant loss of the audience, which would naturally imply many viewers have tuned out for various reasons. In this respect, to say “but a 3.5 now reflects more viewers than it did a few years ago!” is nothing but an excuse to make the numbers look better. WWE has declined massively in domestic viewing figures over this decade and everybody knows it.

Exactly the point. If the WWE were healthy than as the population grew their percentage of the population would have remained the same. Instead, it has declined across the board. So while the growth in potential viewers has offset the loss of total viewership, the percentage of total viewers has declined. That is what makes ratings comparable over time; they take out factors of natural population growth and replace it with a statistic. Slammy Award Winner BobbyC wraps it up:

Any downward trend is an indication that, even though there are more TV sets available, the actual number of viewers remains static or possibly decreasing. So as WWE’s costs increase, they cannot get a relative increase in their advertising revenue because the companies won’t pay more for the same viewers they had last year.

This led into BobbyC’s other point and our other big topic—the WWE adding yet another show to the market:

Look at the Starbuck’s basic business model. They created a very good product that many people would pay “above market” prices for. Well, if they are willing to pay above market – then Starbucks will open 100 stores. But the costs to open up 100 stores is significant, so we can either increase cost (which the market won’t support) or we simply accept lower profits/store.

Well – then they open up 1,000 stores. And their per store profits decrease. Sure, their overall profits are OK, but once we recoup the start-up costs on those 1,000 stores, we’ll be making more money.

But uh-oh – with there being so many Starbucks, the volume of revenue per store decreased. And then competition started to create a similar product at a rate below Starbuck’s above market price. Now the per store profit is even lower as business decreases, and some of these stores are now losing money.

So – they start to close stores and “right-size” in order to go back to a more reasonable per store profit level.

That’s where the WWE is heading. Their per show profits are decreasing as costs are increasing but income remains static. So they go and create additional shows. They anticipate making a smaller profit on those shows, but that will offset the reduced profit on their main shows (Raw and Smackdown).

And at some point – WWE will over saturate the market with wrestling shows. People will find alternatives (TNA, ROH – but also MMA shows), and abandon WWE altogether. At which point you can expect to see WWE consolidate their shows and they will have to be satisfied with the current (but lower) profit levels on Raw and Smackdown.

The only qualm with this argument is your short list of alternatives. Potential audience members will gravitate towards any other form of entertainment, whether it be sport, television show, YouTube, or anything else out there that captivates attention. Guest#4079 continues the thought on the additional show:

The argument about not over saturating the market with shows because there are more cable channels doesn’t make much sense to me. The amount of channels hardly expands the size of the audience, after all. The regular viewers of other channels are hardly unaware of the fact that pro wrestling exists, they just don’t watch it. Some might see the new show and get interested, but I think most aren’t suddenly going to watch.

Rather, you dilute your current audience. Some will try to watch all the shows when you can. These are die-hard fans that will watch regardless of quality. Others – especially if there are extensive recaps – will watch the ones most convenient to them and stop watching the other shows. It isn’t quite a zero sum game, but it is close.

This is actually right along with the argument the CW made for dumping SmackDown. Despite the show being their top rated, people who tuned in to SmackDown did not stick around on the network to watch anything else. In other words, people are not customers of specific networks, they are customers of the content. Some people like dramas and watch all of those. Other prefer sports news and watch that. People who watch wrestling tune in for wrestling. The network has little affect on the rating outside of location on the dial, advertising on other networks to let people know, any lead-in program that can help, and overall homes the network is available in.

MyNetworkTV also realized this very quickly. Despite SmackDown basically doubling their average weekly rating, the people who tuned in to SmackDown did not watch anything else on the network. When they realized that the strategy of trying to build a network around WWE viewer was going to fail, they cut their losses and changed the strategy of the network. Now they are a cheap weekday network with one expensive show that more than pays for itself on Fridays.

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!!

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This concludes Issue #86 (Volume 2) of THE HAMILTON AVE JOURNAL. Join us next week as we get ready to ring the bell again.

Till then!