The Hamilton Ave Journal 11.11.10: Volume 2 – Issue 163

THE HAMILTON AVE JOURNAL
By JP Prag

Volume 2 – Issue 163

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.

TOP STORY: WWE Q3 Results

The WWE has released their Q3 numbers showing radical fluctuations across the board. Revenues were $109.6 million this year, down from $111.3 million in the same quarter last year, a drop of 1.5%. Yet this led to Operating Income of $18.2 million, an increase of 25.5% from $14.5 million in the same period last year. How did the WWE get there? Let’s break it down:

Live Events and Venue Merchandise dropped 15.2% in revenue from $31.5 million to $26.7 million. However, this was mostly caused because there were far fewer events. This year the quarter only had 78 events compared to the 94 events in the prior year. On a per show basis, the WWE made $342,000 per show this year compared to $335 per show in the prior year. Attendance decrease 10% domestically and 26% internationally, however average ticket prices increased 13% domestically and 31% internationally, far outpacing the loss in fans. While the international number looks excessive, it was mostly caused by favorable exchange rates.

Pay Per View took another dive this quarter, dropping 6.2% to $13.6 million in revenue. Below are the comparable buyrates:

The drop in PPV buyrates came amidst a $5 increase for domestic buys The themed PPVs have appeared to have completely worn off their potential for growth as at the end of last year. Meanwhile, the WWE did manage to cut the cost of producing PPVs so profit contributions only decreased 3.6% to $8.0 million.

The bright spot always for the WWE was in Television Rights Fees which increased 9.9% to $31.3 million. Since these numbers do not include SmackDown’s move to SyFy yet and removal of NXT from the schedule, it will be interesting to see where they finally stand. By all accounts SmackDown’s increased contract has more than made up for NXT domestically and the WWE has seen benefits from renewed contracts and international exchange rates.

On top of all this, the WWE was able to decrease the costs of producing television a bit to bring their profit margin up 1% to 44%, or $13.8 million (13.1% higher than the previous year).

Digital Media slipped 8.1% to $6.8 million and Home Video dropped an astounding 35.7% to $7.2 million. For the latter, shipments increased 2% but prices decreased 6% resulting in a far lower sell through rate. For the former, WWE.com advertising revenues WWEShop.com revenues slipped by similar numbers.

On the other end of the spectrum, Licensing Revenue increased and equally amazing 36.7% to $10.8 million. This was led by the new relationship with Mattel that brought an increase of $2.4 million in toy sales alone. The beneficial contract terms also bled through to the bottom line where the WWE say a profit margin of $8.3 million, an increase of 38.3%.

WWE Studios booked a large revenue jump of 153.3% to $7.6 million yet ended up with a loss of $0.6 million compared to a profit of $1.7 million. As explained by the WWE:

During the current quarter, we recorded revenue of $7.6 million related to all seven of our released films as compared to $3.0 million in the prior year quarter. The current quarter results included $3.8 million of revenue associated with our latest film, Legendary. For our first six film projects, we participate in revenues generated by the distribution of these films after the print, advertising and distribution costs incurred by our partners have been recouped and the results have been reported to us. In September we released our latest film, Legendary, under our revised film strategy. This strategy entails self-distribution and marketing of films. Under this new model, we reflect a film’s gross receipts and its associated distribution and advertising costs in our results. In addition, the change in distribution results in earlier recognition of revenue and expenses relative to initial release of the film as compared to our previous model. As a result of the timing of Legendary’s distribution and advertising expenses, we have recorded a $0.6 million loss for Studios in the current quarter.

What is more interesting from the Studios and WWE’s television production in general is that they were able to get a large number of film credits. Last year that number amounted to $1.4 million, but this year the WWE was able to take back $4.0 million in credits. While this was criticized during the Linda McMahon campaign, one can see how important this was to the WWE’s bottom line this year. Removing this credit from both years, the WWE would have had $14.2 million in Operating Income compared to $13.1 million, an increase of 8.4% instead of 25.5%

Overall, the Cost of Goods Sold increased 2.8% to $61.8 million, decreasing the profit margin from 46% to 44%. This was led almost exclusively by WWE Studios, Home Video, and Live Events, representing rising cost or just lower margins in those segments. Without the excess charge to WWE Studios noted above, the WWE would have actually decreased costs across the board.

Selling, General, and Administrative costs dropped 20.2% to $26.2 million representing all of the cost saving measures the WWE has implemented in the past year. This led to an EBITDA increase of 18.2% to $21.4 million.

All together, the mix of the WWE’s sales continues to change drastically as items like toys take the place of videos and television surpasses live events. The WWE continues to more with less and is taking advantage or any regulatory condition they can. Even with slightly lower revenue, the WWE increased their operating margin from 13% to 17%.

And while the street has thus far been happy with these numbers, there is one they should be paying greater attention to: cash. Cash on hand has decreased 43.7% since the beginning of the year, now sitting at $84.4 million. And the only thing that is causing the greatest drop in cash is the excessive dividend. Operating activities have brought in $27.9 in cash this year thus far, but the WWE has paid out $62.6 million in dividends. Operations still do not support the dividend, yet the WWE is adamant in keeping it.

Even with that, the WWE is not in danger any time soon. They are also sitting on a large amount of short and long term investments and are quite profitable. At the end of the day, the WWE is still the strongest company in professional wrestling and is one of the most profitable companies on a percentage basis in the world right now.

Newsbites

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

For anyone imagining the economic impact of WrestleMania waning, the event generated $45.1 million in economic impact for the Glendale/Phoenix, AZ area this year. This included nearly $5 million in taxes at the local, county, and state levels, demonstrating why the event is so highly sought after. Atlanta is already expecting at least $45 million in impact next year.

MediaLife did an examinations of the WWE for advertisers who might be interested in purchasing either time or placement with the company. Among their interesting results was this one:

Among adults who watched wrestling in the past 12 months, 16 percent have an annual household income below $15,000, according to Scarborough Research. Ten percent are between $15,000 and $20,000, 8 percent between $20,000 and $25,000, 16 percent between $25,000 and $35,000, 24 percent between $35,000 and $50,000, 17 percent between $50,000 and $75,000, and 9 percent at $75,000 or more.

With so many lower to mid-level income viewers, the WWE will have trouble attracting high price advertisers. However, there are many that would be interested in this particular demographic.

Also mentioned by MediaLife was the gender and age breakdown of the audience:

Wrestling fans are 60 percent male and 40 percent female, according to the WWE.

Twenty-two percent of fans are under 18 years old, with 23 percent ages 18-34, 25 percent 35-49 and 30 percent 50 or older.

The youth and PG initiative has helped bring the age numbers down, but the audience still skews older, meaning the WWE is alienating an existing crowd.

TNA has for the second time cancelled their house show in Evansville, IN. No reason was given, but TNA claims they are looking to reschedule the event. No possible dates were given. WWE has been cancelling and moving house shows as well recently, but that has more to do with updates to their touring schedule.

DirecTV was having issues taking orders for TNA Turning Point. Automated orders through the receiver could not be completed, but phone orders went through fine.

After ten years in business, indie promotion New England Championship Wrestling will be closing their doors for good. NECW caught the Journal’s attention in August 2009 when they signed a deal to be broadcast on 38 million homes on Comcast Sports Net starting in January 2010. That would have actually given NECW a greater reach than ROH on HDNet. However, upon viewing NECW’s offering, Comcast soured on the deal and relegated the programming to On-Demand. The excess costs of creating television while having shrinking live event attendance led to the need to shut down the promotion for good. Much like the original ECW, NECW found that television can cost more than it brings in, especially if your television partner is not behind you.

Universal Studios is not listing TNA Genesis for January 9, 2011. As such, it is expected that Genesis will still be a PPV in 2011.

One of the members of the WWE’s board of Directors has stepped down, although no reason was given. According to the WWE’s profile for Michael B. Solomon:

Michael B. Solomon has been a Director of World Wrestling Entertainment, Inc. since August 2001 and is a member of the Audit and Compensation Committees. Mr. Solomon is Managing Principal of Gladwyne Partners, LLC, a private equity fund manager. Prior to founding Gladwyne Partners in July 1998, Mr. Solomon was affiliated with Lazard Freres & Co. LLC. Mr. Solomon joined Lazard Freres in 1981 and became a Partner in 1983.

This profile has already been removed from the WWE’s corporate site.

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 time we should be able to see patterns, trends, and anomalies.

For the week ending Wednesday November 10, 2010, here are the current standings of the shows:

Analysis:

It was more of the same this week as RAW slipped back to a 3.10, SmackDown jumped up to a 1.8, SuperStars hovered into a 0.64, and iMPACT settled in to a 1.15. All-and-all, it is about the same as we have been seeing from the shows for the past two months and nothing out of the ordinary.

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? Well, the WWE decided to completely revamp their site this week, removing the top selling lists. However, we can sort the top selling items among a number of categories.

Men’s
1. John Cena Cenation T-shirt ($24.99)
2. John Cena Cenation Baseball Cap ($19.99)
3. Nexus Logo T-Shirt (On sale $19.95)
4. Randy Orton Viper T-shirt ($24.99)
5. The Miz My Name Is T-shirt ($24.99)

Women’s
1. John Cena Cenation Baseball Cap ($19.99)
2. D-Generation X Army Cadet Cap (On sale $3)
3. John Cena Cenation Women’s Tee ($24.99)
4. John Cena Never Give Up Baseball Cap ($19.99)
5. John Cena Never Give Up Women’s Tee (On sale $6)

Kid’s
1. John Cena Cenation Baseball Cap ($19.99)
2. John Cena Cenation Youth T-shirt ($21.99)
3. D-Generation X Army Cadet Cap (On sale $3)
4. John Cena Cenation Illustrated Youth T-shirt ($9.99)
5. John Cena Never Give Up Youth T-shirt package (On sale $34.99)

While it was expected to see some differences in the demographics, the running theme between them should be clear: John Cena dominates all. While the men in the audience seem more willing to embrace the heels (The Miz and Nexus), John Cena is a seller across all demographics. So while some would like you to believe that Mr. Cena has no place in the adult audience; that could not be further from the truth.

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. Jeff Hardy “The Ring Is My Canvas” T-shirt ($19.99)
3. Jeff Hardy Arm Bands ($9.99)
4. Jeff Hardy Enigma T-Shirt (Glow In The Dark) ($19.99)
5. Mr. Anderson………People Are Fake T-Shirt ($19.99)
6. Mr. Anderson “A**HOLE” T-Shirt ($19.99)
7. Hulk Hogan Bandana ($9.99, on sale $7.99)
8. TNA The Best of the Asylum Years Volume 1 ($19.99, on sale $17.99)
9. RVD – Video Wall T-shirt ($19.99)
10. TNA Winged Warrior T-Shirt ($24.99)

The WWE completely revamped their site for the second time this year. TNA? Not so much.

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 upcoming weeks? The Personal Journal answers that question.

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. Now, let’s break down the topics from last week’s commentary section:

One Last Employee Run

Couple of comments on the employee v. contractor situation. These are small nitpicks put they are the type of things the WWE will argue if challenged in court.

1. Evaluations of matches and promos could be considered evaluations of the end product as ultimately the matches and promos are the product. Of course the existence of the WWE style is the first counter-argument to this point.

2. Their pay is actually a mixture of both styles as the pay per view bonuses could be considered a flat rate for work performed.

3. You stated that most expect to just renew their contracts but with the WWE’s constant releases I highly doubt this is the case. The top guys have an expectation of renewal I’m sure but I don’t think most wrestlers feel safe at contract time. Also I’m sure when a worker first signs with the WWE they aren’t given any expectation of renewal. I’m sure they are told that if they work hard and get over then they’ll see where things go.

Even with these nitpicks the relationship seems more employee than independent contractor but there is definitely enough gray area that it needs to be decided in court.
– gpjunk

Just remember: they only have to meet one of the IRS’s criteria to be considered an employee.

As the Brock fiasco awhile back proved, WWE themselves have said that they look at the wrestlers as investments. No company in the world invests expecting to give it away (unless it’s to skirt the law -marginalizing and tanking business units for tax purposes then spinning off the bullshit to recoup losses).
– Guest#7877

On the contractor debate how are music artists or actors classified seeing as they’re in pretty much a similar situation (re: fixed contracts, record/studio control of appearance, when and where to appear to promote new product, etc?)
– V

There’s a huge difference in the contract structures between actors/musicians and professional wrestlers. For one, actors and musicians both have unions that represent them and look out for their interests. Wrestlers do not. Neither work the same intensity of a schedule as wrestlers and do not have to work when their primary instrument (voice, body, etc.) is injured. And those are just scratching the surface.

You make a good point, and wrestlers probably SHOULD have the same kinds of contracts as actors, but currently it’s more or less the old “apples to oranges” comparison.
– Jeremy Thomas

I’m not sure that is what he was saying, but V can speak for himself.

None of the things you mention: union, risk, work schedule have anything to do with defining whether wrestlers are employees or contractors. Not according to the IRS test. These are merely things that exist.

V does point out that there are many similarities between how wrestlers and musicians are used by their labels, yet musicians are not considered employees.

It isn’t true that musicians don’t work when they have some sort of injury. Many are on the road more than 300 days a year and only the top earners don’t perform when they have some sort of injury that is not debilitating. Just like wrestling.

Wrestlers don’t wrestle when they have a serious injury that prevents them from wrestling. They do wrestle injured, just like athletes perform while injured and many singers perform while their voices are not in top form.

Orton, Edge, CM Punk, and many lower card wrestlers have been pulled due to injury. CM Punk did not even have a backstage ambush to explain his absence from the ring.
– Guest#8394

A couple of things. Most musicians are actually subcontractors. They actually work for the incorporation of the band and the band is contracted to the company. Yes, the band can be one person, but it is the parent company that is responsible for paying out all of the taxes and whatnot.

Although actors sometimes have studio deals, they are generally not employees because they have control on whether or not they accept a project. What is interesting is that after the Wrestler was made, Mickey Rourke stated that he felt wrestlers should be in SAG or the stunt works union at a minimum because they perform on TV and need bargaining power. As expected, nothing has come of it yet, but there’s always a chance in another generation.

International Buys

[Some other site] reported this week that UK PPV buys have been as high as 1/3 of US buys, even though the events are on Sunday nights from 1-4am. This suggests that there is a core audience that may not alter much with a price increase. It’s also worth noting that the events with the lowest buyrates (MITB, Extreme Rules, Fatal 4way) are those that are free-to-air in the UK (and I assume in other Sky countries).

If about 40% of an events buys are coming from overseas, then the price disparity is worth looking at.

Your dismissive answer based on population and GDP is very simplistic and ignores the fact that overseas markets are hotter for WWE than the US right now.
– John

The Journal stated that individual overseas markets – single countries – are not as important and do not individually affect WWE’s bottom line as much as the single US market. So the overseas market may be hotter, but the low prices charged means that they have to increase buy rates disproportionately to meaningfully move WWE’s bottom line. That is just math.

The GDP per capita argument is not dismissive, it tells you about market realities. In a country with low GDP/person PPVs are unlikely to sell at a high price. The money just isn’t there. High GDP/person means more disposable income.

It was also stated that as a whole, Europe was a very meaningful market. A statement which can take into account wealth, growth, and percentage of the bottom line. It only makes sense, as the population size and wealth are roughly comparable to the US.
– Guest#0396

Let’s take it one step further. Here is the revenue breakdown by region from the WWE’s Q3 report:

Now, which region is more important to the WWE? EMEA and APAC may be growing while North American is shrinking, but for now the vast majority of dollars is still in the domestic market. That may well change in a decade, but not today.

Furthermore, either that other site got the numbers wrong or you misread it. The WWE has stated that all international buys have sometimes equated to 1/3 of domestic buys.

WWE gets about 70,000 to 100,000 viewers per showing of RAW in the UK. Pretending that all are unique viewers (which they are not), that would mean 170,000 viewers. The latest major PPV in SummerSlam came in with buys of 350,000. If 70% of those are domestic (which is more in line with the latest reported numbers by the WWE), that means 105,000 buys for everywhere else in the world. Are you saying the UK is responsible for 77% of those? Because that would be 1/3 of the 245,000 domestic buys. Furthermore, 81,000 buys from the UK over 170,000 viewers would be a 48% conversion rate. That many people who watch RAW in the UK order the PPVs? The conversion rate in the US is about 2%, so that would be quite a leap for that country!

PG Continues

The paragraph about the ‘youth initiative’ should be read by everyone. I’ve always felt that those believing Linda’s campaign was the sole reason for the PG switch were getting smoke-screened. I don’t expect any switch any time soon due to her failed bid (after all, what’s to stop her continuing in politics and trying again?) and anyone hoping for such will be sorely disappointed.
– Ryushinku

Hopefully you can let everyone know because…

Ring the Bell

In case you didn’t catch it in the teaser or pick up on the foreshadowing in Jeff Small’s retirement, this is the end for me. After five and half years, 458 articles, and countless hours preparing and writing for 411mania, I have decided it is time to retire myself. I’ll get in to all the details next week, but feel free to use the Comment section below or e-mail me anything you’ve wanted to ask… or something you have asked and I completely ignored. Yes, maybe I’ll even answer troll questions for fun. Why not?

So next week I’ll bring you a little taste of what I’ve done around here. It’ll be an amalgamation of In Defense Of…, Hidden Highlights, The Hamilton Ave Journal, and everything else that I’ve lain my fingers on. Plus a bunch of Q&A and a final send off. And then that will be it!

This concludes Issue #163 and Volume 2 of THE HAMILTON AVE JOURNAL. Join us next week as we… well… retire!

Till then!