Ratings Slide Puts WWF in a Sleeper Hold

Fewer people are watching wrestling, and live events aren't generating as much excitement.
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Last Monday the averaged television rating for Raw and Raw Zone, World Wrestling Federation Entertainment's (WWFE) flagship wrestling programs, dipped below 4.0 for the first time since March 1998. Even though the 3.9 that Raw and Raw Zone notched ranked the shows as the most-watched cable programs, the decline highlights the diminishing popularity of wrestling.

The ratings slide began over a year ago, when the entertainment group moved from its longtime home,

USA Networks

(USAI) - Get Report

to

Viacom

(VIA) - Get Report

. As a result,

Raw

and

Raw Zone

switched to The National Network (TNN), a mainstream reincarnation of The Nashville Network. Because TNN is not available on as many cable systems, ratings dipped to around 5, off more than a point from levels reached the year before on USA.

To make matters worse, in a recent filing with

Securities and Exchange Commission,

WWFE said it would lose $1 million to $1.3 million a month because DirectTV refuses to air its pay-per-views as a result of a contract dispute. In addition, business at WWF New York, its Manhattan entertainment complex, has decreased because of the events of Sept. 11. A year ago, live events such as the TV tapings for

Raw

and

SmackDown!

would sell out in a few hours. In its latest quarter, the company said live attendance was down 32% from the previous quarter, with nearly $3.7 million less coming in as a result.

Such drops in ratings and attendance are even more troubling because television and live-event performance drive the WWFE operation, from the New York site to merchandise sold over the Internet. As ratings fell, so did revenue from the company's television and live-event segments, which accounted for 80% of WWFE's first-quarter revenue.

"Their fundamentals are under a great deal of pressure," said Breck Wheeler, a research analyst with Legg Mason, one of three who cover the stock.

The Invasion of the Body Grapplers

Wheeler says the TV product has grown stale in the six months since the WWF bought

AOL Time Warner's

(AOL)

World Championship Wrestling (WCW), its only rival and home to Hulk Hogan, Ric Flair and Goldberg -- three of the biggest names in wrestling. When WWF bought the WCW's intellectual property and trademarks, those stars didn't come as part of the deal. They had guaranteed contracts with AOL Time Warner and chose to collect a paycheck for sitting out rather than take a pay cut to work for the WWF.

Initially, the merger revitalized the product. Ratings for

Raw

and

Raw Zone

jumped a full point -- from 4.7 to 5.7 -- in the week after the company debuted the WCW invasion and fused the two programs' story lines. A pay-per-view show highlighting the feud between the WCW and WWF, aptly titled

InVasion

, did 681,000 buys -- 70% higher than the same event in the previous year.

But viewer excitement soon died. Without the WCW stars, the show became less entertaining in the long run. Television ratings slumped 28%, from the 5.7 logged at the beginning of the summer to last week's 3.9.

"The softness in the TV ratings is the most concerning because it's the least impacted by a softening economy," Wheeler said. "Unlike advertising, watching TV isn't a function of economic outlook."

Meanwhile, a court in the United Kingdom issued another blow to the company by recently ruling that the WWFE could not use the trademark WWF on its popular WWF.com Web site because of a 1994 agreement with the World Wildlife Fund, which uses WWF.org. Judd Everhart, WWFE's director of corporate communications, said that the company had appealed the ruling, and that a hearing would be held at the end of 2001 or the beginning of 2002.

Everhart refused to comment on how the ruling might affect the company -- a reticence that's in keeping with WWFE's lack of clear guidance. After purchasing WCW, WWFE said the rival league would run as a separate entity, with its own live events, television programming and merchandise. But the pending spin-off was shelved indefinitely as the ratings slid.

The Pinning Predicament

WWFE investors face an uncertain outlook, due to a weak advertising market and slumping ratings. Even if ratings do increase, advertisers are cutting their budgets, and the two factors could offset each other.

Some analysts don't recommend buying WWFE's stock until the company shows confidence in its own fundamentals by repurchasing shares. According to Pacific Growth Equities analyst Peter Swan, WWFE has nearly $250 million in cash, which it could use to buy back shares, which were trading at $11.27 on Wednesday, just 96 cents above their 52-week-low. The stock is trading at a price-to-earnings ratio of 20 times 2002 estimated earnings.

"We'll be more confident when we see them eating their own cooking," Swan said.