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SmackDown!

Vince and Martha went public the same day. She did everything right and with flawless taste (darn her). He gave us XFL. So guess who gets the buy.

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Go long Martha Stewart, go short Vince McMahon. Bet with Mood and Food and against Rude and Crude. That's been the home-run trade of 2001 so far, as Martha Stewart Omnimedia looks like it is positioned for explosive growth while World Wrestling Federation Entertainment seems doomed to disaster given the fiasco of XFL football. Ever since October 19, 1999 -- a day that will live in irony, because it was the day that both companies floated their initial public offerings -- I've been watching these two companies closely because of their amazing financial similarities and obvious cultural dissimilarities. They are like textbook business-school studies of what can and can't be accomplished by two of the greatest entertainment entrepreneurs of the late-twentieth century.

Both McMahon, the impresario behind the WWF, and Stewart "own" categories that everyone wants to reach: The 14-to-28-year-old males belong to McMahon; Stewart controls the 25-to-54-year-old women who dominate disposable household spending. When these companies went public, they vowed to leverage their brands beyond their current "platforms." They would do so "horizontally," through tons of new kinds of programming (including on-line), and "vertically," through merchandise and licenses. Their goals would be the same: get a larger share of advertising and consumer dollars by monetizing their ability to connect with their fans.

They took separate paths. Stewart went for the incremental, steady, sure route. Working with Kmart, she expanded a simple sheet-and-towel deal into a major aisle power play, offering everything from paint to housewares. Last year, her company received royalties on an astonishing $1.3 billion worth of Martha Stewart goods, and this year, after massive line extensions, the take could be far greater. She expanded one magazine into many, added evergreen radio and television programming, and extended herself into gardening and baby goods. Despite a difficult advertising market, her company showed gains that far outstripped Wall Street's expectations. Rather than make a gigantic splash online, one that certainly would have caused the company to drown in red ink by now, she actually took her time building out her site. Now it can be completed at a fraction of the cost that might have been incurred two years ago. And it will be better. The company, with not a shred of debt and more than $120 million in cash, is probably better able to ride out this incredible downturn in media than just about any other publishing-entertainment entity out there.

It's been an almost flawless story. In fact, as someone with an entrepreneurial streak, I found myself envious of what Martha has accomplished. Does she have to make it look so effortless, too? Does she do that just to rub it into the rest of our pained and wizened faces?

McMahon, on the other hand, went anything but incremental. He threw the bomb, figuratively and literally, by launching the New Coke of sports, the XFL, a gigantic, expensive, and, in retrospect, wholly unnecessary waste of time and energy. Unlike Stewart, who has taken more and more mindshare of her audience pretty much on an hourly basis since she went public, McMahon has proved that crude and rude doesn't travel well beyond wrestling. Some on Wall Street have begun to realize that McMahon's greatness in wrestling may be his only gift. If you want to reach his cohort, you can reach it only within the confines of Raw Is War and SmackDown!

The WWF Website could become the most lucrative property on the World Wide Web. Eight million downloads alone in the last quarter!

Ah, but the gods of irony could have still one more twist ahead in this tale of two entertainment warriors. The New Coke analogy may not be that far off the mark for WWF. The wrestling business and its ancillary action figures, videos, and Website couldn't be healthier. At a recent Bear Stearns investment conference, Linda McMahon, Vince's wife and the chief executive officer of the company, spent the entire time talking about all of the new high-margined wrestling programming that her company is developing. She revealed that the WWF Website is the single most-downloaded site for streaming video, something that, once it is monetized, could make it the most lucrative property on the World Wide Web. Eight million downloads alone in the last quarter! Take it from this dot-com downloader: That's freakin' incredible.

In fact, Linda didn't mention the XFL once in her whole presentation. When the Q&A naturally turned to the elephant in the stadium, Linda deftly assured everyone that it didn't matter. It was a grand experiment. If it can be tweaked and worked, terrific, she said, without stating the obvious corollary, that if it dies, it dies, and WWF lives on with its incredibly lucrative, albeit somewhat narrower, enterprise. Indeed, if you simply wrote off the XFL and you were left with the cash-generating machine of WWF, this company might be able to earn upwards of a buck a share! At $11.81, this might be the cheapest media play on earth.

Meanwhile, Stewart, at the same conference, talked a much more cautious game. She acknowledged that March was a down month for the magazine, not as off as the industry, but hardly red-hot. Kmart, which seemed to have an insatiable appetite for Stewart's line, did some sort of inventory de-stocking that gave the appearance that growth could be slowing. The fourth-quarter deceleration in catalogue and online orders after a sizzling previous year didn't seem to be turning back up now that the new year has begun.

It looks to me like it's time to cover your short of Vince. You can stay long Martha, but recognize the risks! I would go long McMahon into this gloom. I wouldn't short Martha, ever. She's way too good a businessperson, maybe one of the best I have ever seen. But be aware that if the economy doesn't turn up, Martha Stewart Omnimedia could prove to be a tad expensive at 40 times this year's earnings, where it trades today. That makes Martha, in Wall Street parlance, a terrific hold but a very dicey buy.

TheStreet.com
Check out TheStreet.com's "10 Questions" this week. Bill Nygren of the Oakmark Select fund and Jeff Van Harte of the Transamerica Premier Equity fund are on the hot seat. Available for free at www.thestreet.com.


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