The UFC’s Future Isn’t As Bright As It Seems
Before reading this piece please understand that it is an outlook on the UFC's future. It is not talking about the UFC today or even the UFC 3 years from now. This is an analysis of the UFC's fundamental business model and the troubles the business model will run into within the next 10 years.
The Ultimate Fighting Championship (UFC) is a brand that has taken the world by a storm over the last decade.
Only die hard fans may remember this, but back in 2000 the UFC was bought for only $2 million by Zuffa LLC. In 2016, it was sold for $4 Billion to WME – IMG.
Think about that: in only 16 years, a virtually worthless UFC brand was able to claw its way into pop culture relevancy and become worth multiple billions of dollars.
The Ultimate Fighting Championship Brand Strategy
How did this happen? The UFC used smart marketing strategies and intelligent promotion to spark popular interest in the UFC, UFC Fight Night, UFC Fight Pass, UFC PPV, UFC apparel, UFC merchandise, and the UFC brand as a whole.
For example, they started The Ultimate Fighter to generate interest from free TV so they could lead people into buying PPV. They also own UFC gyms to attract the public to the product in ways other than just media. All in all, the UFC has done an admirable job to this point.
However, the work is not done. WME-IMG did not buy the brand to let it stagnate at $4 Billion, they want it to keep growing and generate dividends for them. But look around, the UFC has stagnated.
The UFC’s premier event, UFC 200, had to be changed multiple times because of dropouts, drug usage, and injury. The next major event, UFC 202, still had large blocks of tickets up for sale just days before the event. Georges St. Pierre recently said he’s a free agent.
In this post I’m going to help you understand why the UFC, on its current path, is headed for failure. It comes down to a few major issues:
- The UFC’s Perception
- The UFC’s Star Power
- The UFC’s Current Valuation
To figure out what needs to be done, we first need to ask an important question:
What exactly is the UFC’s brand?
Recently Troika just redid the UFC’s branding to inspire a sense of excitement and boldness from the UFC..
As you can see, the new system creates much more consistency between the UFC brand logo system and allows for the creation of solid, tight identity.
This is all great and wonderful! Unfortunately, the true issue lies in the identity of the UFC itself.
Currently, Dana White likes to sell the UFC as quick, exciting, and bold – much like the new brand videos . Because UFC is supposed to be “pure” fighting, the excitement and randomness is often on display – missing just one second of action can mean missing out on a knockout. Unfortunately, this chaos also poses a huge problem: a lack of stars.
Lack of UFC Stars
Star fighters generate headlines, drum up interest, and suck in fans. People want to see winners who are exceptional at what they do, and the UFC is sorely lacking in this area. In 2016 alone, 7 champions lost a fight.
This is a huge problem! Remember, champions Anderson Silva and Georges St-Pierre were instrumental in generating growth for the UFC in the early 2000s while Ken Shamrock and Brock Lesnar were huge stars who sucked in fans with them.
The excitement is fun in the short term, but the pure unpredictability hurts long term growth as people don’t have stars to associate with the brand.
Lorenzo Fertitta claims “Our business is built on the fact when consumers tune into the UFC, they get a matchup between top fighters, and that fighters aren’t matched to win,” he said. “It’s like the NFL in the sense that it’s impossible to go undefeated for 10 years straight. We think our fans look past wins or losses and just look forward to the best matchups at all times.”
However, all one needs to do is look at the NFL and see what the most valuable teams are – Dallas, New England, New York, San Francisco – all teams that had insane winning streaks at one point in time. People gravitate towards winners, not parity.
While it’s true no one star is bigger than the UFC, stars are needed to put faces behind brands. People resonate with the stories and the faces of people much more so than with a brand – remember at the end of the day a person is a physical, tangible, real thing while a brand is just a concept. Bleacher Report does an excellent job explaining the pitfalls of UFC 200 and how important stars are to putting on a great show.
And it’s not like new stars are just going to pop up out of nowhere. Stars take time to build and it’s foolish to bet a business model on stars continuously showing up.
Star Power and PPV Buys
A lack of UFC stars directly affects PPV numbers. Look at the top selling UFC PPV buys ever, they all have one thing in common: huge stars. McGregor, Lesnar & Rousey rule the PPV charts and for good reason, people want to watch stars fight.
In 2015, McGregor and Rousey made 61% of the UFC’s PPV revenue. It is INSANE to realize that two fighters are making more than the rest of the UFC roster combined, but that is how powerful stars are. As Bleacher Report puts it, “Unlike the television product, fans aren’t tuning in for the brand; when it comes to paying a substantial additional fee, consumers want stars.”
The 61% revenue also shows us how few stars there are in the UFC. In 2010, the UFC’s best PPV year, the top two attractions – Lesnar and GSP – generated 41% of all revenues while fighting in 25% of the UFC’s PPV events. This means 60% of revenues were made in 75% of the events, which isn’t bad and showed the UFC wasn’t overly reliant on stars like it is today.
Star power also has a trickle down effect.
In 2014 the UFC had its worst ever PPV year with an average of 262,000 buys per event. Guess what was missing from the UFC that year? Stars.
In 2014 Anderson Silva and GSP did not fight, while McGregor and Rousey were not the stars they are today. This makes sense: when stars don’t fight PPV numbers decline. But that doesn’t tell the whole story.
In 2013, PPV fights NOT including stars averaged 320,000 buys per fight. If the trend held, in 2014 fights should have generated around these same buys beacause no stars were fighting. But they didnt. The stars had a trickle down effect by which they raised the PPV buys of every single fight in the UFC that year.
What does this tell us? By not having any stars fighting the UFC did not only lose out on the stars PPV revenue, they also lost out on other PPV events. Stars not only drive their own PPV revenues up, they also spark interest in the UFC and drive other fighters PPV numbers up as well. Without stars, this interest wanes and the entire UFC takes a hit.
Until McGregor and Rousey came along, PPV revenues were decreasing for the UFC. Take out the 61% Rousey and McGregor generated and the trend continues for the UFC. While the UFC has started to move towards having contracts as a large chunk of their revenue, PPV is at the heart of their business model and PPV will not survive without stars; 2014 showed that, 2015 showed that and 2016 is continuing to show this fact.
There is no further proof than UFC 200. UFC 196’s McGregor & Diaz press conference generated 360,000 watchers. Guess how many UFC 200 generated without McGregor? 30,000. UFC 200 was the ultimate celebration of the UFC brand and it generated very little interest in comparison to the McGregor show.
Perception of violence
Another huge issue the UFC needs to counteract is the perception of “savagery” that the brand currently has. While the UFC is doing much better now than in the late 90s – when it was known for being barbaric and John McCain called it human cockfighting– much work still needs to be done.
A quick search for “UFC too violent” yields over 592,000 results. Popular forums ask questions like, “should [the UFC] be banned and can it make younger viewers watching [the UFC] more aggressive?” First world countries like France still ban full contact MMA. An Australian leading medical expert stated “the concept of humans fighting each other was ‘wrong.’”
As we can see, this violent image is still a very big issue globally.
While I wholeheartedly agree the UFC is NOT “too violent,” the perception is one that still needs to change before the UFC can truly gain global appeal.
As we know the UFC was born for $4 billion so many assume this represents the true value of the UFC today. I am not of this party.
I think WMI overpaid for the UFC but did so because it saw value in its growth. In essence, WME paid for the future of the UFC and not its current day value.
To understand why this is the case let’s look at a basic multiple valution. While there have been conflicting figures about the EBITDA value of the UFC – some report it as over $200 million while others report it around $150 million – I am going to defer to Forbes and Bloomberg who both report the EBITDA around $180 million.
The closest comparable to the UFC is the WWE because of the similar business models. The WWE is also a publically traded company so, if you believe in the efficient market hypothesis, its valuation is relatively accurate.
On April 1st, 2016 the WWE had a valuation of $1.2 billion. It had revenues of $650 Million and an EBITDA of $71 Million. The UFC, on the other hand, has revenues of $600 million and an EBITDA of $180 Million. With an EBITDA of 250% of the WWE, the UFC should have a value of around $3.04 Billion.
Even if you believe the EBITDA values are around $200 million, the valuation comes to around $3.6 Billion. That means WWE still paid over $400 million for a company that wasn’t publically traded.
At the same time, Goldman Sachs has been reported in stating the debt levels of the UFC are quite high.
So why exactly did WME Overpay For The UFC?
Look it’s not like WME and its group of private equity partners didn’t realize they were overpaying. They clearly paid the price based on the growth they believe the UFC can deliver. The UFC is going to renegotiate its TV deal in 2018 and still has the potential to improve its global presence.
However, lets look at the factors promoting growth and see if they really the foregone conclusions everyone thinks they are?
TV Deal Not As Foolproof as it seems
The major driving factor behind the enthusiasm of the UFC’s growth is the fact their television deal is up to be renewed in 2018. While the UFC currently make $115 million per year in TV deals, the Los Angeles Dodgers make $300 million and the average NFL team makes $200 million. It has been reported the UFC believed their new deal can go for as high as $400 million a year and will last at least 10 years.
However, there are two major issues with this analysis.
Firstly television deals have already peaked. ESPN just lost 10 million subscribers (worth about $80 million) which made it possible for ESPN to negotiate huge TV deals. People are moving away from TV and moving towards streaming services, such as Netflix, where they can watch shows on demand. TV deals have peaked and are going to be on their way down.
However, there is one portion of TV that is not declining: live television. People do not want to rewatch live events. This would be great news for the UFC, except for the fact their PPV revenues are highly unstable. PPV revenues decreased from 2010 to 2014 until Conor McGregor and Ronda Rousey saved the UFC. We already discussed this issue in depth.
While it is true the UFC is moving towards more contractual revenue, this contractual revenue will easily be renegotiated if the UFC cannot keep interest high. Interest WILL wane, as it did in 2014, if the UFC does not have a framework to create stars. Stars run the fight game and PPV buys so until the UFC has a way to stabilize its PPV revenues, it has a major roadblock towards long term growth.
Global Expansion Remains As Potential
Another major growth factor for the UFC is that “Zuffa is well positioned to capitalize on the expansion and increasing fan market share of the sport internationally.” This was said in 2011. Since that what has the UFC done to capitalize on the international markets?
As of 2016 no events have been held in mainland China. In 2011, Dana White said India was of great interest to the UFC but no Ultimate Figher India has been created.
In 2012, Dana White said South Africa was the next target for growth, but no events have been held on the African continent.
In 2013, the UFC was expected to move into Russia, yet 3 years later no movement has been made to push UFC into Russia.
It’s not as if these places don’t have interest in MMA as Singapore-based ONE FC signed a 10-year media deal with Fox Sports Asia and EFC Championships in South Africa has sold out arenas across Africa.
It’s one thing to say the UFC has the potential to expand globally, but it has been 5 years since the UFC started attempts to move abroad. If nothing substantial has occurred to show the UFC can capitalize on the international market so far, what will change in the next few years?
The Muhammad Ali Deal Threatens The Entire Business Model
The UFC also has a belief that its expenses will continue to stay similiar to what they are now. However, Congressman Markwayne Mullin introduced a bill to extend the Muhammad Ali Boxing Reform Act to mixed martial arts in 2016.
The Muhammad Ali Act protects the welfare of the fighters to prevent them from being exploited. The act has two major implications for the UFC’s business model.
Firstly, it would force the UFC to disclose all revenue made from fights, thus helping fighters increase their leverage. This would likely help push fighter salary up to NBA/NFL/MLB levels and greatly increase the expenses the UFC faces.
Secondly, the act would force the UFC to either accept the act or become an official league like the NFL. If the UFC becomes an official league, fighters go from being contractors to employees and benefits, taxes, and other expenses greatly increase.
Either way, the passing of the act threatens the business model of the UFC itself and greatly increases the amount of expenses the UFC has. This, combined with the high debt load, poses a large issue to long term growth.
So What Does The UFC Need to Do To Fix These Problems?
Now that we’ve established that the UFC has three major problems – stars, perception and valuation – we can figure out exactly how the UFC can counter these problems.
Let’s Start With Fighter Safety
Look, there is a double standard when it comes to the UFC. A guy playing through injury in the NFL is a “warrior” but a guy fighting through injury is seen as being “stupid.” A boxing fight is seen as being entertaining, but a UFC fight is seen as being barbaric.
This standard of judgment is not fair, but that also doesn’t mean its ok to ignore it.
Hardcore fans know how much skill and training goes into being a UFC fighter and how they can protect themselves as top class athletes.
We also know about the extremely rigid drug testing standards, the exceptional training referees get to ensure no one takes unnecessary damage, the amount of medical presence on site for every fight, and the fact that no one has ever suffered a fatal injury in the UFC, ever.
But the general public doesn’t know this. The typical response to someone who thinks the UFC is too violent is to “try it out, then judge.”
What these advice givers don’t understand is that the people who believe the UFC is too violent do so because of a story they have painted in their head. Once a human being has a preconceived notion, it is very hard to change it by just “trying something out.”
Imagine telling a Trump supporter to just “try and listen to Clinton.” Do you think that will work?
The UFC needs a solid strategy to combat the perceived safety issue that currently exists.
- Learn from what the NFL is doing wrong with its image of violence
- Promote safety standards
- Educate the public on its athletes
Learn from The NFL
Much like the UFC, the NFL currently has a huge image problem: violence. The NFL is staving off lawsuits from former players in regards to safety while also dealing with public backlash over domestic violence handling.
The NFL is doing much better in terms of concussions and safety than it is in terms of domestic violence. Why? Because in one area the NFL is striving to make changes, while in the other the NFL is just throwing up some marketing campaigns.
In terms of concussions and safety, the NFL has implemented new concussion protocols, created new helmets, and added heavy fines for players who make dangerous plays.
This is emphasized in games; commentators routinely point out how players with concussion like symptoms have to pass rigid examinations to keep playing; referees continue to flag dangerous plays right away and heavy fines follow soon after.
The action taken shows people the NFL is making a commitment to safety and decreases the negative opinion many have about the NFL and its safety standards.
While the NFL clearly has nothing on the UFC’s concussion policies – where fighters take months of medical leave as compared to weeks – the general perception is that the NFL is doing a good job. This perception equity is what is needed.
On the other hand, the NFL has huge PR headaches when it comes to domestic violence with it’s players. Many people believe the NFL does not care about domestic violence that its players commit and does not punish them enough for it.
What has the NFL done in response to this? Only a few millions worth of Public Service Announcements!
Normally this would be great, but the NFL has done nothing else! The NFL is doing a lot of talking about how domestic violence is horrid, but its actions (Ray Rice’s and Greg Hardy’s short suspensions come to mind) show that it doesn’t really care about domestic violence.
This is not good and it serves to show that if the content is shit, no amount of marketing will be able to cover up the smell.
The UFC needs to make actual changes towards safety, not just talk about them.
*The UFC has a great opportunity to handle domestic violence thoroughly in its own sport. Doing so will show a clear contrast to the NFL and is an easy way to generate publicity for the promotion.
Promote Safety Standards
The great thing is that the UFC has made tangible changes to improve safety. Drug tests are extremely strict, referees have strict instructions to not allow unnecessary damage, and medical staff is always on site!
The UFC just needs to promote this more.
Since the UFC owns its own supply chain of media creation, they need start creating media emphasizing the drug testing, the referees and the medical staff.
Some things they can do right away include emphasizing a referee’s decision to stop the fight during broadcasts, to show how it was made to protect the fighter. They can also bring on site doctors into broadcasts to talk about fighters who are dealing with an injury and whether fighting is a safe thing to do. This will immediately paint images of a safer UFC.
I know the above is already done to a limited extent during UFC live broadcasts, but it needs to be emphasized even more so. A clear push towards an emphasis on safety is what garners media attention and, ultimately, a changing image.
Another effective tactic would be creating high end PSAs focusing on fighter safety – much like the NFL – and buying influencer marketing to emphasize safety standards. I can easily see top Instagram users creating images on how to fight safely, top blogs creating posts on the keys to safe fighting, and top YouTubers learning safe fighting tactics from professionals.
Promote The Skill Level of Athletes
One reason the persona of violence exists is because some individuals believe UFC fighters aren’t athletes but just glorified “street thugs.” This is not true at all and needs to change because of how much hard word and dedication goes into being a UFC fighter.
Thankfully, the UFC has a perfect medium for this: The Ultimate Fighter. Start using the show to slightly emphasize the skills and sacrifice fighters need to get to the top level. This will help make UFC fighters more accepted globally and help the UFCs image.
Again, content marketing can be used to have top influencers post about clickbait topics such as “This guy spent 10000 hours learning jiu jutsu before his first fight” and “the insane skills you need just to last one round in the UFC.”
Now Let’s Move onto UFC Star creation
Stars are the driving force of every fighting sport. To understand the power, look at the top selling UFC PPV fights: the top 6 UFC events all feature either Conor McGregor or Brock Lesnar. Also look at what happened the last time the UFC was without stars, the UFC PPV average plummeted.
If the UFC was really all about unpredictability, the top PPV fights would be unpredictable as well. However, the reality is that stars sell. The simple fact is the UFC needs more stars.
Please Current Stars
UFC fighters believe they just don’t get paid enough and this is a major issue. Anderson Silva launched a complaint against the UFC for not thanking him enough, a group of former fighters launched an anti trust lawsuit against the UFC with pay being a major factor, and a group of fighters believe a fighters union needs to be formed to create significant benefits for UFC fighters.
These fighters aren’t wrong about their pay. The average NFL player gets paid $3 million a year while the average UFC fighter gets paid under $200,000 a year. Who is putting more stress on their body?
Of course, one could argue the NFL makes more money than the UFC. But that doesn’t explain why NFL athletes get paid over 40% of all league revenues while UFC athletes make under 20% of all league revenues.
Even stars aren’t going to be content. It makes no sense that Conor McGregor gets $3 million for 1.6 million PPV buys in UFC 202 while Floyd Mayweather makes $40 million for 1.4 million PPV buys against Shane Mosely. It also makes no sense, from a fighters perspective, that fighters are locked into endorsing Reebok when they could be making millions through endorsements with other apparel companies.
Pay might also be a reason Ronda Rousey might consider her next fight to be her last. She can make a lot more money by transitioning into other careers than she can at her current one.
Fighter pay and benefits is a major issue that needs to be taken care of to help keep current stars happy and continuously fighting.
Currently, the UFC has two bona fide stars – Conor McGregor & Ronda Rousey.
Why do I say this? Look at PPV numbers (which McGregor & Rousey dominate), ESPN world fame rankings (which Rousey & McGregor are featured in), and Google Trends (where Rousey & McGregor dominate the closest potential stars in Jon Jones & Meisha Tate).
I’m classifying a star as someone who is a household name, not an athlete who may be great in his sport – like Robbie Lawler – but isn’t well known outside of it. After all, true growth comes from gaining fans you didn’t have before.
McGregor just came off an epic rematch with Nate Diaz, but he’s shown an aggressive nature to take risks. Ronda Rousey hasn’t fought in ages since her loss to Holly Holm.
Of the two stars, only one appears to be reliable. You can’t have ONE superstar if you want to grow your company (McGregor appears to be right when he states he is worth $4B).
So why is this happening? Why are stars not being made?
Well we already talked about how champions are dropping like flies. But we also need to understand that fighter careers aren’t being managed properly. Dana White makes the fights so he, himself, needs to fix this.
I understand the want for Dana White to give the fans the best fight that they want, but this creates too much unpredictability and does not bode well in the long term.
For instance, why was Holly Holm matched up with Meisha Tate right after her Ronda Rousey fight? It was a horrible matchup for her. Remember, Holm had a chance to jump into super stardom for the UFC, but she lost it all with that fight.
Fighters need good performances to turn into stars and the easiest way to do that is to create favorable matchups.
Find fighters who are marketable, see if they can fight and then turn them into stars. Of course, don’t make this like boxing where everyone is ducking everyone else, but give marketable fighters favorable matchups to help them become stars.
Once a fighter becomes a star, their star power lasts for a while – think of Brock Lesnar. The best part about creating stars is that when they lose, their opponent also becomes a star- think of Nate Diaz, who’s popularity rose immensely since his two fights with McGregor.
I would also suggest the UFC look at the best way to attract talent to the UFC. Currently, fighters are chosen through who is the most skilled at various other promotions and whomever catches Dana White’s eye. I’d suggest another approach: a partnership with the NCAA.
Create amateur MMA programs in top colleges across the nation and promise top fighters a place in the UFC. A best case scenario would be a yearly NCAA tournament where the champions get UFC fights. While the financial stake would be small, there would be free marketing from schools and college acceptance would create a huge boost in general acceptance for the UFC.
Make colleges your allies and you’ll be able to inject fresh blood every year to continue to replenish stars.
Finally, Let’s Talk About This Valuation
We need to keep in mind $4 Billion is supposed to be the value today, and WME expects this value to increase substantially to get a return on its investment.
Based on everything that we talked about, this appears extremely difficult to do but can be done. Other than the above changes, here is what needs to be done right away.
Synergies Need To Be Exploited
WME needs to exploit the synergies that exist with this merger immediately.
We’ve already established that the UFC has a dire need for stars. But that is exactly why WME makes so much sense. At their heart, WME-IMG is a talent agency.
WME build stars, such as Tom Brady and Dwyane Johnson, and this is an excellent opportunity for WME to use their services to create stars within the UFC.
More stars will generate more PPV revenue and WME has all the tools to produce them. If star power increases, you can bet the TV deals will continue to grow as well.
WME-IMG can also help the UFC expand into Asia very quickly. In 2015, Japanese Telecom Softbank invested $250 Million into WME because of its footprint in Asia.
WME is no small player in Asia. As bloody elbow puts it, “WME-IMG has built out the infrastructure, partnerships, business relationships - and therefore probably political connections - necessary to develop a massive presence in the country of 1.35 billion people. Not a bad untapped market.”
Muhammad Ali Act Needs To Be Accounted For
The Muhammad Ali act threatens the business model for the UFC itself. However, on top of that, it also affects the synergies that WME can create with the UFC.
The act prohibits managers from having financial interests in the promotion or a fighter. This would prevent WME from managing UFC clients and would hinder its ability to turn them into stars.
WME needs to carefully strategize for the worst case scenario. What happens if the act passes, fighter salary increases by 100% (from 20% of league revenues to 40%) and WME cannot manage fighters anymore?
This is a very large problem that will takes a large number of risk mitigation actions. Thankfully, private equity firms are quite good at managing risk so WME has the capabilities of preparing for this.
New Television Deals Need To Be Maximized
From what we know, it seems the major reason behind buying the UFC at the $4 billion valuation was the TV deal. Currently at $115M a year, the TV deal is expected to double or triple as soon as the current deal ends. This needs to happen right away and needs to be maximized to its fullest potential.
While we already talked about how the television market is declining, the fact is there is still money to be made from TV deals. If the NFL can get $7 Billion per year, and the Seattle Mariners can get $150 Million per year, the UFC definitely can go up.
However, this may be the last major increase in media revenue the UFC sees. With the falling PPV numbers and falling TV markets that we discussed, the UFC needs to ensure this television deal is around the $400M a year mark. This gives it enough revenue to stay afloat even if it can’t find stars after McGregor and Rousey.
In the meantime, the UFC can work on building more stars so it can stabilize its PPV revenue and help grow its business through its star power.
The UFC Has A Huge Future But It Needs To Take The Right Steps
The UFC is one of the fastest growing leagues today, but the growth needs to continue into the future. There is a future where the UFC can be worth tens of billions of dollars, but there are serious roadblocks that need to be dealt with.
If the UFC really begins to emphasize creating stars and promoting safety, there is no doubt in my mind their growth will continue in its current exponential trajectory.
Let me know what you think and if you feel the UFC should change anything in the comments below!