Sports Business Journal Offers MMA Industry Reality Check

April 23, 2008

The following article was originally published in the April 21 edition of Street & Smith’s Sports Business Journal and is republished here with permission. Thanks to Dan Kaplan and Richard Weiss.

Filings Show 2 MMA Groups Financially Bloodied
By Daniel Kaplan

Two key players in the mixed martial arts industry may soon go down for the count, underscoring the significant financial volatility in the sport despite its tremendous hype.

International Fight League and ProElite Inc., the latter of which made waves in February by signing the first MMA broadcast contract, warned in securities filings last week that they may run out of money later this year. Both also cautioned they could have accounting irregularities that resulted in inaccurate financial reports.

“You have got maybe some 20 MMA groups around the world, and every single one of them is struggling,” said Jay Larkin, IFL’s chief executive. “In the last three or four months, 10 have either reorganized, folded, changed names or completely gone out of business. That is a very heavy casualty rate for a sport that is supposed to be the greatest thing since the NBA.”

IFL is looking to align with a media concern or another MMA outfit, Larkin said, though the three-year-old company also is confident of raising additional equity. The MMA industry must consolidate to survive, Larkin said.

MMA combines boxing, judo and other hand-to-hand combat disciplines.

The dominant company in the conversation is Ultimate Fighting Championship, the Zuffa Corp.-owned outfit that dominates MMA but does not release financial results. UFC, which has previously dismissed rumors in the MMA world that it is looking for a buyer, declined to comment for this story.

Standard & Poor’s in November downgraded Zuffa’s $350 million of debt, citing weak pay-per-view buys and poor results in England.

IFL, which has lost $31 million since its inception in 2005, said in its annual 10-K filing last week that it “will likely have a cash shortage which would disrupt our operations, have a material adverse effect on our financial condition or business prospects and could result in us being unable to continue our operations.”

ProElite, which lost $27 million in 2007 on $5.3 million in revenue, similarly disclosed in its 10-K filing that “our auditors have expressed substantial doubt about our ability to continue as a going concern.”

A ProElite spokesman, in an e-mail, said “The company is optimistic about its financial position improving.”

Later in its report, IFL stated, “Our auditors have identified a material weakness in our disclosure controls and procedures … due to insufficient resources in the accounting and finance departments.

“There is more than a remote likelihood that a material misstatement of the consolidated financial statements would not have been prevented or detected.”

ProElite also reported it has identified internal accounting control problems.

In 2007, IFL reported revenue of $5.7 million and a loss of $21.3 million. The company is cutting the number of events it stages from 13 last year to six or seven this year. Commissioner Kurt Otto, who earned $250,000 in 2007, was let go on March 31 and instead will be paid $10,000 per event as a consultant.

UFC is broadcast on Spike, while IFL has deals with Fox Sports Net and MyNetwork. ProElite, which recently signed renowned fighter Kimbo Slice, announced in February a broadcast package with CBS.

Pro Elite 10-K Notes

April 22, 2008

ProElite released its 10-K annual report last week. The company has lost a total of $31.3 million through the end of 2007, including $27.1 million last year alone. As with the IFL, the company’s auditors have also expressed “substantial doubt” about ProElite’s ability to continue as a going concern. However, the company’s practical reality is much brighter thanks to the continued financial support of CBS/Showtime, whereas the IFL must find a financial patron.

The company generated $5.3 million in revenue in 2007 including $4.6 million in live event revenue, $447,679 in television and pay-per-view revenue, and $184,192 in merchandise, DVDs, and licensing fees. Live event expenses total $9.6 million including $2.9 million in production costs paid to Showtime. The company ran 18 events which would bring the cost per event to around $533,000, nearly one-third of the $1.2 million per event spent by the IFL. The difference would seem to be a step discount in production costs provided by Showtime, however, that’s really just speculation, especially in comparing across companies and accounting practices.

In 2007 the company received no license fee from Showtime and bore all the production costs. This year the company will be receiving a licensing fee, reported by Dave Meltzer to be between $50,000 (for ShowXC events) up to $500,000 (for major events), to be split between ProElite and Showtime and the network will bear the cost of production. As part of the deal Showtime received a number of stock warrants and the right to appoint one member of the ProElite board of directors.

ProElite.com was the most eye catching item line on the company’s balance sheet, costing $3.3 million in 2007 while generating only $68,782 in revenue. That is a mind boggling amount of money to spend on a website. The website is an integral part of the company’s business plan:

Our business plan is to capitalize on the popularity and growth of mixed martial arts in building an “elite” fight brand, EliteXC, while also taking advantage of the Internet to capture fans, fighters and organizations in combat sports with its ProElite.com social networking web site. We plan on reaching MMA fans and participants through normal marketing channels (print, television, radio) and harnessing the efficient networking available over the Internet. We are in the process of acquiring multiple on- and off-line brands to increase our entertainment properties, content libraries and tool set offerings for fighters, fans and organizations in and around MMA. EliteXC, our fight brand, produces and promotes live events featuring the top fighters in MMA while ProElite.com has created an MMA grassroots online social network. We cross-promote our Internet and live properties so that each can strengthen the other.

The filing also recognized what many outside the company have identified as a major flaw in the company’s management, absentee executives:

The Company’s executives, directors and shareholders have business relationships requiring them to advise, manage and/or provide services to other businesses. The Company has engaged in transactions with some of these businesses. Due to the wide-ranging network of contacts and business relationships of our executives, directors and shareholders, the Company was not always able to devote sufficient resources to identify, monitor and report all transactions with such businesses in a timely manner.

These executives appear to have been well paid based on the salaries of CEO David DeLuca ($200,000), President of EliteXC Gary Shaw ($435,724), and President of ProElite.com Kelly Perdew ($475,224). The company recently went through a management restructuring with DeLuca being promoted to Chairman of the Board and replaced by Charles Champion as CEO. The move was made shortly after the CBS deal was announced and is believed to represent CBS’s increasing influence on the company.

Advances for UFC 84 & 85

April 22, 2008

The Wrestling Observer Newsletter reports that UFC 84 (5/24 in Las Vegas) has a $2.5 million advance with 10,000 tickets sold. Ticket prices appear to have been scaled down after the disappointing results for UFC 81 in February. With four weeks still to go, a sellout seems nearly certain.

UFC 85 (6/7 in London) has also sold more than 10,000 tickets with a $2.3 million advance.

Liddell Out of UFC 85

April 22, 2008

Yesterday the UFC announced that Chuck Liddell is out of his scheduled bout with Rashad Evans at UFC 85 due to a torn hamstring. It’s not clear what direction the promotion will go in as a result of the injury. With a win over Evans, Liddell was expected to meet the winner of Jackson-Griffin for the Light Heavyweight title in what would have been expected to be the company’s biggest event of the year.

That bout may now have to wait till the Super Bowl Saturday show in 2009, assuming Liddell successfully recovers and can get by his next opponent. That could mean that the champion, either Jackson or Griffin, would fight only once in 2008.

Spike Profile

April 21, 2008

Media Life Magazine, a cable trade publication, ran a profile of Spike last week in anticipation of the beginning of cable upfront presentations this month.

The network ranked 11th in total primetime audience in the first quarter, up 15% from Q1 ’07 to almost 1.4 million viewers. It placed in the top ten among the 18-49 and 25-54 demographics (which were relatively flat year over year), but was down 3% in the 18-34 demographic with an average of 298,00 viewers (SEE ALSO: The Ultimate Fighter Cumulative Rating Breakdown).

According to the experts, the network is in good shape heading into upfronts:

“They have to be pretty satisfied,” says Brad Adgate, senior vice president and corporate research director at Horizon Media. “They found a pretty strong niche in young men, which is a tough audience to reach because they’re doing a lot of things other than watching TV.”

On a scale of 1 to 5, with 5 being excellent: 3.5.

Spike TV is in pretty good shape going into the upfront. Its focus on young men has been getting clearer and it’s been adding shows that fit well into its brand. It’s also a top-12 network in every major demographic with mostly improving ratings.

IFL 10-K Notes

April 21, 2008

The IFL released its 10-K annual report last week. The company has lost a total of $31 million through the end of 2007, including $21.3 million last year alone. The biggest news from the filing was the inclusion of an opinion from the company’s independent auditors expressing doubt about its ability to continue as a going concern. From the filing:

As a result of our continued losses, our independent auditors have included an explanatory paragraph in our financial statements for the fiscal year ended December 31, 2007, expressing doubt as to our ability to continue as a going concern. The inclusion of a going concern explanatory paragraph in the report of our independent auditors could make it more difficult for us to secure additional financing or enter into strategic relationships with distributors on terms acceptable to us, if at all, and may materially and adversely affect the terms of any financing that we may obtain…

We expect that our revenues from operations will be insufficient to meet our projected expenses, unless we are able to increase our revenues through other sources, such as entering into a strategic alliance with a significant television broadcaster or sports or entertainment enterprise or exploiting our digital rights. Unless we can successfully increase our revenues through these other sources (in excess of the costs we incur to generate these revenues), we will likely be required to raise additional capital through equity or debt financings by the end of the second quarter or in the early part of the third quarter of 2008. Such capital may not be available, or, if it is available, may not be available on terms that are acceptable to us. A future financing may be substantially dilutive to our existing stockholders and could result in significant financial and operating covenants that would negatively impact our business. If we are unable to raise sufficient additional capital on acceptable terms, we will likely have a cash shortage which would disrupt our operations, have a material adverse effect on our financial condition or business prospects and could result in insolvency.

In other words, the end game is approaching for the company as it will need additional capital to continue through the end of the year. The inclusion of a going concern explanatory paragraph will make the company’s efforts to find additional funding more difficult. At the end of 2007 the company had $6.1 million in cash.

The IFL’s largest expense in 2007 was the promotion, staging, and production of live events. The company spent $15.9 million on 13 events last year, an average of $1.2 million per event. The company generated $5.7 million in total revenue including $2.4 million in live event revenue (mainly consisting of the live gate), $1.6 million in TV rights fees from MyNetworkTV, $1 million in international TV rights fees (with programming in 50 countries), $498,000 in sponsorship revenue, and $117,544 in branding revenue.

The company currently has 27 employees in two offices in New York and Las Vegas (20/7 split). The total staff payroll for 2007 was $4.5 million. Jay Larkin (CEO) and Michael O’Keefe (CFO) currently have base salaries of $325,000 and $240,000 respectively.

UFC 83 Review: Breaking Kayfabe

April 21, 2008

kayfabe. n. the showbiz and stagecraft of professional wrestling, including the ring personas of professional wrestlers, especially when maintained in public; insider knowledge of professional wrestling.” – definition from DoubleTongued.Org (emphasis added)

“We’re buddies. We might have a drink together, so please don’t do anything to this guy. He’s a gentleman. He just said stuff to hype up the fight and I did as well.” – George St. Pierre on Matt Serra after his dominant victory at UFC 83

The influence of pro wrestling on the MMA industry is undeniable. Many top executives from across the industry grew up watching WWE, or more appropriately the WWF as it was formerly known, and take many of their cues from Vince McMahon’s promotional model. That model is fairly simple at its core: Take two characters. Create a conflict between them. Tell a story that makes people care what happens when they square off. Deliver a resolution. Repeat.

The UFC’s biggest business has followed that simple strategy to a tee whether it be Tito Ortiz v. Ken Shamrock, Chuck Liddell v. Tito Ortiz, Randy Couture v. Tim Sylvia, etc. The difference being, those “feuds” or “storylines” are real or at least real enough to be believed to be real by the general public. While everyone understands that “hyping up the fight” is part of the show, the conflicts aren’t seen as fake.

The most simplistic explanation of the MMA-pro wrestling crossover is that those fans want to see real fights, but that is only part of the story. If that was the case then the biggest events would likely be those featuring the most competitive fights. Instead the UFC’s two biggest pay-per-views in history featured what were believed to be uncompetitive fights. No one thought Shamrock had a chance against Ortiz and few gave Ortiz much of a chance against Liddell.

The fact is that real fights is only part of the equation and perhaps a smaller part than is widely assumed. The results suggest that it is authenticate conflicts that people want to see. That is not to discount the value of the fights themselves, which provide authenticate dispute resolution, but it does go a long way towards explaining why 785,000 will pay to watch a short one sided affair between Ortiz and Shamrock, but roughly half as many, of the same audience, will pay to watch Anderson Silva v. Dan Henderson, a battle of highly regard fighters with no real conflict.

It’s also why I expect UFC 83 to do better than expected on pay-per-view. The fight garnered a lot of momentum thanks to the hype surrounding the seemingly real conflict between GSP and Serra. Saturday night fans went home happy with that conflict resolved, however, anyone paying close enough attention got the rug jerked out from the under them by St. Pierre’s post fight comments.

As an isolated incident the incredibly brief and relatively unnoticed comment is nothing to get worked up about, but breaking kayfabe on a regular basis is not a good idea for industry. The magic of the hype only works if the audience is allowed to believe that these conflicts are real or at least based in reality. The audience is generally willing to look the other way after the payoff (or resolution) when the hated enemies shake hands and compliment each other, as with Ortiz-Shamrock, but that wink-wink “burying of the hatchet” is different from being outright told they’ve been had.

So while building the fight and blowing minor conflicts into outright “hatred” is just part of the business, it’s part of the business better left unsaid.

Other notes from UFC 83:

  • Edge Shaving Gel became the company’s latest main stream sponsor with a prominent place on the octagon mat.
  • Michael Bisbing looked impressive at 185 pounds and would appear to be on the fast track as a charismatic challenger to Anderson Silva’s invincible aura.
  • Kenny Florian was a stellar stand-in for Joe Rogan and could be in play as Randy Couture’s replacement as the third man in the booth.

UFC 83 Quick Notes

April 20, 2008

  • The event in Montreal drew the largest crowd in UFC history with an attendance of 21,390 for a $5+ million gate.
  • According to Dave Meltzer, the event was shown at more than 1,000 bars and restaurants across Canada, breaking the previous record set by Lennox Lewis v. Mike Tyson in 2002.
  • Payouts are not available yet, however, the UFC announced four $75,000 performance bonuses, the largest announced bonuses in company history:
    • Fight of the Night: Jonathan Goulet v. Kuniyoshi Hironaka
    • Knockout of the Night: Jason MacDonald
    • Submission of the Night: Demian Maia

Rave Review for Redbelt

April 19, 2008

Peter Travers of Rolling Stone gives Redbelt three out of four stars:

Though MMA figures in Redbelt, Mamet, who studied jujitsu for five years, is more interested in the philosophy that understanding will defeat strength. With uncanny skill, Mamet directs the movie like a moral combat sport in which a variety of techniques are used to crush [the main character’s] spirit… The resonant stillness he brings to Redbelt pulls you in. Even allowing for a few slips in pacing and judgment, Mamet is on his game, and that is a sight to see. No con.

The film opens nationwide May 2. More information available at the official website.

Dana White Off the Record

April 19, 2008

Dana White’s appearance on Off the Record with Michael Landsberg is must see TV. By far the most aggressive interview White has faced. Kudos to Landsberg for asking the tough questions and White for answering.

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