UFC Pay-per-view Revenue Up, Buys Flat; UK Expansion Turns Profitable
July 21, 2008
On Friday S&P released its latest credit rating assessment for Zuffa, parent company of the UFC. The headline was a change from negative to stable in the company’s rating outlooking with its BB- rating affirmed. However, beyond the headline, the report contains a valuable glimpse into the current industry environment and the financial standing of the company.
According to the report, “overall pay-per-view (PPV) revenues, which represent nearly 75% of total revenues, have trended up in recent quarters, albeit largely due to an increase in the number of events, higher pricing, and more favorable contract terms, rather than an increase in the number of buys.”
The headline is great: overall PPV revenue is up. However, the entirety of the passage suggests that the number of PPV buys is leveling off for the UFC. The increased number of events needed to generate essentially the same level of raw buys would indicate a cooling off. Despite this the UFC has seen increased revenue by raising the basic PPV price from 39.95 to 44.95, as well as higher sales of HD broadcasts of the PPV, which go for $54.95. But the most important factor in the company’s increased PPV revenue may be the last factor listed, a more favorable arrangement with PPV distributors.
The UFC has become a force with in the PPV industry, and with that comes a much better bargaining position when negotiating with PPV providers like InDemand as well as DirecTV, DishNetwork and others. While the UFC has been back on PPV since they attained regulation, for most of that time they have not drawn PPV buys on the level of boxing or professional wrestling. That changed after the The Ultimate Fighter premiered and the UFC has been able to sustain a high level of PPV buys over an extended time period. They have become a good earner for the PPV companies and with that comes the ability to get better terms for their PPV. While exact terms are not available, it is believed that the company is getting a 50/50 split under the new deal.
The S & P report also broke down the various revenue streams for the UFC. 75% of revenues are event based (the largest amount derived from PPV buys, with the live gate making up a small but still sizable portion of the live event revenue pie). The other 25% of coming from television broadcasts license fees (Spike), sponsorship, merchandising, and other content deals (DVD, UFC on Demand, etc.).
Zuffa’s credit rating is generally lower because of this structure. The company is heavily dependent on an event driven business model, which means it is much more vulnerable to fluctuations in their market. The increased focus on the merchandising side of the business will be big help to the company in addressing these concerns. With an increase in merchandising revenue, the company will be able to have a stream of revenues/cash flows that has a more constant level, thus helping to off-set somewhat the up and down nature of the live event business model.
The report also discusses international expansion and the effect that this has had on past quarters as well as how improved performance has helped their overall bond rating. S & P reports international operations have been profitable in 2008, after substantial losses in 2007 as the company was in it’s start-up phase of operations in the U.K.
The high costs of the start-up in the UK may color how they approach international expansion going forward. The UFC UK division required a high level of initial costs (like personnel, office space, legal and regulatory costs). Such high costs had a detrimental effect on the company’s margins and therefore dragged down the bond rating. The company may be reticent to do such a large scale effort in the future, with the accompanying yo-yo effect on margins.
Recent comments by company executives have spoken of a more grass roots approach in other expansion candidates like The Philippines. Using these grassroots efforts will be much less resource intensive (read: cash necessary) and therefore have a much smaller a effect on margins. Keeping the margins high will be key in maintaining and possibly improving their bond rating.