Fighter Salaries: A Fair Share of Revenues (Part 2)

August 5, 2008

Reinvesting Into Zuffa

Some are quick to point out that accurate information isn’t required for them to know that the fighters are getting “screwed.” Despite the obvious shortcomings of this argument, it needs to be addressed, because it’s an important segue to another issue that is not commonly explored: the re-investment of earnings back into the company.

We need accurate information to assess the fairness of fighter payouts, because there are a host of intangibles both from the revenue and expense side of things that are involved with running not just an event, but also a growing leader in a rapidly expanding industry. We’re not looking at the whole picture if we simply compare the gross revenues from the last event relative to the fighter payouts.

The latest Standard & Poor’s credit rating report on the Zuffa revealed that the Zuffa’s EBITDA (Earnings Before Interest Taxes Depreciation & Amortization) margin has declined from 40% in 2006 to the low thirties in 2008. This drop was initially attributed to the costs of the UFC’s expansion into Europe, however it was revealed in a November 2007 report that increasing fighter costs and rising domestic production costs would be responsible for ensuring the margin did not return to 2006 levels.

The most obvious destination for part of the Zuffa’s earnings is the ownership group – after all they need to be rewarded for the financial risks they’ve taken. Zuffa recently exercised a rather large, unprecedented dividend reimbursement which may be the only one of its kind since the new ownership group took over in 2001. Many believed it was a signal that the Fertitta’s were preparing to get out of the business. Now we know that it was likely something more akin to profit taking – a act quite common amongst shareholders experiencing capital gains in the stock market.

The profits not paid out as dividends serve as capital to be reinvested into the firm. At first glance you notice the enormous benefit to the ownership group; not only are they getting dividends (albeit S&P reports that the large distribution was a “one-time-only, special dividend”), but they’re also set to reap the rewards of an increased value in their equity. Many estimate the UFC to now be worth upwards of $1 billion and that figure will only continue to grow as the firm and the sport expand over the next five years – that’s quite the ROI considering the firm was purchased for $2 million in 2001.

The future of the UFC will also go a long way towards determining the future of the sport. Like it or not, MMA is essentially known as “Ultimate Fighting” to most of the uninitiated. An expanding, cash-strong UFC helps to grow the sport through increased notoriety and media presence – the trickle-down effects of which can be traced to the smaller shows and grassroots programs that will help establish an even greater foundation for the sport going forward.

While reinvestment is certainly good for ownership and the sport itself, is it good for the fighters? Absolutely. As Zuffa continues to grow, its increasing capabilities will provide more opportunities for the fighters not only to fight, but to earn more money as the result of larger revenue streams.

Zuffa is now just starting to scratch the surface in terms of UFC-related merchandising and sponsorship opportunities that could potentially be very lucrative for the fighters if done properly. Imagine Chuck Liddell representing the UFC in a Bud Light commercial – the sky is the limit.

Furthermore, as the industry leader, the UFC is helping to open doors for its fighters in terms of opportunities with other promotions and independent marketing or merchandising deals. Just ask UFC veterans how valuable it is to be associated with the UFC name and brand.

Whether it’s bigger upstarts like Affliction or smaller shows in every region of North America, promoters realize the value of the UFC brand – using former UFC veterans gives their show instant credibility. As a result, you’ve got some big shows paying fighters 4-5 times what they’re really worth just to draw. You’ve also got less-well-known fighters that are able to headline smaller shows and rake in extra cash simply because they once fought in the UFC.

None of these opportunities would exist if so much money was not reinvested into the company on a yearly basis.

Fighter Salaries: A Fair Share of Revenues (Part 3)

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