Narrowing In On Better Revenue Sharing
We’ve already acknowledged the fact that the information isn’t available to make an absolutely precise definition of fair. As a result of this we’re forced to use what we have at our disposal. Let’s look at what we know:
- 75% of Zuffa’s revenue is event-related (i.e., PPV buys, live gates).
- The remaining 25% of Zuffa revenue comes from their SpikeTV deal, sponsorships, and merchandise sales.
- Zuffa is likely to maintain an EBITDA margin in the mid-30s in the foreseeable future.
- Estimated Zuffa revenues for 2008 are expected to be $250 million (according to Lorenzo Fertitta).
- Base salary payouts average out to 10% of event-related revenue.
I’ve made it clear through previous posts that I do not believe revenue-linking via a percentage is going to get the job done. While I still stand by that, I will refer to percentage figures as necessary to convey ballpark estimates.
At this stage in the industry life cycle, the organizations still require a greater proportion of revenue because the size of available revenue streams are not big enough to cover expenses and reward ownership for the financial risks they’ve undergone. An EBITDA in the mid-30s more or less, eliminates any chance of UFC fighters seeing 50% of the revenues like their athletic counterparts in the big four (e.g., NHL players receive 54% of league revenue).
In fact, 30% is probably still unreasonable as much of a companies earnings in a growth industry are reinvested back into the company. However, I cannot say this with absolute certainty as I don’t have enough information to assess whether or not fighter costs don’t already account for 25-30% of company revenues. Everything that I’ve seen as of late indicates that fighter costs are increasing at a significant enough pace to impact Zuffa’s earnings.
So where does this leave the UFC and its fighters? When you factor in the unknown performance or discretionary bonuses and rumoured PPV shares it’s possible that the fighters are receiving close to 15-20% of the UFC’s event related revenue, which is equal to anywhere between 11-15% of the UFC’s total revenue.
All issues with minimum fighter pay aside, 11-15% of revenues cannot be considered bad when the UFC takes home just over 30% (EBITDA) while reinvesting most of it back into the company to the additional benefit of the fighters.
Problems With Revenue-Linking Revisited
Given that Zuffa’s revenues are event-driven, any revenue-linking scheme has to start here. A plausible, albeit extremely complicated system (aren’t they all?) might look like this:
- The production costs of each event would be covered as usual.
- Fighters would receive base salary payouts as usual (although likely toned down).
- The remaining operating cash would be held in escrow until the end of the year, at which time further company expenses would need to be accounted for.
- Finally, disbursements of the remaining lump-sum would be distributed.
While Zuffa revenues are primarily event-driven, it remains to be seen whether or not this is the case for most of the company’s expenses. Due to the limited amount of capital expenditure required, there’s probably good reason to believe that much of the organizations expenses are also event-driven. However, if expenses aren’t associated with the events in close proportion to the revenues, it makes matters infinitely more complicated.
A third party would need to be hired to handle the escrow, which effectively cuts off the Zuffa from this money. If their non-event related revenue streams fail to cover their expenses they’ll have to fall back on the $25 million revolving credit line – an option which has interest implications – instead of using revenue related to PPV events.
To avoid using the escrow account and dipping into the $25 million revolving credit line, Zuffa could retain the balance of the operating cash following fighter payouts and simply issue a dividend disbursement to the fighters at the end of every year.
Aside from the prohibitive accounting costs of this entire revenue-splitting structure, schemes such as this raise questions as to whether fighters would feel comfortable with less guaranteed money upfront as they would essentially become partners in the business’s yearly successes or failures. Furthermore, problems of dividing the escrow or dividend distributions amongst the fighters would almost certainly sour most of them from the plan.
There also exist those obvious questions like, why would the UFC ever agree to this or how would the fighters accomplish something that requires such unanimity?
Even if you set aside the problems with revenue-linking that I posed previously, the bottom line is that direct revenue-linking is a lot of fuss for a company and an industry that is quite small relative to the other sports that employ similar revenue splitting schemes. What good is the solution to one problem if, in the process, it creates an additional 3-4?
And so, I think this much is very clear: a definitive “fair share” of revenues for the fighters isn’t possible at this point in the UFC’s or industry’s life cycle.