The State of the UFC Address

There’s a lot of misinformation circulating around the MMA community in regards to the state of the UFC, so I’d like to provide a little payout perspective on the hot button issues that currently have some folks troubled.

UFC TV Ratings and PPV Buyrates

Simply put: the PPV buyrates are up and the TV ratings are down.

The UFC is now just exiting an eight (8) event streak where it scored 500,000 PPV buys or more. Moreover, the UFC is currently on pace to break its PPV sales record with a 2010 showing that should come in around the 9 million mark: UFC 121 should do at least 1 million buys with the Brocktober promotion, plus a decent UFC 123 card and TUF-backed UFC 124 should be able to do another million combined.

The PPV sales are encouraging and demonstrate the potential of the UFC. There is a strong demand for its product at the highest levels, which implies strong matchmaking, evocative story telling, and reasonably injury free combatants. If the UFC can continue to develop fighters and carefully select matches that make sense for both the division and entertainment purposes, the sky is nearly the limit.

However, the television ratings are dropping on Spike for just about everything. I don’t think this a reflection of the sport or a slight to the potential of the product. Rather I think it comes back to provide compelling content. When the UFC provides content like UFN 14 (Silva vs. Irvin) or UFC 105 (Couture vs. Vera) people are going to tune in. When the UFC offers up something like Swick-Burkman as a main event for UFN 12, people won’t.

I hear a lot of concern about over-saturation in the marketplace, but it really all comes down to the product offering. The good events will be highly successful and the bad events will experience just mediocre results.

But I will caution that the UFC cannot afford to get complacent. Spike has essentially run the same format on TUF for the last 12 seasons and the results of a stale and bland product are starting to show. The UFC is a company known for its willingness to experiment and live on the edge – both with its product and its marketing tactics – but we haven’t seen the same level of innovation (or risk taking) on the production side. It would be a shame to see the company fail to change and adapt to an evolving fan base with new and different tastes and preferences. The issue of what exactly should be done with TUF is something I’ll save for another day.

UFC Attendance and Gate Revenues

The attendance and gate revenues for UFC events are a bit of a mixed bag. The UFC claims to be selling out many of its events, but they’re often papered to varying degrees and the setup is often built to less than arena capacity. However, I don’t buy the argument that the percentage of out-of-town fans at each event should somehow diminish the attendance or gate figures. These fans are part of the sport and what make it so great.

 

Overall, the attendance and live gate are still pretty solid. Las Vegas and all of Canada are incredibly strong. New markets like Philadelphia and Boston have good potential. Yet, by and large, the average gate sits in and around the $1.5 million to $2.5 million mark. People were shocked to hear Indianapolis did $1.6 million, but that’s not a terrible gate.

If anything, I think the reaction to some of these things is more a reflection of heightened fan expectations than anything else. There’s been a certain falsehood perpetuated by some in the media that suggests the UFC should sellout and do a huge gate in every new market, but rarely is this the case. It takes time to build a local spectator market – no matter if you’ve had television exposure in the area or not.

Yes, the UFC did tremendously well in its Montreal and Vancouver debuts, but Canada is MMA crazy and certainly not representative of the American market. More to the point, only Montreal has done multiple events and I can almost guarantee you that UFC 124 will sell better than UFC 83. Why? There are far more UFC/GSP fans in Montreal now than in April 2008.

The Popularity of UFC Fighters

The UFC is having no more or less difficult a time producing star fighters than it ever has. In this regard MMA fans seem to have very short memories; the prevailing thought seems to be that if a star isn’t born every six months, something must be going wrong. However, there are a number of examples that currently point to the contrary:

• Three years ago the MMA community was questioning the ability of Rampage Jackson to fill the shoes of Chuck Liddell, both as light heavyweight champion and one of the biggest draws in the sport. Now he sits at #3 in terms of average PPV buys since 2008.
• Two years ago it was widely believed that Lyoto Machida was boring and incapable of headlining a fight card. Now we know different as he currently sits at #6 in terms of average PPV buys since 2008.
• Today we’ve got men like Jon Jones and Cain Velasquez emerging as viable fighters that could very likely reign over their respective divisions for many years. Others will emerge in their respective divisions given time. That’s really the beauty of MMA right now: we’re finally starting to see elite athletes like Jones and Velasquez enter the sport. It’s only a matter of time before more follow.

The most important thing to remember about star fighters is that it’s not necessary for them to be charismatic, good looking, and own a life story that could land them on the New York Times #1 Best Seller list. A fighter’s popularity simply all depends on performance. If a fighter proves to be highly skillful and entertaining, people will start to watch and the word will spread. It’s really not complicated.

I tend to think that sometimes people confuse being a star or draw with being a cross-over pop culture icon. Very few athletes have this potential in any sport – let alone MMA. There are only so many athletes like Derek Jeter or Shaq. Perhaps MMA will have one some day, but it doesn’t need one to be successful or continue its growth, either.

UFC Payouts

There’s been a lot of fuss made over the recent firing of MMA agent Malki Kawa as the result of his failure to generate more than $5,000 in sponsorship money for Matt Mitrione at UFC 119. It’s again raised the issue of fighter compensation in MMA; something that we’ve discussed at length before and quite popularly in this MMAPayout.com feature earlier this year. Here’s an excerpt:

The UFC likely earned somewhere in the range of $300-$350 million last year, which absolutely pales in comparison to the estimated $2.7 billion the NHL will have made or the $3.8 billion of the NBA. It’s far easier to pay your personnel 50~% when you’re left with $1-2 billion in company coffers to cover expenses and provide some modicum of return. Even then it can be difficult to earn a profit, just ask the Phoenix Coyotes that have lost over $30 million since the year-long lockout that was supposed to deliver a miracle cure for the NHL’s business model ails.

 

Standard & Poor’s credit reports have indicated that the UFC’s gross margin hovers around 30%, which means that even in the best case scenario of $350 million in revenue, the UFC could only afford to pay roughly 100 fighters $1 million each. But if that were the case, the company would have no revenue left to cover its substantial operating and marketing expenses (the stuff that keeps this sport growing through expansion, regulation, and promotional efforts).

The chart below plots the average disclosed payout, disclosed bonus, and disclosed compensation of UFC fighters from 2006 to the end of September 2010. It clearly documents the growth in fighter pay. While the percentages do not perfectly align with the growth in UFC revenues, there are at least a few different potential causes for this discrepancy.

The most likely scenario is that as the UFC has grown, it’s compensation models have evolved away from disclosed payouts towards more percentage-based and discretionary means. For example, the disclosed pay for UFC 116 was $923,000 but it’s widely known that Brock Lesnar receives a percentage cut of PPV sales that likely put his total compensation over $3-4 million. Then factor in the number of discretionary bonuses handed out to fighters who all contributed to what was arguably one of the UFC’s best events ever (especially considering its hype and the size of its audience). This the kind of information not available to the public and absent in so much of the speculation that I read.

Industry Outlook

The promotion side is healthy at the local and regional levels, but competition is quite fierce. There are some metropolitan markets with as many as 5 or 6 competing fight leagues, which can make differentiation difficult. Still there’s enough money to go around if promoters keep an eye on their bottom line, know how to effectively market to the right audience, and establish a consistent brand over the long term.

However, the jury is still out on some of the major second tier organizations like Strikeforce, WEC, and Bellator. It’s very difficult to compete on an elite level when 85-90% of the that elite talent is locked up with the premier organization in the sport. The biggest reason why the AFL, XFL, and soon-to-be defunct UFL have not been successful is due to the NFL’s control over the talent pool, television networks, and media outlets. The UFC isn’t quite on that level, but it still has a monopoly that’s difficult to work around.

The key to success for organizations like Strikeforce, the WEC, and Bellator will be finding niche segments of that upper tier market that the UFC doesn’t serve and becoming the best in that area. I’m not sure that Strikeforce has found that niche yet; the company is still attempting to become another UFC but lacks the depth within its divisions or production/marketing capacity to really strike a chord with the MMA audience. The WEC has found its home with the lighter weights, but I question if the best long term play isn’t to take those assets (divisions, titles, and fighters) and place them on the much stronger UFC platform. While Bellator has an intriguing format, it’s plagued by both product and promotion issues; poor attendance and a bad television deal have soured the buzz from the tournaments.

The apparel industry is experiencing a bit of a shake-up as Tapout, Hitman, and Silver Star were all just purchased by Jamie Salter’s Authentic Brands Group (ABG). I’ll be watching quite intently to see ABG handles the brands with its full licensing model, and I’m eager to see if any licensee will take the clothing in a new direction. I have been calling for moderation in the MMA apparel market for some time; essentially clothing that MMA fans can wear in any number of social settings without perpetuating certain negative stereotypes currently associated with graphic t-shirts or MMA clothing in general, but articles that would still allow fans to promote the sport and advertise their chosen lifestyle. The MMA audience is evolving, so too should its clothing.

I’ll also be watching for any impact on the fighter sponsorship market. Imagine if ABG, with its three new brands in tow, approached the UFC to purchase an exclusive apparel sponsorship agreement. It would probably cost somewhere in the range of $8-12 million per year, but it would also afford ABG a host of negotiating leverage over fighters as they would only have one place to go for in-cage apparel sponsorships deals. I don’t see this as tremendously likely. These brands were founded on the principle of supporting the fighter, not to take advantage of them. Moreover, the consequences of a scorned fighter roster could hurt the business of both the UFC and ABG. It’s intriguing nonetheless.