Earlier this year the Ultimate Fighting Championship was sold for $4 billion to the WME-IMG organization. This was very big news, primarily because in the early part of the previous decade the company (UFC) had been bought for $2 million. At the time of purchase in the early 2000’s, cage fighting was very much an underground phenomena and not something that captivated the mainstream. Today that has changed, as evident in the promotion’s sale.
While cage fighting, or what is generally referred to as mixed martial arts (MMA), is now in the mainstream, it does not mean that it will automatically continue to grow. The purchase of MMA’s premiere organization, the UFC, was done at a lofty price tag. Its new owners are counting on the organization to continue its rapid growth trajectory into the future. In order to reach this goal, a key component of the UFC’s business model must continue to be vibrant. That component is pay-per-view sales (PPV).
When you think about a major UFC event, two revenue streams should pop into your mind. The first is the most tangible; the ticket sales in the arena that the event is held. This is a highly visible revenue driver. People buy tickets to see an event live and in person. They also purchase concessions during the event. When you hear news outlets quoting “the gate”, the dollar figure they are stating is the sum of the money taken at a sporting event for the sale of tickets.
The second revenue stream, which is less tangible than the gate, is the number of PPV buys. This is where the big money is made. Arena’s are limited in their capacity and geographic draw. A PPV can be accessed regardless of geographic location. At a $50-$60 access fee, the money brought in can be humongous, if the event’s demand is strong.
To generate strong demand for a PPV event, the general public must be engaged. From the start of 2014 until UFC 206 this past December, 2016, the average buy rate for a UFC PPV was 483,000. If we used $60 as the cost per PPV, then the average gross PPV revenue for an average event is just shy of $29 million. This amount dwarfs the few million dollars that a large event’s gate typically draws.
At the time the UFC was sold in the summer of 2016, the new owners were without question focused on the recent growth and potential of future of UFC PPV sales. As we noted above, the potential of large swaths of money to be brought in via events is substantial.
What drives PPV sales? In looking at the UFC PPV buy rate data, a noticeable trend stands out. Though the UFC is about making fights, the idea that two well matched and skilled opponents will draw a high buy rate does not typically hold true. What the data shows is that stars or personalities are the key driver of high PPV buy rates.
At the time of purchase, the average number of buys the UFC generated from an event headlined by Connor McGregor was 1,160,500. That is over 2.3 times what we estimated the average event’s buy rate was between 2014-2016. While McGregor is an exceptional fighter, he is also an exceptional promoter and personality. These qualities outside his fighting skills attracted the casual fan to purchase the event.
The reason why McGregor is needed now more than ever is that the two punch PPV generating combo of Connor McGregor and Ronda Rousey is now gone. This past Friday night, Rousey’s return was unsuccessful as she challenged the current women’s 135 lb champion Amanda Nunes. Rousey was defeated within 48 seconds of the first round. Her continued role as a fighter might have come to an end. Even if she continues, her star power and draw have been diminished from her two consecutive knockout losses.
McGregor is the UFC’s lone mainstream star. He has the skills, personality and attraction beyond the UFC faithful to enable to organization’s continued growth. At the current time, no other prospect is expected to garner the attention he has and continues to bring. Without McGregor, the UFC’s new owners will likely see half a million PPV buys, with McGregor they will see PPV buys well over a million. As a sales person, McGregor is performing over twice as well as the other PPV headliners.
The new UFC owners need to see the company grow. The valuation at which they bought the company included an assumption of future growth. How big the new owners assumed the growth rate to be is unknown. Without PPV sales growing, you can be assured that the new owner’s forecast will be clashing with an undesirable reality. Skill is important, yet without star power the numbers don’t compute.
Note – PPV sales in the discussion were estimated in gross dollars. We can estimate that around 50% of the gross sales are captured by the PPV distributor (cable provider).