Cable Operators

Defending The Belt

7/06/2009 11:30 AM Eastern

As the Ultimate Fighting Championship reaches its 100th pay-per-view event milestone on July 11, what stands out most about the UFC’s success is not the crowds it attracted in its wild, early days but what it has accomplished in the last eight years.

In that time, the UFC has gone from the edge of bankruptcy with a blood-stained stigma to a viable business to the verge of becoming a mainstream sport with a vast domestic and international presence.

“We’ve accomplished a tremendous amount in a very short period of time,” said Lorenzo Fertitta, chairman and CEO of Zuffa LLC, which he founded with his brother Frank and boxing promoter Dana White in 2001, when the trio bought UFC. These days, the UFC has crushed or swallowed imitators while building a powerful franchise, generating millions in revenue on pay-per-view and basic cable and forging a dominant brand image.

 

STAGGERING AT THE START

UFC and mixed martial arts in general made a lot of noise in the 1990s, but much of it was howling from powerful foes opposed to its very existence. UFC was founded in 1993 by promoter Art Davie, martial artist Rorion Gracie and pay-per-view producer Bob Meyerowitz of Semaphore Entertainment Group; SEG ultimately bought out Davie and Gracie. There were no gloves, no rounds, no time limits, no weight classes, no rules against head butts, hair-pulling or kicking a man on the ground.

“It wasn’t a sport, it was a spectacle,” said Marc Ratner, then a member of the Nevada State Athletic Commission and now UFC’s vice president of government and regulatory affairs. While on the Nevada commission, he appeared on Larry King Live alongside Sen. John McCain (R-Ariz.) to decry the sport. McCain called mixed martial arts human cockfighting. Political pressure ultimately led to a ban on the sport in three dozen states and, more importantly, an agreement by Tele-Communications Inc., Time Warner Cable, Cablevision Systems and other smaller cable operators not to carry UFC on pay-per-view.

UFC Ultimate Fighter reality series on Spike TVNear death, the sport began imposing rules and regulations, which in the long run made it, on many levels, safer than boxing or possibly even the National Football League. Still, SEG lacked the power to resurrect the UFC and, near bankruptcy, in 2001 it sold the business to Zuffa for $2 million.

“I was very passionate and felt it could be turned around into a legitimate sport,” said Lorenzo Fertitta.

“We bought the company at UFC 30 and at the time the brand was tarnished,” White said. “We had a tough time getting the franchise up and off the ground, but during this we’ve continued to grow the business.”

The Fertittas were successful casino executives and White knew sports. Still, despite important strides including getting sanctioned in Nevada (where Lorenzo Fertitta was also a former athletic commissioner) and returning to pay-per-view, the UFC remained very much a fringe sport and a major money-loser.

By 2005, Zuffa had poured about $44 million into the company with nothing to show for it. But that year everything would change, as the UFC made its name with the Spike TV reality series The Ultimate Fighter.

The route to that series was circuitous. The UFC had the same agent as Craig Piligian, founder of Pilgrim Films and Television, one of the original forces behind the reality-show phenomenon Survivor. Fertitta and White knew they needed a television show and arranged to meet with Piligian. “UFC wasn’t on my radar,” Piligian said, but they met to kick around ideas for “how to orchestrate the format.”

But it didn’t matter — because no network would touch the show. “There was still residual resistance — people thought it was a blood sport, where two men enter and one man leaves,” Piligian said.

Then, a couple of years later, Piligian approached the Fertittas about doing a reality show at their casinos for Discovery Channel (American Casino). They also decided to revisit the UFC idea. This time they managed to get a commitment from Spike TV, which had decided it needed a combat sport to attract young male viewers and had looked at the UFC, at an MMA organization from Japan called Pride (since bought by Zuffa) and at kickboxing.

“Like most people, I knew of UFC because of its aggressive nature, that it had been banned in New York State and about McCain’s opposition,” said Brian Diamond, now Spike’s senior vice president for sports and specials. “It wasn’t front and center for us.”

Diamond went to a UFC event and was impressed on every level — the crowd was bigger, more diverse in terms of age, gender and ethnicity and the star power (from Shaquille O’Neal to Cindy Crawford) was higher than anything he expected. “We decided, 'This is the one, now what?’” he said.

Piligian had the answer with his reality format, which would introduce contenders as elite athletes and interesting human beings, not just bar-room brawlers. Spike was sold — as long as Zuffa ponied up the $10 million in production costs. (The UFC couldn’t even find sponsors — Fertitta remembers a totally blue mat, where now the Octagon is covered by sponsors like Burger King and others.)

 

'ULTIMATE’ SUCCESS

Already in for $34 million in losses, Zuffa was now in for $44 million. The Ultimate Fighter proved to have everything this video-game generation could desire—constant action requiring strength and skill, along with an integrity missing from wrestling or boxing.

“We didn’t get a lot of support from Spike, but fans found it themselves,” Fertitta recalled. The finale featured basic cable’s first live UFC event, a battle royale between Stephan Bonnar and Forrest Griffin that has since gone down as perhaps the greatest UFC bout ever (and it wasn’t even the main event). Viewership kept growing to a peak of 12 million over the course of the evening as people called friends and told them what was happening. “It was truly organic and a turning point for the UFC,” Fertitta said.

“At the truck afterwards, we started negotiating a new deal,” said Diamond. Soon after, Spike introduced numerous new UFC-related shows including Fight Nights, All Access, Unleashed and Countdown, the latter of which promotes upcoming pay-per-view events. “This relationship has been incredibly important to the growth of the network,” Diamond said.

By 2007, UFC was generating about $250 million and about 90% of all MMA revenue — and it has continued growing. The following year, UFC nailed down sponsorships with Bud Light and Harley-Davidson. Thanks to the sport’s soaring popularity, Piligian now has a much larger and better qualified pool of applicants from which to choose.

But while he has tweaked the show’s format since then — shortening the period of shooting, getting rid of the coaches’ challenge — for the most part he has left things the same. “People watch because we keep it raw, keep it true, with no gimmicky stuff,” he said.

 

A NEW ERA

While the essence of UFC in general remains unchanged, everything on the business side has changed since those days just four years ago when Zuffa had to buy its way onto cable television.

For starters, the UFC has taken huge strides in fulfilling its dream of global reach.

“When we bought this thing, we had a mindset that we were building a global sport,” White said. “We could stay right here and be successful in the U.S. — we haven’t even scratched the surface in terms of our potential in America — but our ultimate goal is to go out into all these other countries and turn this into a global sport.”

Two years ago, the company opened an office in the United Kingdom as a springboard into Europe. This year, it staged its first fight in Germany. The company is now in 431 million homes worldwide, up from 289 million a year ago, thanks to deals with companies like DSF in Germany and RTL9 in France.

“Now we have the leverage,” Fertitta said. “In just the past year, it has changed dramatically — people are calling us, and I’m surprised by how knowledgeable they are in, say, the Middle East, with references about what we have been able to do for Spike.”

The leverage has enabled Fertitta to focus on finding the best network for UFC’s demographic — while the sport is universal, strategies vary from country to country. In some locales, UFC might be best served by a free network, while in others a subscription channel might work best. In one market, UFC might favor a general entertainment network while in another Fertitta chooses a sports channel.

“We do a lot of research,” he said, adding that they are looking for partners in marketing too. “RTL 9 in France has promoted the heck out of it for us.”

But Fertitta hasn’t lost sight of the tremendous opportunities at home, either. “We still have a lot of growth left domestically,” he said. “Our mainstream press coverage has really increased in the last six months to a year. We have more coverage on ESPN. But we are still far from being considered mainstream. A big-name boxing fight still gets 100 times more coverage, so there’s a lot of room left.”

And now, everyone wants to partner with the UFC. “They reached out to us and we were enthusiastic,” said Jim Riley, chief sales and strategy officer at TVN Entertainment, about his firm’s new video-on-demand collaboration with UFC. The VOD package will soon be in 25 million North American homes, said Riley, who expects to double that within a year or two, thanks to the enthusiasm of cable operators like Comcast for the product.

To achieve mass audiences, Fertitta hopes to broaden UFC’s appeal beyond the core audience of men 18 to 34. “We will grow to the 18-to-49 demographic,” Diamond said.

Already, Fertitta said, the UFC attracts older boxing fans who miss the big fights of the 1970s and 1980s. Of course, one key is that Zuffa (which has also bought up World Extreme Cagefighting for lighter weight classes) dominates the mixed martial arts world as no single entity ever controlled boxing, though Fertitta encourages smaller organizations that operate within a defined regional niche as a breeding ground for UFC talent.

By controlling all content, UFC can now explore various avenues for expansion.

Fertitta said Zuffa, which has a deal through 2011 with Spike, continues to discuss possible events on HBO and CBS.

“There is room for other outlets,” he said.

And Diamond said that exposure on other outlets would ultimately “bring more eyeballs back [to Spike], since we are the foundation and the regular presence.”

 

UFC EVERYWHERE

But Fertitta wants to reach potential fans everywhere — UFC has an exclusive broadband pay-per-view deal with Yahoo that he said has been successful and that will be adding new on-demand statistics and other features later this year.

“We’re working to create more value,” he said. “It’s a full-time job just keeping up with the new technologies.”

He also boasted that the company’s marketing goes beyond anything done by sports reliant on pay-per-view. “We’re pulling dollars away from traditional advertising,” he said, focusing instead on new ways to reach broader audiences while continually promoting specific pay-per-view events.

For instance, he believes the new, best-selling UFC 2009 Undisputed video game from THQ encourages general interest in the UFC events while the online video games actually promote specific upcoming pay-per-view events. (If you play online now, inside the fighters’ Octagon will be ads for UFC 100).

Later this year, he said, UFC will sell action figures at Wal-Mart and Target and “every one will have an insertion promoting an upcoming pay-per-view,” Fertitta said.

A new deal with TVN that has launched video-on-demand programming also serves to promote the pay-per-view.

“We can simultaneously drive awareness of the sport and consumption of pay-per-view,” Riley said. “We can expand exposure to a new audience.”

There are three UFC Zones in on-demand: a free channel that has programming ranging from introductory basics about the rules of the sport to promotions of upcoming events; the Fight Zone with single fights for as little as $2.99, featuring bouts involving fighters who will appear in an upcoming pay-per-view match; and the Event Zone, featuring an entire card of fights for as little as $4.99, again featuring fighters on upcoming cards.

Over time, said Riley, as the sport grows more mainstream, the explanatory programming may be replaced by mixed-martial-arts-related lifestyle programming.

That fits with Fertitta’s idea of making the UFC an “aspirational brand,” through products like the video game, which lets fans participate on one level to a new line of UFC gyms which will launch later this year.

“The gym market of treadmill and weights is tired and our fighters have developed these different types of sophisticated training techniques,” Fertitta said. “But fighter gyms or a place with a dojo can be intimidating to the average person, so ours will be very unassuming with no fighting going on, just training that can appeal to a woman or a guy who doesn’t want contact.”

Next up is this month’s UFC 100, which White described as a big milestone for the company and a sentimental one for the fans. “The fans were talking about UFC 100 long before I was,” he said, “and I would be disappointed if we don’t do 1 million buys.”

So it’s no surprise that the UFC has stepped up marketing for the event. “We actually are doing a show on Spike, the 100 greatest fights in UFC history, and then that weekend [on Friday July 10 and Saturday July 11] for the first time ever we’re doing a fan expo,” White said. “We have a ton of booths, we have legends coming in, we’re inducting several fighters into the hall of fame, and we have a concert. We’re also doing a grappling tournament — it’s going to be cool.”

“It’s a great time for us,” said Fertitta. “Everyone else is worrying about laying off people, but we come to work every day and talk about expanding and hiring more people.”

September