How the UFC's mixed martial arts became the biggest non-tech trade of the century Media Man Int

How the UFC's mixed martial arts became the biggest non-tech trade of the century -
6th July 2017

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A camera man gets a close-up of Holly Holm and Ronda Rousey during UFC 193 at Etihad Stadium in Melbourne in 2015. Darrian Traynor

by Chritopher Joye

It's arguably the greatest non-tech trade of the 21st century. When Las Vegas casino bosses Lorenzo and Frank Fertitta III spent $US2 million ($2.6 million) buying a tiny mixed martial arts business called the Ultimate Fighting Championship in 2001, they could barely have imagined selling it for $US3.77 billion 15 years later in what was the most expensive sporting sale in history. After adviser fees, the transaction totalled $US4 billion. In the process, the Fertittas created the fastest growing sporting organisation on earth.

The investment provided a 1888 times return on a deal the brothers' Italian-American father, Frank junior, "vehemently opposed" because he thought MMA was akin to "human cock-fighting". Ironically, Frank Jr thought it might tarnish the family's prized reputation, earned through its Station Casinos empire, which is worth $US2.8 billion.

Originally known as "cage-fighting", modern MMA is unarmed combat, contested by athletes from the striking and martial arts disciplines. Fights take place in the UFC's patented "Octagon" ring over three five-minute rounds, which is extended to five rounds for championship matches. The UFC has standardised the rules and regulations of these contests, holding around 41 MMA events annually in cities around the world. There are 12 fights on a card (event) across up to eight different male and female weight-classes.

By 2016, this once obscure business delivered $US170 million in profits before interest and tax, and was ranked by Forbes as the world's seventh most valuable sporting brand. It is the largest Pay-Per-View (PPV) event provider globally, broadcasting in more than 163 countries to more than 1.1 billion households in 35 languages.

On Sunday July 9 (AEST), young striker Robert Whittaker hopes to become the first Australian UFC champion. He will battle Cuban Yoel Romero – a former Olympic silver medallist in free-style wrestling – for the interim middleweight championship of the world at UFC213 in Las Vegas, an event headlined by two females from Brazil and Kyrgyzstan contesting the bantamweight championship.

Capitalising on boxing's flaws

In his final interview as the UFC's chief executive, one of the billionaire brothers, Lorenzo Fertitta, 48, sat down with The Australian Financial Review in the bowels of T-Mobile arena in Las Vegas to exclusively lift the lid on the secrets behind his business's stunning success. This followed a series of interviews with the UFC's management team, including Fertitta's little-known right-hand-man, Lawrence Epstein, who advised the brothers on the 2001 investment. He has been consigliere ever since in his role as the UFC's chief operating officer.

The stocky and blue-eyed Fertitta, who resembles a barrel-chested brawler himself – and can bench press 365 pounds (165 kilograms) – says the inspiration for the UFC's business was found in what he viewed as boxing's failings. Capitalising on that sport's shortcomings was something the Fertittas and their junior partner, rock-star promoter Dana White, were passionate about personally and professionally.

At the age of 27 Fertitta was appointed to the Nevada State Athletic Commission, which regulates boxing in Vegas. A Tony Soprano lookalike – sans hair – White was a former bouncer and amateur boxer who was training and managing fighters. Fertitta knew him from school, and says they reconnected at a wedding, reinvigorating their friendship over 5.30am boxing sessions led by the "Baldfather" White.

"I always felt that when I looked at combat sports and the billions of dollars that had been produced by boxing over the last century, it was fascinating that there was no clear brand associated with that business," Fertitta reflects.

"Every other sport where that much commerce had taken place had a brand. Yet boxing was a broken business with no structured organisation. You don't go to see a league or sport. You paid to watch a one-off event – so-called 'super-fights' like Mayweather versus Pacquiao. But with no overarching control, you rarely got the right fights – and when they did come they arrived too late. Boxing has as a result disappointed fans for years."

Don't just run the sport, own it

Fertitta says his fixation with putting the entertainment value of products first was drummed into him by his late father. "As a young man I would walk our casino floors with my father for hours every Friday and Saturday night, seeing if the slot customers and restaurant patrons were happy," he says.

The Fertitta brothers and White originally split the UFC's equity 90:10. Their key insight was to recognise the power of owning a sporting league outright. This would allow them to create a meritocratic competition that forced the best athletes to compete in the most sought-after fights, which they thought could create a compelling combat product with a competitive edge. (Abu Dhabi's Flash Entertainment bought 10 per cent of the UFC's entity, Zuffa LLC, in 2010, diluting the founders' shareholding.)

There are few sporting competitions in the world that are owned outright. Most – such as soccer, baseball, NFL, basketball, rugby and cricket – have teams that are individually owned with the sport governed by associations that may or may not be controlled by its participants. In boxing there are more than half a dozen governing bodies, which disperse athletes, fights and consumers with multiple world champions that may never face one another in the same way rugby league and union players are professionally bifurcated. Whereas in boxing records are padded by avoiding tough opponents – a practice that manufactures long winning streaks – it is rare for UFC athletes to triumph in more than six fights in a row.

The only major competitions controlled by a single owner are the unsurprisingly valuable Formula One and MotoGP racing businesses. Yet they have shortcomings. Formula One and MotoGP's teams are run by powerful private companies – such as Ferrari – which can be hard to manage. They also represent a man and machine hybrid, which means inferior athletes can win with a better car. That contrasts with the primal athletic experiences offered by the UFC.

"Quite honestly, I felt like boxing was old technology and MMA was new technology, and in 2001 we thought that we would be the 'disrupter' – and we used that word – if we could create a brand that was sustainable and signalled to consumers that it was best-in-class," Fertitta says.

White believes that one of the reasons the UFC has emerged as "the fastest growing sporting competition in the world" in terms of viewership is because "pretty much everyone on the planet has had a fight at some stage and can viscerally relate to the events we present".

Epstein argues that this "universality" is reinforced by the accessibility of the UFC's product compared with more complicated alternatives like baseball, cricket and NFL, which have rules that can "take years for the uninitiated to master".

MMA's dux to boxing's dunce

A derivative appeal of MMA is that it is arguably more complex, creative and captivating than single-discipline combat sports, including its main rival, boxing. It is also a better approximation of fighting in the real world. In fact, special forces units have become avid fans. "The UFC is very popular within the SAS and heavily incorporated into our training regime with three MMA sessions per week," says a patrol commander in Australia's Special Air Service Regiment, who cannot be named for security reasons.

MMA's diversity is reflected in the fact it encompasses no less than five Olympic disciplines – boxing, judo, taekwondo, greco-roman wrestling, and freestyle wrestling – over and above Brazilian jiu jitsu, kick-boxing, Russian sambo, karate, and Muay Thai. Olympic medallists from these sports are peppered throughout the UFC's weight classes – former bantamweight champion Ronda Rousey was a bronze medallist in judo – and Fertitta believes it is inevitable that MMA one day features at the Olympics.

When Australian Robert Whittaker enters the 70 square metre Octagon on Sunday – which dwarfs a 53 square metre boxing ring – he will have myriad threats to deploy and defend against, including fists, forearms, elbows, knees, shins, and feet combined with whole-of-body wrestling. Top MMA athletes must master a range of skills and disciplines, which can make divining what they do next like three-dimensional chess.

This means the sport requires intellectual rigour with many athletes embracing the cerebral prescriptions of its genres, like jiu jitsu and karate. A surprising fact is that more than half of the UFC's 520 or so contracted athletes have graduated from university. Epstein claims that the UFC's exacting safety rules also do a better job protecting athlete welfare than other sports, citing studies showing that boxers suffer far greater brain damage over the long term.

Whereas in boxing a fighter can be knocked out multiple times in a match as long as they recover by the referee's 10-second count, UFC contests are halted once a fighter loses consciousness or is out on their feet. Quick finishes are also more common than decisions because of the many ways fights can end, including through "tap-outs" where contestants signal they want to concede because a choke or wrestling manoeuvre imposes too much pain.

The four to eight ounces of extra padding in boxing gloves might seem safer, but they also enable more frequent head strikes. And although the UFC's skinnier four-ounce gloves inflict deeper soft-tissue damage, fighters have to be more careful when it comes to hitting heads due to the heightened risk of breaking hands.

Fertitta maintains the sport can furnish superior career paths with the UFC's median athlete pay better than boxing – "compare the compensation on our undercards" – and the "top 10 or 15 fighters making millions of dollars". Irish UFC superstar Conor McGregor is on track to become one of the world's best paid athletes with expected earnings north of $US150 million 2017, up from $US34 million in 2016.

As the UFC has transformed MMA into a professional sport that is legalised in most jurisdictions, there have been positive feedback effects: more and more athletes have committed to the sport as a full-time vocation, which is improving the quality of contests.

A truly global game

The UFC's former chief brand officer, Gary Cook, who previously served as CEO of Manchester City Football Club and president of Nike's Jordan brand, says MMA's multi-facted heritage contributes to its global reach: "The truth is that few folks are interested in NFL outside the US."

Jiu jitsu, for example, is the second biggest sport in Brazil after soccer. This has meant that the South American nation with 208 million people has become the UFC's third largest PPV destination behind only the US and Canada. Australia, which is the UFC's biggest per-capita PPV domain, ranks fourth.

The UFC estimates there are 3.4 million fans in Australia, which holds the record for the largest live audience with 60,000 people filling Etihad Stadium in Melbourne in November 2015 to watch UFC star Ronda Rousey get knocked-out by a rank underdog, Holly Holm.

"And then there is the immense latent potential in China, Russia and Mexico where the UFC has yet to properly penetrate," Cook says.

"China is the biggest martial arts market in the world in which the UFC only captures a few million dollars," Epstein adds. "We should be doing $US150 to $US200 million a year there."

The UFC's video game, which is now EA Sports' second-most popular behind its "FIFA" soccer product, has been downloaded most in Russia, which is also the third biggest market for the UFC's apparel provider, Reebok, even though there has never been a UFC event there. Fans may not have to wait long with Conor McGregor declaring that after he fights Floyd Mayweather – in a boxing, not MMA match – on August 26 he wants to battle undefeated Russian lightweight legend Khabib Nurmagomedov in his homeland.

"The next evolution of our business model is to develop multiple leagues around the world working with local partners, including a China-based competition, that roll up into the UFC," Epstein reveals. "This is the key to unlocking the UFC's scalability beyond its fixed semi-weekly fighting schedule, which similarly constrains Formula One and MotoGP."

Some question the logic of the UFC allowing its most valuable human asset, McGregor, to cross codes and attempt to level Mayweather – the 49-0 American who is considered the finest pound-for-pound boxer of all time – in what will be the Irishman's inaugural professional boxing match.

There are, however, rejoinders. First, it could be the most widely covered international sporting event of the year, which will project the UFC's brand into more households than ever before. And boxing is ultimately a constituent discipline in the UFC's product.

Second, the UFC is not actually pitting itself against a rival brand in the bout, but against the two boxing promoters on the card, which are commercial non-entities.

Finally, it is possible that the 28-year-old McGregor, a former amateur boxer and freakishly-fast striker at the peak of his powers, has a chance of upsetting, or at least gaining parity with, the 40-year-old Mayweather, who has not fought for more than two years. Rightly or wrongly, this could devastate boxing while entrenching the UFC as the dominant commercial fighting franchise.

Building a multi-dimensional brand

In line with the laser-focus on branding, the UFC's bosses no longer consider themselves fight promoters, rather a "global sports, media and entertainment enterprise". Or, in Fertitta's words, "we are promoters of human potential".

This is where the business becomes more nuanced. Whereas in most sports intellectual property is diffused between players, teams and media, the UFC has emulated Formula One, MotoGP and World Wrestling Entertainment by "vertically-integrating". They control all online, digital and televised content, which they produce in-house – with more than 2000 hours of live events each year – even when it is distributed via the likes of PPV and FOX Sports. This maximises the UFC's ability to control and monetise its IP while also ensuring it can tailor local content (eg, British commentators for UK events) rather than crudely exporting American fare.

Fertitta is the first to acknowledge that the timing of his 2001 investment, which coincided with the advent of social networks and the internet's explosive growth, was providential. "What the UFC has achieved in the space of just 15 years in the commercialisation of a new professional sport is unlikely to ever happen again," Cook avers.

Cook designed the UFC's eight multi-dimensional – and gender-neutral – brand maxims revolving around "fitness, discipline and respect", which have helped push the UFC's business into adjacent verticals, including gaming, apparel, and gyms. The first maxim is the ingeniously simple, and provocative, statement "We Are All Fighters".

He says the UFC is no longer selling a specific contest but rather purveying a broader entertainment experience across its 12 fight cards: "We sold out our London event in 19 minutes – faster than a Justin Bieber concert – without advertising a single fight."

The UFC's brand values urge consumers to aspire to the athletic feats of its fighters. That has paved the way for it to open 130 UFC Gyms in a profitable partnership with New Evolution Ventures, including several Australian sites. Combined with the introduction of female fighters in 2012, the UFC Gyms reinforce the sport's gender-neutral nature and drive eye-balls to its PPV content, which still accounts for 70 per cent of revenues.

The import of the UFC's first contracted female Ronda Rousey, an ESPY award-winning icon, was the duality of her allure to both male and female markets. "Men don't normally watch women's sports with the exception of beach volleyball," Cook says before reflexively reciting the underlying, and some might think cynical, brand meme that "Ronda's real fight began when she lost her father at age of 8".

Physical and virtual domains

Cook is adamant that the UFC's virtual world will ultimately become as relevant as the physical one. To this way of thinking, EA Sports, which is run by an Australian Andrew Wilson – a black-belt in Brazilian jiu jitsu – should be viewed less as a gaming company and more a "social network with half a billion clients," Cook says.

"The UFC will eventually hold a virtual world championship the same day as the physical one. In our first online contest, we had 50,000 entries with $10,000 in prize money. And in the three weeks before UFC200 we had 267,000 virtual knock-outs." Revenues are not restricted to just game sales: embedded "microtransactions" let players upgrade moves, attributes and teams with a virtual currency.

Epstein agrees that the UFC's "most important individual marketing tool is our EA Sports game because of its 24/7, 365 days a year cycle". He sees parallels in music: "DJs are essentially virtual musicians and are nowadays as big as old-school artists. If they can do it in music, which is extremely experiential, we can do it in sports."

For the UFC to hit its ambitious $US350 million EBITDA target in 2018, set by new owner WME-IMG – led by the talent agent Ari Emanuel, immortalised in the Entourage TV series – it must relentlessly internationalise.

More than half of its events are now held outside the US – a similar share of athletes are foreigners – with offshore markets providing 70 per cent of the UFC's audience. "1.4 billion households have access to the UFC," Cook says. "But only 130 million of these are located in the US."

The business must also contend with its own threats, including emerging rivals like the Bellator competition, the never-ending problem of digital piracy, a resurgence in boxing on the back of popular British heavyweight champion Anthony Joshua, and the risk of re-regulation given concerns surrounding sporting concussions.

Asked where the UFC stands on a 1-to-10 scale of a corporate lifecycle, Fertitta judges "2 or 3". This may explain why the brothers have not taken all their chips off the table, despite a desire to roll the money into an NFL team. They have hedged their bets, retaining a passive minority stake in the UFC, which makes sense given the business could end up being worth multiples what they sold it for.

The new shareholders agreement has, however, discarded the brothers' idiosyncratic dispute resolution clause, which was to settle arguments with three five-minute rounds of jiu jitsu refereed by Dana White.

Cook, who left after the WME-IMG deal, claims the business is now "unstoppable": "I always said to Lorenzo, 'you don't know what you started'."

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(The Australian Financial Review)