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WME-IMG & UFC Betting Against Sports TV Rights Trend

When the WME-IMG paid $4 billion for the UFC they are making multiple bets on the future.  First, they are betting that they can market athletes so the revenue stream on a per athlete basis boosts the income of WME agents.  Second, that IMG can coordinate huge sponsorship agreements between corporations and the UFC.  Third, that the volatility in the industry between an inconsistent schedule and looming legal battles will work in the UFC’s favor.  Lastly, and probably most importantly, that when the UFC and FOX reach an agreement on a new television rights deal in 2019 will earn the UFC $400 million annually.

The market on television rights has been dwindling.  I am not alone in thinking that a sports television rights bubble is about to burst.  Sports have been considered DVR-proof because a viewer has to watch the game live.  Sports are the only type of programming that loses any value to the viewer once the initial run is over creating a strong desire to watch the game live.

Television rights have been one of the most consistent forms of revenue for sports organizations.  When the PAC-12 conference formed their own television channel every school received a new revenue stream worth $25.1 million a year.  The PAC-12 conference was even $7 million behind the SEC Network revenue payout to the fourteen SEC schools.

In the case of the UFC a network broadcast deal would stabilize the revenue that comes from their top programming events.  The majority of the UFC’s revenue is based on PPV revenue, which is nearly entirely dependent on the star that is fighting in the main event.  For example, Conor McGregor’s fight against Jose Aldo earned 1.2 million PPV buys while the next month’s PPV program featuring Lawler and Condit only earned 300,000 buys.  The difference in those two events is about $54 million from PPV alone.

A canary in the coal mine on the future prospects of the next television deal with the UFC could be the lack of interest from sports broadcasters when the organization was for sale.  According to a Sports Business Journal article:

WME-IMG, which will serve as the UFC’s majority owner and operator, will have substantial insight into what the media rights are worth. The agency, through WME-IMG co-CEO Ari Emanuel’s longtime friendship with UFC Chairman and CEO Lorenzo Fertitta, has negotiated all of the UFC’s TV deals in the United States, first with Spike in 2005 and more recently with Fox in 2011… At least three media companies — ESPN, Fox and Time Warner — kicked the tires on buying the UFC, sources said, in addition to Chinese investors China Media Capital and Dalian Wanda Group.

Time Warner was interested in splitting UFC content between Turner Sports and HBO, with iStreamPlanet handling Fight Pass. Time Warner pulled out of negotiations relatively early…  Fox Sports took a strong run at the company, eventually submitting a $3.6 billion bid that the UFC rejected, sources said. Fox executives decided not to increase that bid… ESPN was interested and received the UFC’s sales deck, but it never submitted a formal offer and dropped out of the process early on.

Ultimately, sources said, each media company was skeptical about the media rights valuation.

The lack of confidence in future sports television rights comes from a few sources.  Many people are cutting their cable cords and simply going without television.  ESPN is already seeing millions of subscribers leave.  Since 2013 ESPN has lost 10 million subscribers, has lost 1.5 million subscribers between February and May of this year, and is losing 10,400 subscribers daily.

It is possible that the networks and content distributors didn’t have the resources to maximize the value that the UFC brings.  WME-IMG is in a great situation to take full advantage of multiple revenue streams and has a global vision that the networks don’t have.  The networks have many other issues to deal with such as the increased segmentation of sports fans and content.

WME-IMG made a huge bet by going against recent market behavior.  There is an outside shot that the UFC purchase will be a home run for WME-IMG and the other investors.  If the estimates on future revenue are shown to be overly optimistic I still don’t see a situation where the purchase will be a car wreck for the organization.

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