Motley Fool Hidden Gems Investing - UFC Economics

Episode Date: June 18, 2023

You can’t be afraid to step on toes if you want to run a mixed martial arts promotion… or stomp on them. Michael Thomsen is the author of “Cage Kings: How an Unlikely Group of Moguls, Champions, and Hustlers Transformed the UFC into a $10 billion Industry”. Ricky Mulvey caught up with Thomsen to discuss: - The rise and transformation of the UFC - How president Dana White negotiates with fighters - What investors may want to know about the upcoming merger between WWE and the UFC Companies discussed: EDR, WWE Host: Ricky Mulvey Guest: Michael Thomsen Producer: Deidre Woollard Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

head back to the streets and FX is the drop a snowfall saga watch Wanda Bell and Leon Simmons fight to reinvent themselves in 90s Los Angeles where the fallout from the crack epidemic fuels the rise of west coast rap ambition loyalty and survival collide as everyone risks everything to build something lasting and FX is the drop a snowfall saga streaming now on hulu on disney Plus, click or tap the banner to sign up now. You know, the WWE is an interesting case because they're kind of a mature business, too. They've sort of been at a plateau for the last few years and kind of trying to think about what the next growth catalyst would be for them. In a way, it's sort of a precursor of where the UFC is heading.

I think the UFC is heading towards a point of saturation also. I'm Mary Long, and that's Michael Thompson, author of the new book Cage Kings, how an unlikely group of moguls, champions, and hustlers transformed the UFC into a $10 billion industry. Ricky Mulvey caught up with Thompson to discuss the early days of mixed martial arts, the upcoming merger between WWE and the UFC, and what it takes to be the alpha of a cage fighting organization. Today, the UFC is this mixed martial arts conglomerate. It's something that's regularly on ESPN. We often associate it with Dana White, the president, but he's not the founder. At its heart is the story of a corporate turnaround. I'm hoping you can share with us that story,

starting with its founder, Art Davies. Yeah, sure. Art Davies originally came up with the idea in the early 90s. He was a marketing executive in California. And he had come up with this pitch for one of the clients, this beer importer. Ironically, it was the same company that distributes Modelo, which is now a big UFC sponsor. But back then, he was trying to rebrand Modelo and they asked for pitches. So he came up with the idea of doing this martial arts tournament that pitted different styles against each other and they wound up passing but in the process of researching it and putting it all together he got so excited by the idea he decided to kind of just run with it and he ended up quitting the job taking his savings and starting his own like

production company and then trying to just slowly sell everybody on it and at the time pay-per-view was a huge growth market you know investors were expecting that to be you know the next big like high margin, um, media sector, or, you know, in the eighties, it had been all about cable subscriptions. And so people were thinking if, if, uh, you know, a family will pay 20, 30 bucks a month for premium cable television, they might also pay 10, 15, 20 bucks for premium shows individually. And so it was almost this, this fantasy of like infinite, like profitability. Um, so there was a huge incentive for pay-per-view companies to start looking for original programming. Now we think of it as just boxing and pornography and second-run movies that

are done with the movie theaters but aren't out on home video yet. But back then, they were really pushing for original content and original series ideas. That was the sweet spot that Art Davey hit with the 1993 launch. But it always had to push the edge. I think, what was it? They also tried street racing and these leading edge reality shows. Art Davies starts it. The story is well known. Hoist Gracie comes in, wins the first tournament, this regular everyman, proving to the world at that time that Brazilian jiu-jitsu is the top martial art. Then after that, the company starts to falter a little bit. Maybe there's a little bit more pressure on them. The shine has worn off. What is the state of the business, maybe just before Dana White brings the Fertitta

brothers in? They were pretty close to bankrupt. The company that Art Davey had partnered with was called Semaphore Entertainment Group. It was a subsidiary of BMG, the big music conglomerate, and they had started this smaller pay-per-view company. They were left running the show So after all of the legal problems where a bunch of local governments all the way up to the federal government with John McCain really had kind of turned against the sport as this like crass, exploitive, you know, human cockfighting. So they they had eventually been kicked off U.S. cable. They were only available in the U.S. on satellite, which cut their addressable market in less than half. I think it was about a third the number of homes they were in. They had a wave of bad press. And so in 2000, SEG was, they were scrambling to get money to fund the next show. You know, they didn't even have money for a full year of shows. It was, you know, Rob Meyerowitz, who was running it at that point.

he had taken over after Art Davey left the company under some controversial terms. He was basically trying to get people to give him money to fund the next promotion and he started looking for ways out and that's how he found Dana White and the Fertitta Brothers who wound up buying the a company at the end of 2000, early 2001. What's interesting about this as well is that your book discusses is the UFC didn't just have a regulatory problem or a pay-per-view interest problem. At the heart of this, there's also a product problem because it's intensely difficult, especially in the early stages of this sport, to book competitive, exciting, compelling matchups. Yeah. That's still a problem with the sport today in a lot of ways where

if you're selling bulk fights, which is what the UFC is in, it's easy to get excited about Chuck Liddell and Tito Ortiz or Conor McGregor and Nate Diaz or whoever. But when you have 12 fights in event, 40 events per year, you're putting on hundreds of fights and each of them can't have this sort of Hatfield versus McCoy blood vendetta to it you know and a lot of these over time they just kind of feel purposeless and part of the magic I think that the UFC had in the early days was it was a tournament you know you look back at a lot of the early fighters and in the mid 90s they would come to the UFC as a tournament this like one night win three in some cases four four fights in a couple of hours it was almost like climbing Mount Everest and you

would see guys you know try and fall short and then come back and it wasn't really about being you know the champion of the world or winning in your weight class it was about you know just accomplishing this sort of feat on the night and um that sort of gave it drama but i think you know after seven eight years that got old also it was sort of like well you know we've seen you know a dozen two dozen people climb mount everest now it starts to lose its sort of specialness and then it became more about matchups and building characters and personalities and stakes for the individual fights um and that's where it really becomes a kind of like promotional problem in terms of a business like how do you how do you create a sense of meaning and significance

to each fight enough that you're going to convince someone to spend 30 40 dollars on it well not just that i think it's like 80 almost 80 85 i think let's talk about one of the key key figures at the ufc who's uh actually sort of going to be at the helm of the new ipo um the company the conglomerate between the wwe and the ufc the ticker will be tko and that gentleman is ari emmanuel um how does he how does like kind of tell me about who ari emmanuel is and how he becomes such a key figure for the UFC? Yeah, it's a tempting question. There's a lot of different versions of the Ari Emanuel story you could tell. The simplest one is he's an agent. He's a talent agent. He got his start in Hollywood in the mid-90s as an agent trainee.

and um he he didn't really have any particular vision at that point i don't think there's an interview um i quote in the book if you go back you know they they interviewed i think this is around 1995 and they asked him what his sort of ambitions were what his his big um goals were for the future and he said he didn't really have any beyond just money and power that was that was the closest thing that he could kind of come up with um for like a personal kind of motivating mission and that's really been his life arc in a way um where he's just sort of gone from agency to acquisition now he started his own agency which is called endeavor uh in the late 90s and then just steadily built that up he kind of got a chokehold on the talent business with

especially in television that was his where he started television and animation he represented a really valuable client list. In the 90s, when television deals were at their peak, we had Seinfeld. It was the age of the sitcom, the network sitcom, where there's just absolute premiums for actor commissions, writer commissions, showrunner commissions. He was in the center of all of that. He parlayed that into consolidating the agency business. He went on to acquire William Morris and made Endeavor into an even bigger agency. And then he started to make that sort of conglomerate into a multimedia chimera. It's not really clear what Endeavor is anymore, whether it's a fashion show or a bull riding production company or a cage fighting

promotional company, or they're still in talent. But he found the UFC because he was their agent in 2005, after the launch of the UFC's first reality series called The Ultimate Fighter, Ari saw the success they were having. And in typical Ari Emanuel fashion, he just started calling and calling and calling and calling, saying, how can I help you? How can I help you? And eventually, he persuaded Dana White and the Fertittas to let him represent the UFC in its media licensing negotiations and um the the way he kind of persuaded them to do that at the time was he promised to get dana white a uh a meeting with the head of hbo sports to try and get the ufc on hbo sports which had a really long-running reputation as like the place to go for boxing

and dana white was a huge boxing fan so the idea that the ufc could be on an equal footing with boxing was very appealing. That deal fell through, but the relationship stayed. Now the UFC is at a point where it just made $1.1 billion in revenue. Mixed martial arts journalist, the great Luke Thomas pointed out that that was more than every other combat sports promoter combined. If you look at where the UFC is today, HBO doesn't even have boxing anymore. And the UFC is on ESPN, which also has sort of become a home of boxing with top rank on there. um you know for as much as fans complain about not having any superstars you know there's too many fights at this television studio for the ufc that the apex and training facility

you know it seems like their strategy is working pretty darn well yeah yeah absolutely i mean it it's it's always been a cyclical sport i mean you know the if if people complain about the sport being in a lull in terms of stars presently with Conor McGregor not being out with injury and having his own issues. Like knocking out the mascot of Miami Heat in just a brutal and unnecessary way in between a basketball game. Please continue. Yeah. I mean, if you can watch that for free, why pay $85 to watch him fight Michael Chandler? But people would say the same thing in 2013 you know after george saint pierre went away and you know he pseudo retired he needed a break you know john jones had a bunch of fights canceled and there was sort of a talent void for

a while there's always a talent void you know the era of tito ortiz being this unstoppable force and then he had the great fights with ken shamrock in like 2002 um and then all of a sudden tito couldn't win a fight anymore. Then it was the Chuck Liddell era, and then he started losing. He couldn't win a fight. There's a continual churn of talent. But you still have people like Jorge Masvidal. He emerged as a superstar out of nowhere. He had been a long-running presence in the sport. You know, he's, you know, he's been fighting since the mid 2000s. Like, so the idea that just, or even Nate Diaz, you know, Nate Diaz was one of the most familiar names in MMA, but like very few people thought of him as a superstar. And then, you know, you just hit this

catalyst matchup, a matchup where the stakes, the significance of why these two people are fighting suddenly becomes clear. And it just draws this intense reaction from, from fans. And I think that's always going to be there you can kind of feel it happening a little bit with um you know israel adesanya who you know is one of the biggest stars i think they have now kamara usman became a big star you know even though he was sort of for large parts of his career he was thought of as kind of a dry boring grappler you know or not not a knockout artist not a submission fighter who's just kind of a smothering wrestler um so it's really you know there there isn't a game there's a gambling analogy to the way they deal with the star building you know where you know

they hold the maximum number of chips and then they just choose when they're ready to go all in on a certain fighter but you know they have all the fighters available to them and then when one of the fighters hits a streak, then they have the media platform to really blow that person out, send them all over, promote them, buy commercials for them on radio and YouTube and everywhere else. But until there's sort of that momentum going, then it feels like nothing's happening. I want to talk about where the UFC is going, specifically this IPO slated for the second half of the year. The UFC or Endeavor is combining with the WWE in TKO group. The CEO will be Ari Emanuel, who we just discussed. And Endeavor, Ari Emanuel is able to own a 51% stake while the WWE

shareholders are going to get the remaining 49%. That in and of itself has to be an incredible feat to wrestle away ownership of the WWE from Vince McMahon. Yeah. Yeah, absolutely. Ari, famously, he has a lot of doubters. He does things similar to what the Fertittas did in the locals' gaming market, where they take on enormous amounts of debt and they make bets that a lot of people on the sidelines say are not going to pay off, they're going to leave them too vulnerable, they're not even going to able to repay the interest on the debt. It was the same with the UFC acquisition in 2016. A lot of people at that time were like, this is way too much money for what the actual revenue

this company produces year-over-year is, and he just keeps finding marginal profit to scrape out of these companies as they build up. I think the WWE is an interesting case because they're kind of a mature business too. They've sort of been at a plateau for the last few years and kind of trying to think about what the next growth catalyst would be for them. In a way, it's sort of a precursor of where the UFC is heading, I think. The UFC is heading towards a point of saturation also they've you know you've with domestic ratings you've seen you know clear evidence of that even you know like in the last few weeks people have been talking about how low the the espn ratings are for the conor mcgregor ultimate fighter series that just launched

and you know those are just linear cable that's not the espn plus streaming ratings um there may be a substantial audience divide there but like you know 300 000 viewers for a conor mcgregor you know cable series show on a platform that still has some 70 million households that it's available in with espn like you know that's shockingly low and that even you go back to the ufc's heyday in the mid-2000s when they was the era of chuck liddell and randy couture and um, you know, Brock Lesnar, you know, they were getting, you know, regularly two, three, 4 million viewers per fight night. You know, the, some ultimate fighter episodes broke 2 million, 2 million people watching. So, you know, this is, this is, you know, a far cry from what it was

even back then. And yet the company never made more money. It's never been more profitable, which is kind of the magic of someone like Ari, just finds more and more ways to monetize, whether that's like you mentioned earlier, the gambling or international licensing, sponsorships. So, just for a little bit of context, the Fertitta brothers were sort of the long-time owners, financial partners of the UFC, along with Dana White running the show. And while the UFC has grown revenues, and I want to focus on this IPO, especially its public investors in Endeavor have been fairly disappointed. While revenue has grown significantly, the stock went public in 2021, and the stock itself has returned about negative 20% since then total. Meanwhile, the share count

has risen by about the same figure. So you sort of have this contrast where the WWE has been intensely friendly to its common stockholders, meaningfully reducing share count. It's been a phenomenal performer. But I would say with Emanuel's leadership, you often see these deals such as boosting earnings, but only for the sake of hitting maybe short-term bonus payments for the owners of the company. Yeah, absolutely. I'm not sure he has a grand vision either other than, you know, keeping his, his, the channels for investors open for, you know, institutional investors to fund whatever his next acquisition is, whether it's F1 or, you know, you know, whatever he's got planned, but, you know, that's been the common criticism of Endeavor is how does

bull riding fit together with, you know, uh, an amusement park in the middle of London with, you know, the WWE, what's the, what's the grand vision of all of this. And, you know, there's not one necessarily beyond just sort of continuous expansion into as many different sort of areas of entertainment as possible. And, you know, I mean, it's a fair assessment, I think, to say his priority is not necessarily giving shareholders back a return. It's sort of keeping his sort of lines of credit open so that he has as much options or as many options as possible for future acquisitions. As long as he gets to be involved in every bid, when a company like WWE goes up for sale, if he gets to be involved, he gets to have at least put an offering on stuff

like that. That's what he wants to be. It's an agent's mindset. Whatever is happening, I want to be in the middle of it. We'll continue to keep an eye on that IPO. I'll be very curious to see how the structure is set up, especially between those preferred stockholders and the common stockholders, because I think there might be some key differences there. We haven't talked about Dana White that much. Let's talk about the President, which you feature prominently in your book. Not your opinion of them necessarily, but what does it take to be the silverback of a cage-fighting organization? It's a good question. It takes a lot of different things. I think the one thing,

Dana is a true believer. The thing Dana can't fake is his excitement about fighting. It genuinely gives him joy and that joy gives him a form of insight into you know what will be interesting about a prospect or a one matchup versus another timing for different matchups um and especially in the early days in the mid-2000s when people were still kind of getting re-familiarized with the ufc as a brand again and there wasn't this 90s pay-per-view kind of It was actually heading towards a legitimate sport with legitimate athletes and legitimate skill sets. His enthusiasm was really a very powerful kind of stepping stone. I write a lot in the book about how the UFC had figures that modeled a certain way of looking at fights that for the uninitiated in the public, they could kind of mimic that excitement. They could mimic that jargon.

You know, Joe Rogan would do this a lot, too, where he'd sort of describe fights or use certain types of words. And that became easy for fans to kind of mimic that as they're learning to try and understand the sport on their own terms. Dana White was the same way. He was almost like a proctor. They saw this media spectacle. They weren't sure what it was, and he guided them through into it and helped people become comfortable with the idea of cage fighting as a mainstream sport. He was a ruthless negotiator. He's a very charismatic person. He's very good at drawing fighters to him and giving them a sense that, you know, they were valued, that they, you know, there was a bright future for them. You know, he talks a lot about Tony Robbins and a lot of different sort of motivational

self-help kind of ways of looking at the world. And I think, you know, that comes from a genuine desire to see people succeed. You know, it's not a gimmick, but it's also tied to a sort of business model that runs a lot more functionally uh with the odds of a casino where you know nine people that walk in the door are going to lose and there's only one that's going to hit the jackpot and be the big winner and everyone will be happy for that part you know what who who could you know not be happy for someone that hits a jackpot but the reality of the business the reality of the profit making machine is that you know they need more people to come in and lose than they that come in and win

And it's just not possible in a sport that has six, seven hundred people on the roster at any given time that, you know, they're all going to hit the jackpot. In comparison with Vince McMahon, Abraham Josephine Reisman has a wonderful biography about McMahon. It's called Ringmaster. And one of the one of the common themes of it is that, you know, hate is not a barrier to working with McMahon in any sense of the word. That's why Brett Hart's back working with the organization. But in the case of the UFC, it does seem more intensely emotional. And those emotions drive many of the negotiations and practices of White as a boss. And to his credit, it seems to have worked pretty darn well for him. I also think that there's sort of this yearning that I can't quite explain with, I would say MMA media, maybe observers, that they're almost looking for moral boundaries when they

talk about Dana White. And I think you're going to be consistently disappointed. This is someone who has basically steamrolled fighters for decades. And granted, he's made some of them absolutely wealthy. He's put a lot of money in their pockets. He's created a middle class of fighters that doesn't exist in boxing or any other combat sport, right? But he's also promoting slap fighting which is just people taking turns slapping each other giving them giving them brain trauma but in putting it on tbs um yeah i'll stop there yeah that's true i mean that's that's a you know i mean that's more of a a cultural kind of like truism of the sport but it is true that the fans are always kind of open to and susceptible to a kind of desire to square the moral circle

about like is it really good for us to even be watching this is there you know especially you know I I had my own sort of moments with that you know every every few years you'll just see a fight that's just so purposely violent you know for me the the worst one I think in recent memory was the second Conor McGregor Nate Diaz fight where it it was it just kind of ended as a dog fight where neither of them could beat the other and they were just kind of locked on each other and just you could just feel like they were neither was going to knock the other out but neither was gonna um but they're still doing damage to each other and it's just sort of like you know you don't have to prove this anymore you're both great fighters you're both you can take the pain you

both will never quit you won't break but you're just still smashing each other in the head like How many more rounds? How many more minutes? How many more punches? Especially in a rematch, how deep into the darkness do you have to go? And I think that there's always going to be that sort of paradox in the fandom where you want to see the darkness. You want to see the courage that comes from someone being willing to go all the way down into the last round, the last minute of the fight, their body broken, maybe have a broken bone somewhere, eyes swollen shut, and they hit a knockout punch, come all the way back from behind. to, you know, like Leon Edwards and Kamaru Usman, the second fight, just losing the fight pretty handily and all of a sudden fifth round head kick, like shocks the world. You know, people love that, but, you know, the cost of that is always going to be unsettling. And Dana White, his conviction, his real optimism and his buoyancy, I think, is a real important force in that sort of cultural swirl where he kind of, you know, he'll come to post-fight

conferences and is very caring. Like, we sent him straight to the ER, met, yeah, talked to him, like, you know, we're going to take care of him. You know, he's a very paternal kind of figure. And he's also kind of, you know, a moral kind of beat cop in a way. He's like, this is right, that's wrong, you know. Well, he's also, he's not going to pay for their health insurance. Right. Or give them pensions. Yeah. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

I'm Mary Long. Thanks for listening. We're off tomorrow for the holiday, but we'll be back again on Tuesday. See you then. Thank you.