Motley Fool Money - 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

Okay, caller one wins court side seats to tonight's game. What? I won floor seats? You did. I've been calling for 13 months. Wait, Chris? Yes, I finally did it. What are you going to wear? Men's Warehouse. They've got today's looks for any occasion, and I need to look like a celebrity.

Don't want to stick out. Exactly. They've got Chill Flex by Kenneth Cole, Joseph Abood, and a tailor at every store for the perfect fit. Congrats. You can stop calling now. Not a chance. Hit any look for every occasion at Men's Warehouse. Love the way you look. 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 Moby 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. This, 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.

So, Art Davy 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. 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 production company and then trying to just slowly sell everybody on it. And at the time, pay-per-view was a huge growth market. Investors were expecting that to be the next big, like, high-margin media sector. In the 80s, it had been all about cable subscriptions.

So people were thinking if a family will pay 20, 30 bucks a month for premium cable television, And they might also pay 10, 15, 20 bucks for premium shows individually. And so it was almost this fantasy of infinite profitability. So there's a huge incentive for pay-per-view companies to start looking for original programming. And now we think of it as just boxing and pornography and, you know, movies, you know, second run movies that are kind of 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. And that was kind of the sweet spot that Art Davy hit with the 1993 launch. But it always kind of had to push the edge. I think what was it? They also tried like street

racing in sort of these like leading edge reality shows. So Art Davy starts that the story is kind of well known. Hoist Gracie comes in, wins the first tournament, this regular every man, proving to the world at that time that Brazilian Jiu-Jitsu is the top martial art. But 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 Fertita brothers in? They were pretty close to bankrupt.

So the company that Art Davy 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. And they were kind of left running the show after all of the legal problems or a bunch of local governments all the way up to the federal government, John McCain really had kind of turned against the sport as this, like, crass, exploitive, you know, human cockfighting. So 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. So in 2000, SEG was, they were scrambling to get money to fund the next show. They didn't even have money for a full year of shows. It was, you know, Rob, Rob Myrowitz, who was running it at that point. He had taken over after Art Davy kind of 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 Fritita brothers who wound up buying the company. at the end of 2000, early 2001. And what's interesting about this as well is, you know, 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. Yeah, you know, that's still a problem with the sport today in a lot of ways where, you know, if you're selling bulk fights, which is what the UFC is in, you know, it's easy to get excited about Chuck Liddell and Tito Ortiz or, you know, Connor McGregor and Nate Diaz or whoever.

But, you know, when you have 12 fights and event, 40 events per year, you know, 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, the UFC had in the early days was it was a tournament. You know, you look back at a lot of the early fighters in the mid-90s. They would come to the UFC as a tournament, this like one night, win, three, in some cases, 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 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 person. and stakes for the individual fights. And that's where it really becomes a kind of like promotional problem in terms of a business.

Like 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 on it? Well, not just that. I think it's like $80, almost $80. Yeah, $85, I think. Let's talk about one of the key figures at the UFC who's actually sort of going to be the helm of the new IPO, the company, the conglomerate between the WWE and the UFC, the ticker will be TKO. And that gentleman is Ari Emanuel. How does he, how does, like, kind of tell me about who

Ari Emanuel is and how he becomes such a key figure for the UFC. Yeah, it's a, it's a tempting question. There's a lot of different versions of the Ari Emanuel story you could tell. The simplest one is, 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 he didn't really have any particular vision at that point. I don't think. There's an interview, I quote in the book, if you go back, they interviewed, I think this is around 1995, and they asked him what his sort of ambitions were, what his big goals were for the future. And he said he didn't really have any beyond just money and power. That was the closest thing that he could kind of come up with for like a personal kind of motivating mission.

And that's really been his life arc in a way. He's just sort of gone from agency to acquisition. Now he started his own agency, which is called Endeavor in the late 90s. And then just steadily built that up. He kind of got a chokehold on the talent business. especially in television. That was where he started television and animation. He represented a really valuable client list in the 90s when television deals were kind of at their peak.

We had like, you know, Seinfeld, you know, the age of the sitcom, the network sitcom where there was just absolute premiums for actor commissions, writer commissions, showrunner commissions. And he sort of like was in the center of all of that. And he parlayed that into, you know, consolidating the agency business. You've, you know, 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, you know, chimera. It's not really clear what Endeavor is anymore, whether it's a fashion show or a bullwriting production company or a cagefighting 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 and saying, how can I help you? How can I help you? And eventually, he persuaded Dana White and the Frititas to let him represent the UFC in its media licensing negotiations. And the way he kind of persuaded them to do that at the time was he promised to get Dana White 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 playwright. to go for boxing. 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 in the in the UFC's on ESPN, which also has sort of become a home of boxing with top rank on there. 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, the apex and training facility, you know, it seems like their strategy is working pretty darn well. Yeah, yeah, absolutely. I mean, it's it's always been a cyclical sport. I mean, you know, if people complain about the sport being in a lull in terms of stars presently with Connor McGregor, not being out with injury and sort of, you know, having his own issues

and, you know, Francis. 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 bucks to watch him fight Michael Chandler? But, you know, people would say the same thing in 2013, you know, after George St. 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 he had the great fights with Ken Shamrock in like 2002. and then all of a sudden, Tito couldn't win a fight anymore. Then it was Chuck Liddell era. And then he started losing. He couldn't win a fight. There's just sort of, there's a continual sort of churn of talent. But, you know, you still have people like Jorge Masvidal. He emerged as a superstar out of nowhere, kind of.

And he had been a long-running presence in the sport. You know, he's been fighting since the mid-2000s. 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 fans. I think that's always going to be there. You can kind of feel it happening a little bit with, you know, this. Israel Adesnia, 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 a knockout artist, not a submission fighter, who's just kind of a smothering wrestler. So it's really, you know, there isn't a game, there's a gambling analogy to the way they deal with the star building, you know, where 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 by commercials for them

on, you know, 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. I mean, you know, Ari famously, he has a lot of doubters. He does things similar to what the Furtitas 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 be able to repay the,

the interest on the debt. And, you know, I mean, it was the same with the UFC acquisition in 2016. You know, 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, like, profit to scrape out of these companies as, as they build up. I think, 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. With domestic ratings, you've seen clear evidence of that. Even, you know, like in the last few weeks, people have been talking about how low the ESPN ratings are for the Connor McGregor Ultimate Fighter series. just launched. And, you know, those are just linear cable. That's not the ESPN plus streaming ratings. There may be a substantial audience divide there, but like, you know, 300,000 viewers for a Connor 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 there of Chuck Liddell and Randy Couture and you know, Brock Lesnar, you know, they were getting you know, regularly two, three, four million viewers per fight night, you know, the some ultimate fighter episodes broke two million two 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, you know.

So just for a little bit of context, the Fratida brothers were sort of the longtime 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 an endeavor have been fairly disappointed. While revenues grown significantly, the stock went public in 2021. 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 with, I would say,

With Emmanuel's leadership, you often see these deals such as boosting earnings, but only for the sake of hitting maybe bonus part, short-term bonus payments for the owners of the company. Yeah, absolutely. And I, you know, I'm not sure he has a grand vision either other than, you know, keeping his, the channels for investors open for, you know, institutional investors to fund whatever his next acquisition is, or that'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, 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. And as long as he gets to be involved in every sort of bid and every, you know, when a company like WWE goes up for sale, if he gets to be involved, he gets to have a, you know, at least put an offer in on stuff like that. That's sort of 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, opinion of them necessarily, but what does it take to be the silver back of a cage fighting organization? Yeah, it's a good question. It takes a lot of different things.

And I mean, I think the one thing, Dana's a true believer, right? 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 one matchup versus another timing for different matchups. 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. There wasn't this 90s pay-per-view kind of freak show. It was actually, you know, heading towards a legitimate sport with legitimate athletes and, you know, 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. Joe Rogan would do this a lot too, where he'd sort of describe fights, or use certain types of words. That became easy for fans to kind of like mimic that as a way as they're learning to try and understand the sport on their own terms. And Dana White was the same way. He was sort of, it was almost like a proctor as people were they, you know, they saw this sort of media

spectacle. They weren't sure what it was. And he kind of guided them through into it and kind of helped help 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 they were valued, that there was a bright future for them. 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 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 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 person, you know, 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 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 Reesman has a wonderful biography about McMahon. It's called Ringmaster.

and 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, you know, Brett Hart's back working with the organization. But in the case of the UFC, it does seem more intensely emotional. And that absolutely, 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 yearn. 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 slapfighting, which is just people taking turns slapping each other, giving them brain trauma,

and putting it on TBS. Yeah. I'll stop there. Yeah, that's true. I mean, that's, you know, I mean, that's more of 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? good for us to even be watching this. Is there, you know, especially, you know, I had my own sort of moments with that. Every few years, you'll just see a fight that's just so purposely violent. For me, the worst one, I think, in recent memory, was the second Connor McGregor, Nate Diaz fight, where 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 going to, but they were 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, like, 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 it's sort of 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, eye swollen shut and they, you know, hit a knockout punch, come all the way back from behind to, You know, like Leon Edwards and Kamara 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, man. Yeah, talk to him. Like, you know, we're going to take care of him. You know, it's a very paternal kind of figure. And he's also kind of, you know, a moral kind of beat cop in a way. It's like, this is right.

That's wrong, you know. So 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 ourselves 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.