Looking at three seemingly random events that happened in the world of the UFC last week, I made the argument that the UFC was at an inflection point and was making key changes to their business model in response. Luke Thomas challenges my assertions in the following video discussion. Video and transcriptions of excerpts follow (sorry for the sound and video being out of sync):
Nate Wilcox: This decision to cancel that pay-per-view, that's' what tells me they know they're at an inflection point and they're looking back at the results of the last two years of their business and that they've made some changes which is good. That's the sign of a winning fighter, winning team, winning organization is to make adjustments mid-game and what you saw in 2010-2011 was a steady erosion in their pay-per-view numbers. Going back to 2007-2008, you had a period where they had a floor of 360,000 buys for the crappiest, weakest foreign pay-per-view they put up there. I mean, Rich Franklin vs. Wanderlei Silva at UFC 99 got 360,000 buys.
Luke Thomas: It would never do that today.
Nate Wilcox: No, two years later they'd be happy to get 360,000 buys for a title fight card, maybe a multi-title fight card. Now you look at Frankie Edgar-Gray Maynard getting 225,000 maybe less?
Nate Wilcox: The pay-per-view is where they get 75 percent of their revenue so that's very big, especially for a company that's got a lot of debt overhung. They've got a lot of payments to make and they've pushed their revolving credit almost to the limit so their cash flow has always been tight. This is a company that lost 43 million dollars before they were a hit on Spike TV and they've never really gotten out of that financial hole. I mean, the Fertitta brothers and Dana White have apparently cashed out a lot of money for themselves, but they chose not to put that money back in the business and that leaves the business with that overhang of debt.
Luke Thomas: Explain the debt thing for people that may not know. They'll say, "Well they did put stuff back in the business. The shows are better than ever in terms of the live event production. Fighters make more than ever, that's gotta count. The UFC product itself in terms of the online digital quality and the infrastructure, just on the PR side, I know for a fact, they've built out the infrastructure in an enormous way," so when you mean, "they still have that debt," what is that floating debt that you're talking about?
Nate Wilcox: Well they took out a 500 million dollar loan a few years back and they have not paid down the principal of that. They've been making interest payments and they've got a 50 million dollar line of revolving credit and according to the Standard and Poor's report or whatever, they've drawn that out almost to the limit, like to within the last five million dollars of it and that's very important for a business because that's how businesses pay their bills is with revolving credit. Businesses aren't like your household accounts.
You don't just sit there and go, "Well I've got this much in my bank account. I'm gonna just spend that and not any more," businesses have payrolls, investments and expenses. It's very common for businesses to have revolving debt to use to pay their payrolls and any ongoing expenses and they've been very good in investing in the business. I'm not saying they haven't invested in the business. They spent a fortune on lobbying New York, trying to get it regulated in New York State. They spent a fortune trying to expand into Europe. They expanded into Australia. They've expanded into South America. They dabbled into the Middle East with Dubai.
Luke Thomas: And of course North America, Canada as well as Mexico.
Nate Wilcox: They haven't done an event in Mexico, but they're pushing the product in Mexico. They're laying the groundwork. If Mexico were safer, It hink they would have already gone to Mexico but the situation is such that they've invested into the cost of growing the business but they could have taken the money that they paid themselves with, and by that I mean I'm talking Frank and Lorenzo Fertitta and Dana White and put that back into service the debt and they possibly, no one knows because it's a private company, could have substantially cut down the debt overhang but they haven't done that.
They've been cashing out as they go according to reports I've read from MMAPayout and other places so what that means is there's significant pressure on them to remain at a high profitability. That's all I'm saying. They need to keep the pay-per-views at a nice profitable level and the reality is, they could drop down to 100,000 pay-per-views and be profitable for all but the biggest pay-per-views. As long as they don't have a Brock Lesnar or a GSP on the card, they can do quite well for themselves at a much lower level of pay-per-view. The problem is that the fighters have come to expect ever increasing returns and higher pay-offs on the pay-per-views and you get a better caliber of athletes when there's more money to it so they're kind of on a treadmill where they need to keep growing to do what they do. The growth has been built into their business plan so it's not like they're a mature business like the WWE that is in a position to deal with declining pay-per-views.
Nate Wilcox: The decision to start testing athletes when they sign the contract shows that they're sending a signal to their athletes like, "Look, we're not gonna play cute. If you're roided balls out, we're gonna crack down. It's not just the incompetent, underfunded athletic commissions you have to worry about. We too are going to be watching you guys and trying to crack down on the steroid use."
Luke Thomas: I'm a little all over the place on this one. First of all, the test, I really only believe that randomized drug testing works although what's funny about it is I'm kind of conflicted. I also feel like this test is like the ultimate dummy test. You're gonna catch the absolute tards on this one because it's essentially no different than a drug test for your employer you may have should you work for the government or somewhere that's sensitive to those issues and it's easy to skate around.
Nate Wilcox: The decision to run the op-ed in the Las Vegas Review Journal after SOPA and PIPA had already been pulled and the bills are not moving forward and the response to that, the reason I bring it up in this context is the fan response to that, if you remember our last instance where we talked about UFC versus ESPN and the way Dana White is so successful at getting his fans to rally around him whether he's going against ESPN or going against a rogue fighter like Ken Shamrock or Tito Ortiz, almost inevitably, Dana White and the UFC get the support of the fans overwhelmingly.
However, the SOPA instance, not only was their website hacked, but this was one of the only instances where you see the MMA media and the fans not taking the UFC's side on this and to me this shows you've got two good steps where they're adjusting their game, they're recognizing a new environment where they need to make adjustments but this third one, they walked into a hornet's nest, they stepped on their dick. However you want to put it and it didn't go well and they got their website shut down and it got a negative response and for somebody that's done public affairs at the corporate level for a decade and a half, I know something like an op-ed in a major newspaper is something way in advance.
I guarantee they scheduled that op-ed to appear long before the SOPA blackout happened on the 18th but they didn't adjust it after it was pulled. I've never seen a company come out in favor of unpopular legislation that's already been defeated. I'm mean, what the fuck? There's no point in doing that. That gets you nothing. The only possible benefit I can see from running that op-ed in the paper is saying, "Hey, Harry Reid, we appreciate what you did on behalf of us and the content industry but there are ways to do that without endorsing legislation that Harry Reid himself has already pulled. There's no point. It's one thing to be the first man over the line and get shot down, but there's no point in being the last man to die for a mistake. It was just stupid. It was bad public affairs practice all the way around.
Luke Thomas: One, I read the op-ed by Lawrence Epstein. Dana's not mentioning SOPA, not even on twitter. Dana realizes this fucking issue is toxic and they don't want him or Lorenzo Ferttita, two important faces of the company, Dana moreso than Lorenzo obviously, even addressing these issues and they'll address any other issue like fighter pay but they don't want them touching this one and I don't blame them at all. That would be my first recommendation, do not mention SOPA publically at all, even when asked and Lawrence Epstein is a super important figure in Zuffa but as far as fans are concerned, he's a faceless name basically so there's that. Let me tell you, the op-ed, Lawrence Epstein is a really bright guy but it's a bad op-ed. It's basically an entire defense saying piracy is bad and therefore because piracy is bad, therefore we support SOPA and SOPA is the mechanism to solving the bad things that piracy causes namely killing innovation and joblessness.
First of all, the idea that piracy does that is facetious to begin with but even if it did, SOPA is not the answer. Darrel, representative Issa's OPEN act is much better in that regard and we saw this with the Megaupload situation that in conjunction with New Zealand authorities, we can go over to that country, seize that fucker's assets and try him on American law. The idea that we now need SOPA, think of the power you can add in doing that and now you have more power. SOPA has nothing to do with stopping piracy. It's about, as [Clay] Shirky pointed out, raising the cost of moderating amateur usage in communities, making it so onerous that they get out of the business altogether. That's what it's about. Basically it's about these Hollywood and recording industries stopping you, the amateur, from producing and basically just becoming a consumer.
Nate Wilcox: Dana White did err on the side of responding to this indirectly when he tweeted about the website being hacked and was very dismissive. He was like, "I'm not in the website business. Who gives a shit?" Dude, you're in the website business. You sell pay-per-views via your website. Your website has credit card information stored on it. Now the attack was just a redirection, when you typed in UFC.com it sent you somewhere else.
Nothing else happened to their website, it just told DNS routers, "Hey, look at this server if you want to find UFC.com," and it wasn't UFC.com. Their website information, there's no reason to believe that was ever threatened however if you're a customer of the UFC, and you see the website's down, you tend to be a little concerned and when the response of the company President is, "I'm not in the website business. Who gives a fuck?" Dude, you're in the website business. You're doing business in the 21st century, you're in the website business and that was bad public relations on Dana White's part and that got him into, because the hacking was in response to the SOPA editorial, that drew Dana White into the issue and this is something where Dana White for the first time found himself against his fans who are on the side of someone they have an even closer relationship with and that's Google.