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The Fertitta brothers, UFC's saviors, cashing out is pivotal moment in history of MMA

Esther Lin, MMA Fighting

While things weren't always smooth, and it seemed there were twists, turns and crises on a regular basis, the story of the Fertitta brothers purchase of the UFC in 2001 for $2 million, and its sale 15 1/2 years later for $4 billion, was the ability to see in a nearly-dead product the potential of major mass appeal.

The original UFC, the brainchild of Art Davie, was about creating a fighting event where the best fighters from different disciplines would battle with almost no rules to see what fighter, and what fighting art, was superior. The original shows were successful, based on over-the-top marketing with the idea that there were no rules and claims the events were banned in 49 states.

Eventually that sensationalized marketing bit them, as in nearly every market, and years later with the expansion, in almost every country, the media decried fights that involved things, such as punching on the ground, or submissions like chokes, that weren't allowed in the boxing world they grew up on. The new UFC, when trying to get regulated in many states and provinces, and in going into new countries, faced those obstacles.

As a strictly pay-per-view event, the sport was on death's door when pay-per-view companies were pressured to stop carrying the events. When the Fertitta brothers purchased the company, the first thing they did was try to clean up its image. They pushed that this was a sport with regulations. Virtually all the current rules were in place before they purchased it, although most states didn't regulate it, and regulation became a key goal. The belief at first was simply that once they could get back on pay-per-view, things would be successful as they were in 1993-97.

But things had changed. The 2001-2004 version of UFC, back on pay-per-view, lost tens of millions of dollars. The original success was novelty-based.  The only reason the sport survived those lean year was because of the deep pockets of the Fertitta brothers. Step one of the turnaround was getting The Ultimate Fighter television show on Spike. It was new, different, and cool to the younger viewers. Pay-per-view numbers exploded. Then, the television world was shocked in 2006 when the company put on a huge fight with Tito Ortiz vs. Ken Shamrock on television, and in the 18-34 male demo, it beat the numbers of several games of that year's World Series. Suddenly, the television industry started to take notice. 

The company's business had its peaks and valleys over the past decade, with the peaks built around marketable stars and big fights. But even in a year when everything seemed to go wrong, like 2014, with a lack of both, the company still pulled a healthy profit. In 2015, as Ronda Rousey and Conor McGregor drew large pay-per-view numbers, the company had its biggest year to date, grossing $608,629,000 and ending with $157,806,000 in operating income.

In short, the deep pockets of the Fertitta brothers saved UFC. Their pockets became even deeper than ever from the financial success of the UFC. And this led to the biggest windfall of all with the sale of the UFC.

For all the controversy and craziness of the sport, Lorenzo Fertitta as CEO, and his calm public demeanor -- and his more publicly volatile partner, White as president -- have steered the ship of enormous financial success.

White will stick around, which was considered a key with every company that put in bids. But the dynamic that built the success, of the two best friends working side-by-side on what started as almost a passion product, will change.

A key part of the announcement that was a surprise to many following the story is the money for the purchase came from an American business. WME-IMG, which had been known to be the front runners in a bidding war handled by The Raine Group. But the names of the different companies that had gotten out, from the Dalian Wanda Group to China Media Capital, to FountainVest Partners of Asia, were consortiums where much of the money was coming from: China.

The financial backers of the new group, and new stakeholders, Silver Lake Partners, a worldwide business that has offices in China, are based in New York. The other major investors, KKR (Kohlberg Kravis Roberts), MSD Capital and MSO Partners, are also New York-based.

The expectation is if the UFC was sold to one of China's business heavyweights, that it would open the door to an emerging financial market. There was the idea that the company's key market, the U.S., was mature, in the sense its popularity level is established. But with the huge population base in China, the potential long-term of a sport that has a natural appeal because so many people like to watch fights, that the sky was the limit.

China is still going to be a clear goal, but the navigation is different for an American-based company.

WME-IMG, headed by Ari Emanuel, are not strangers to the UFC. Emanuel was a key figure in brokering the company's television deal with FOX, which has given them more revenue and more exposure than ever before.

As far as the timing of the Fertittas deciding to cash out, there are different ways of looking at it. Last year's numbers were spectacular and were going to be difficult to duplicate. Both Rousey and McGregor lost their last fights, and there are questions as to Rousey's future, and she brought a unique fan base to the sport every time she fought. The UFC's short-term fortunes are star-driven and there don't appear to be candidates to replace them. With upsets more and more prevalent, the long periods of domination that made Anderson Silva, Jon Jones and Georges St-Pierre into stars are harder-and-harder to achieve. Unlike when the UFC first got on television, championship titles alone don't necessarily create stars, nor guarantee big audiences.

Rumors have persisted during all the sale talks, and this goes back months before ESPN first broke the story, that the Fertittas were interested in being involved in bringing the NFL to Las Vegas, perhaps not as owners, but in building a stadium, or looking to expand their casino business. Their company just purchased The Palms. You can look at the decision as feeling the 2015 success would be difficult to sustain, or the decision to sell had nothing to do with that at all, but simply the timing of wanting capital for business opportunities presenting themselves now.

On the flip side, the UFC and MMA are more established as sports in the culture than ever before. The Jon Jones drug test failure, Brock Lesnar's return, UFC 200 and this sale were all huge mainstream stories. While the UFC is not the NBA in terms of popularity, the analogy that may hold is that the NBA has its periods were huge stars and big popularity, and other periods not as big. But even in those periods, tons of people watch the NBA and it's still a hugely successful franchise.

UFC television ratings are growing at a time when most television numbers are down. Live attendance is solid. Pay-per-view, which is extremely volatile, as UFC shows can do anywhere between 100,000 and 1.5 million buys, are still a significant percentage of revenue. But it's not like the pre-FOX years, where UFC was mostly a pay-per-view business and its fortunes were dependent upon one risky revenue stream.

But the world is also rapidly changing. Television, pay-per-view and streaming technology are going to change in ways that nobody can fully figure out right now. With that, revenue potentials will change.

Years ago, the idea was that if the entire world was connected by the Internet, and you put on a big fight, and you don't need cable partners around the world to distribute it (and in North America, get about a 50 percent split of the revenue), the financial potential to the company was enormous. But we're still not at that day, since the vast majority of UFC's pay-per-view orders come from traditional means, the satellite and cable companies rather than directly from the promotion on streaming services, where they can get the full cut instead a half-cut.

But with that change, piracy also becomes easier.

The big picture is far more than whether Rousey is done, or if McGregor can continue to pull in big numbers. Stars will come and go. Even if we may look back on the 2015 business, and view it as a peak in some ways, past it being the catalyst for the enormous sale price, the future is about things that may have little to do with big fights and their results.

It's more having to do with what happens with television, or other content distributors. The key to the UFC going forward looks to be the value of sports rights fees both domestic and abroad. When the FOX deal is up at the end of 2018, will there be competition for the franchise, whether from ESPN, or another network? Will new distribution models be able to compete with television financially for sports rights? Or will more and more research and knowledge in regard to brain injuries turn the next generation off to combat sports? What will happen with lawsuits and labor issues?

As far as how the company looks to the public, a big question is also, what will happen to White?  While still the corporate face of the company, with the sale, his own fortune has increased substantially. His nine percent of the company would be worth about $360 million at closing. Exact details of his agreement haven't been released, as to whether he took less than that figure to maintain stock, or whether he got a sweetheart deal on the stock because of the belief it was important to the new owners that he stays on board.

White is now an enormously wealthy man who built a business from the ground to prosperity. It is a lock there will be business disagreements on directions between he and the new owners. They may end up with a relationship as good as White had with Lorenzo Fertitta. Or they may not.

He could walk away, probably not soon, and not have a financial care in the world. White is used to getting what he wants and not often getting his decisions overruled. The new ownership is going to eventually place major officers of its choosing in the key top positions. They will likely have more high-level business experience in aspects of their own expertise, but they won't have the fight business knowledge that Fertitta picked up from working in the trenches for 15 years and learning through trial-and-error. This will also play into the dynamics going forward when it comes to settling differences in ideas about direction.

With so much at stake, corporate ownership of a very unique business will change things. There is dealing with fighters, their egos, their management and insecurities and short shelf-lives. There are similarities to the entertainment business and the sports business, but MMA is its own unique entity. It's not football where there are ways to learn, courses to take, experience at the lower level to be gained, before moving up the ranks into top decision-making positions. This is a business where few have learned it from the ground up.

There is the ability to recognize stars early on and give them their platform. A huge part of Rousey and McGregor's success is that White and Fertitta spotted their potential early. But that's only a small part of the equation. Both had great success in winning fights in dynamic fashion. They were also tireless promoters, at least at first, for both themselves and the brand. There is skill in matchmaking, and almost nobody has experience in this unique sport on how to navigate those waters. There is the balance in presenting fights that the public will buy with keeping a semblance of legitimate sports competition. There is the ability to make the big fights, and deal with the inevitabilities of major injures and suspensions changing plans at the last minute. 

From day one, White and Fertitta worked alongside each other and learned together from going through similar battles and experiences. They could jump on deals and make changes in one discussion. In a corporate environment, things change, and have to go through more channels, and more second-guessing. In time, White will be working with people whose experiences come from other businesses, and not the fight business. What works in other businesses won't necessarily work in this one. And what used to work in this one may not work in the same way due to landscape changes. A big part of the future of the company depends of the people in charge and their abilities to coexist. It also depends on charges in the world that they have no control over, and being able to make the right moves a those changes take place.

Another big question is the one every fighter is probably wondering, which has to do with compensation.

The $4 billion price tag alone speaks of how significant a business UFC has become. Yet its fighters earn 12 to 14 percent of total gross revenue, a fraction of the cut of the pie that athletes in most major sports earn. It's the ability to keep fighter pay low that enabled the UFC to be profitable in a bad year like 2014, and enormously popular in 2015. It enabled the owners to line their pockets with huge dividends from those profits.

The relatively low cost of talent in comparison to total revenues, and big margins, got multiple investors into bidding on the product. And they clearly see the potential in building it bigger than it ever was on a worldwide basis. 

While everyone will publicly talk about things being business as usual, that may be the case at first, but much will change. Sports franchises change ownerships all the time, and the differences are noticeable. But this is much bigger, because the UFC doesn't have the stabilization factor of a major sports league with deep-rooted team-related interest.

Make no mistake about it. When it comes to the true history of the UFC, this sale will rank right there with the original concept of the UFC, the Fertittas original purchase and the first television deal with Spike, as the most important moments in company history.

Where it's going was almost unpredictable. Now, it's even more so.

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