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ESPN turmoil could impact UFC’s long-term economics

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UFC Guilherme Cruz, MMA Fighting

What may be the most important news story so far this year regarding the UFC's long-term economics was a major media story that on the surface appeared to have absolutely nothing to do with the promotion.

The story is the extensive layoffs at ESPN, shining a light hard on the economic condition of the station that for years seemed to be almost printing money.

Ever since WME-IMG paid nearly $4 billion for UFC ownership, with much of that money borrowed, the company started making its own substantial cuts. The most publicized ones were the dumping of several well-known executives, many of which played a substantial role in getting the company to a level where a slew of bidders were willing to pay $3 billion and at least a couple were willing to go to $4 billion or higher.

But after a strong 2016 on almost every front, this year the UFC has struggled. Pay-per-view is way down. Ratings are way down. Some would say that the Fertittas knew the company had peaked and unloaded it when its value was perceived as the highest. Certainly, repeating the economic success of 2016 looked difficult as the company was built on two of the biggest stars it ever had, Ronda Rousey and Conor McGregor. If one or both weren't fighting regularly in 2017, there was nobody on the horizon who could even remotely come close to filling their shoes.

We are now into the fifth month of 2017 and there has yet to be one megafight announced with an official date on paper.

But whether WME-IMG made a wise investment in the long run has nothing to do with what the company has always been reliant on, which is creating big stars and big fights, and selling them directly to the customers on pay-per-view. While that is still important, WME-IMG was banking on the idea that, like the major sports, the UFC will be carried by getting a major increase in domestic television rights.

The UFC's exclusive deal with FOX, which expires at the end of next year, is believed to peak at less than $150 million per year. WME-IMG bought in based on the idea that in the current landscape it could garner a huge increase, like the other major sports have gotten. The key in getting that $150 million figure to $250 million, or even $400 million, the latter figure that was being bandied out for the next contract at the time of the sale, brought on by multiple bidders.

Aside from FOX, ESPN would be on paper the best fit to bid. ESPN and FS1 are rivals, and the UFC is one of FS1’s strongest consistent properties.

The ESPN cutbacks last week was the result off people moving away from cable or ordering cable in smaller bundles that don't necessarily include all of the major stations. ESPN has gone from 101 million homes at its peak to 87.4 million, which means everything when its primary revenue stream is the amount of money the cable and satellite distributors pay them per customer that gets the channel.

ESPN already has sports commitments on the books for years to come at more than $5 billion per year, between the NFL, baseball, NBA, soccer and college sports. Will ESPN be bullish on adding a new commitment beyond what it already has while looking at continued losses of homes, since there’s no sign the end of the decline is anywhere in sight?

Most of the major sports contracts expire between 2021 and 2025. It means anyone wanting to add a major sports entity to bolster its network in the next few years would have the UFC as the strongest option available.

That was also used as a theory, with companies wanting to lock up major sports properties long-term, for the UFC being in a great position for a rate increase.

Among the expectations were either a bidding war with ESPN, FOX, and perhaps others, for the contract would lead to a big increase.

To understand what that means, if the UFC can get such a deal for more than $250 million per year — let alone more — the added revenue would be enough to make up for a potential major decline in pay-per-views in 2017.

But with consumers, and particularly younger consumers, becoming less reliant on cable or satellite television, revenues for the stations paid by subscribers could take a hit. ESPN hasn't felt the hit as bad as it could have. While it has lost a huge chunk of homes, it has increased the price for the people who provide the cable. The continued price increases are passed on to consumers with higher cable bills. It's the higher cable bills that are leading to people cutting the cord, or younger people never bothering to have a cord in the first place.

This could affect things, especially if the key sports stations fear for their future, or have long-term commitments from major sports on the books that they can't get out of. With long-term high commitments and a declining subscriber base, ESPN, or any sports station, may not be willing to bid high for a new regular sports franchise.

But if stations feel they need more live sports as the last savior of traditional television, the UFC may still be golden next year.

It is the answer to those questions that will largely determine the level of economic success for the new UFC regime going forward.