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Winners, losers in UFC’s landmark pay-per-view deal

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2017 LACMA Art + Film Gala Honoring Mark Bradford And George Lucas Presented By Gucci - Inside Photo by Neilson Barnard/Getty Images for LACMA

It’s was only a few months ago when television commercials featuring famed boxing ring announcer Michael Buffer and the sport’s leading active North American drawing card, Canelo Alvarez, talking about the $9.99 price tag of DAZN and how it would be the death of pay-per-view.

Given that the UFC in 2018, did an estimated 5,515,000 pay-per-views buys, which generated approximately $185 million for the promotion, including the biggest show in company history in October, the idea that pay-per-view was anywhere close to dead seemed laughable.

And to a degree, the new deal announced Monday with ESPN+ and UFC seems to guarantee nothing of the sort will happen until 2025. But the announcement was still a seismic shift in the industry. The big winner in this deal appears to be the UFC, which, in getting a guaranteed flat fee from ESPN+, has an insurance policy against future declines in pay-per-view or the inability to create new major draws who will have the drawing power of current stars like Conor McGregor or Jon Jones.

While the exact flat fee wasn’t released, industry sources have indicated the number is in line with what UFC has been earning on pay-per-view the past few years. A second component of the deal is that if revenues increase past that average, the UFC gets a cut of that increase. The big losers is the television pay-per-view industry, notably inDemand, DirecTV and the Dish Network. The three companies that controlled the pay-per-view industry for decades, now, with the exception of a few boxing shows with secondary draws, and pro-wrestling fans who haven’t signed up for cheaper streaming services, are dead when it comes to the live event business.

John Ourand of Sports Business Journal reported the deal was precipitated by the DirecTV/UFC negotiations after the deals with all three companies expired at the end of the year. DirecTV wasn’t marketing UFC 234 at all, and until just days before the show, wasn’t even planning on carrying it until both sides agreed to a last-minute deal for just the show. That carried on through UFC 235 earlier this month.

But with the deal, all three are cut out immediately, as ESPN+ subscribers will be the only ones who can order the show inside the U.S. starting with UFC 236 on April 13 in Atlanta.

According to Ourand, the UFC was pushing to change the revenue split from the previous 50/50 to a 65/35 split. The UFC’s position in theory felt stronger than ever, with stars like Alvarez and Gennady Golovkin being pulled from pay-per-view by the huge guarantees from DAZN. The UFC gave the television pay-per-view business steady monthly events that weren’t compromised by them streaming for a much lower price, like has been the case with World Wrestling Entertainment since 2014, which put shows formerly priced at $60 as part of its monthly streaming package that goes for $9.99 monthly.

DirecTV wouldn’t budge off the 50/50 split. Ourand also reported that UFC and inDemand, which handles the pay-per-view business for Americans with traditional cable television providers like Comcast and Verizon, had come to an agreement on a new deal. However, UFC had yet to sign the contract. The new deal only applies to the U.S. Pay-per-view will remain the same, largely ordered through cable companies, in Canada and Australia.

For the UFC fan base that has adapted to streaming, the change is minor. The pay-per-view price is down from $64.95 to $59.95, but ESPN+ is a $4.99 monthly service, which makes up the difference. Historically, there are significantly more transmission issues with streaming pay-per-view than with television. Even of late, when the UFC has offered pay-per-views through various streaming methods, as well as through television, the breakdown is usually 75 percent or more order the shows on traditional television.

There are some people who are simply more comfortable with television that won’t order shows on the Internet, and there are people in rural areas who don’t have a strong enough stream to handle those type of live events, although that figure is likely dwindling. Still, with the WWE example, until the company stopped reporting its pay-per-view numbers more than a year ago, there were still about 20 percent of the previous level of pay-per-view orders still ordering from television providers at $59.95 for regular shows and $74.95 for WrestleManias, rather than the $9.99 monthly charge for the streaming service.

Since the UFC is going to be exclusively on ESPN+, and only for subscribers to the service, and not with a significantly lower price tag, that percentage that has continued to order pay-per-views are not going to be serviced. On the flip side, perhaps those losses can be overcome because ESPN itself, with a heavy expenditure on buying the rights, has a strong economic incentive to market the shows harder than ever. There is likely no single entity in the U.S. that can raise the potential value of a live sports event like ESPN can by giving it credibility and importance as a major sporting event based on coverage.

Still, ESPN is assuming the risk if UFC future shows don’t deliver the kind of numbers they have done in the past. And the pattern of pay-per-view for the last few years is far less consistency than in the past. UFC fans are more willing to skip a show if the line-up isn’t interesting. But if there is a big main event, they are doing bigger numbers than ever before, as evidenced by most of the biggest UFC shows in history being since 2016.

With pay-per-view being such a major revenue stream for UFC, in fact, the biggest revenue stream until television rights fees just recently overtook it, it created an uneasy feeling. With Endeavor heavily in debt regarding the $4 billion purchase price of UFC, the volatile nature of the “feast-or-famine” pay-per-view business was an issue. Even more, that business was more reliant than ever on the biggest stars.

Getting a guaranteed money deal in that realm makes the companies who helped finance the UFC’s purchase more at ease. In addition, if Endeavor does go public, the stock market will look at guaranteed monthly income far more favorably than income that is unpredictable and widely varying. It’s unclear what this will mean for the top UFC fighters who had pay-per-view points in their deals. If no longer having a television component for pay-per-view leads to decline — and it will, the unknown being how much — that means lower bonuses.

In addition, guaranteed income from the big shows over the course of the year hurts the leverage of a McGregor or a Jones. They still will have leverage to cut strong deals because ESPN+ will want them fighting as much as possible, given how much they are paying for big shows. But the leverage won’t be nearly as much as they’ve had in recent years. It’s less concerning to UFC to put together a show, like UFC 237, with a Rose Namajunas vs. Jessica Andrade main event, which would likely not do well under the previous way of doing business. Now the major income from that show would be guaranteed.

It also creates a situation where the UFC no longer needs those type of draws, nor will they be hurt significantly if stars leave the sport and aren’t replaced by equal level stars.

“Essentially, this deal removes the inherent risk of month-to-month PPVs,” an industry source said. “Some PPVs break records (Conor) and some don’t do well because main events get canceled. This deal removes the risk/unpredictability of that model. Now ESPN can market the hell out of these PPVs and drive the sales.”