UFC’s Dominant Position — Easy Answers About Fighter Pay
By: Aarish Patell
January 19th, 2011
'It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses.'
~Gordon Gecko, Wall Street (1987)
Michael Porter, at the Harvard Business School in 1979, wrote a book called ‘Competitive Strategy’, a brilliant work that can help understand who has strong market positioning and negotiating power within an industry. ‘Porter’s Five Forces’ explains the dynamics between a business, like the UFC, and its competitors, suppliers and buyers.
Of particular interest for the UFC is Force #5, which focuses on the relationship between the fighters and the organization. Understanding the market provides simple, obvious answers that explain the issue of fighter pay.
Force #1 – Threat of Entry of New Competitors. We all know that MMA is growing very quickly. With all the profit potential, why don’t a plethora of new firms surface to share the UFC’s profits? This force focuses on why a firm can or can’t keep its share of the market in an industry over a longer term horizon. Below are the key factors that create a well-established position for the UFC.
Leading Brand Name: The value of a brand name, whether it’s Coca-Cola or the UFC, can be a firm’s most valuable asset. Consumers tend to make unconscious decisions (in what is called a ‘mindless state’), as they are bogged down by a hundred other daily decisions. Casual fans tend to flock toward what they know. A brand name is a firm’s promise for quality and consistency. The brand name is reinforced by the Octagon, Dana White’s shiny bald head, and the UFC logo. Try to mess with the Octagon or the logo and expect to be sued.
Various Relationships: I don’t know much about the UFC’s relationships, as they keep them pretty secret. I do know that they have created relationships with various state commissions and they have grown internationally. Also, they seem pretty well established in Las Vegas, particularly in their ability to land venues. All this is hard to replicate.
Experience: We’ve watched all the errors. Elite XC betting its business on Kimbo Slice, causing them to face plant. Affliction attempting to pay its fighters like boxers, leading to massive losses. Events require a lot of investment, and one or two flops can mean the end of a promotion. The UFC knows how to turn a profit, and it has already seen itself through the worst of situations.
Expected Retaliation: The UFC has made it clear that it will aggressively squash competitors that irritate them. Dana White will publicly call the competitor’s best fighter ‘overrated’, and the UFC will schedule an event on the same day as its competitor’s events. This type of aggressive retaliation keeps people from even wanting to try to begin with.
Verdict – UFC pretty much owns this one - +2
Force #2 – The Intensity of Competitive Rivalry. An industry can really lose value when the competitors decide to just duke it out and compete on price until no one is making much of a profit. This happens particularly in industries that are slow growth, with products that aren’t really differentiated. Think cement or housekeeping services.
The dynamics of the MMA industry don’t point toward competitive rivalry. The UFC hasn’t resorted to any sort of price cutting on its PPV events or ticket fees in order to restrict competition. It has instead looked to brand and differentiate its product through marketing (advertisements, expos and The Ultimate Fighter).
Verdict – Neutral- +0
Force #3 – The Threat of Substitutes. The easier it is to substitute a product, the less valuable it is. Products that are easily substitutable are cane sugar or whiskey.
In the case of the UFC, I’d say its main competitors aren’t traditional sports (baseball and football) as much as professional wrestling and boxing. I believe people do make decisions between boxing and UFC, compromising the UFC’s profits in certain instances. As much as I hate to admit it, given the UFC’s shifting fan base, I would say the same about professional wrestling.
The UFC works hard to differentiate itself from boxing. The UFC continually mentions MMA’s more dynamic striking, and it was thrilled to invite James Toney to be sacrificed in the Octagon as proof that UFC beats boxing. It doesn’t really mention the WWE, as it sees itself as a real sport, but the UFC knows and respects the power of the WWE.
Verdict – The substitutes aren’t as daunting as other products, but the UFC doesn’t have any particular advantage – +0
Force #4 – The Bargaining Power of the Consumers / Buyers. That refers to you, I, the bars, and whoever else purchases PPVs. Do we get a say in how much they charge?
One major way someone could get the UFC to budge on its PPV prices would be if a certain person or bar bought a significant portion of the PPV revenue. For example, the chain of Hooters restaurants may be able to negotiate a deal. You or I get nothing.
Verdict – the buyer has little to no power over the UFC and its pricing - +1
Force #5 – The Bargaining Power of Suppliers. The suppliers are anyone who supply inputs that are necessary to the business. In this case, like most any service industry (like accounting or consulting), the fighters are the main inputs or ‘suppliers’. In these cases, who gets to keep the lion share of the profit, the employer or the employee? It’s pretty simple.
If you are someone who realistically puts butts in seats, then you have bargaining power. You are profiting the UFC more than just another body fighting under their brand name. If that’s the case, you’ll get the UFC to budge in negotiation. Few guys, like Chuck Liddell, BJ Penn, Randy Couture, GSP and Brock Lesnar have achieved this level.
However, an up and coming fighter is not only anonymous to the casual fan but also has hundreds of other quality fighters nipping at his heels desperately wanting the same spot. Most fighters don’t have a plethora of other options, and fighters usually are desperately to compete. From a supply / demand perspective, the UFC could probably get these guys to fight for free, as the fighter will see the first few fights as a ‘free opportunity’.
Verdict – Because the UFC has the majority of the bargaining power against its fighters, it will ultimately keep the vast majority of the profits - +3
In order to curb any negative perceptions from the public, the UFC is adamant about keeping pay scale confidential. It also likes to make a big show out of fight bonuses and it likes to hand out money on TUF. In particular, it gives out hard cash, because that has a psychological impact on the viewer. It wants to create the perception that it pays more than it really does, particularly to the lower-tiered fighters. TUF winners get ‘six figure salaries’. We don’t know what that means exactly, but to the average person, that sounds like a lot of money. Dana White mentions the fighter’s sponsors whenever possible. Anything to detract from the fact that they don’t pay their fighters much relative to their profits. It’s nothing more than brilliant marketing and public relations.
Even top quality fighters are in the same boat. Fighters who are well-respected and have accomplished a lot, but aren’t popular enough to fill seats, can find themselves upset. The problem is that money runs this business, not some sanctimonious force that decides makes decisions based upon right and wrong.
It may sound like the UFC is evil. That’s far from the truth. In business, there is no moral judgment. Executives are understood to pursue any legal (or sometimes illegal) action that’s in their best interest. Fans may judge the UFC, but if the fans found themselves in the UFC’s position, I’m sure most of their views would do a ‘180’. The UFC is a very well run company. I respect their business prowess, and their international expansion is worthy of an academic case study.
From a personal standpoint, I do wish the fighters were paid more. Upcoming fighters have to struggle with all sorts of fees (managers, training camp, medical, etc.) and they usually have kids to support. Josh Haynes comes to mind. Even sadder are the older fighters, like Ken Shamrock, who allow themselves to be punching bags for cash.
At the end of the day, it’s just business.
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Originally Posted by SPX
