The Bottom Line: Perverse Disincentives

By: Todd Martin
Jun 9, 2020

Editor’s note: The views and opinions expressed below are those of the author and do not necessarily reflect the views of Sherdog.com, its affiliates and sponsors or its parent company, Evolve Media.

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When the Ultimate Fighting Championship reached an agreement with ESPN in March 2019 for ESPN+ to be the exclusive provider of UFC pay-per-views, it was a deal that boded well for the world’s top MMA organization. It ensured that the UFC would get a big guaranteed payday for each pay-per-view event, regardless of how many people purchased it. That protected the UFC for years against any downturn in business with massive, fully protected annual revenue so long as it kept putting on events. That’s a big part of why the UFC pushed so hard to keep running in the middle of the coronavirus pandemic, even when other sports leagues shut down.

Other beneficial aspects of the arrangement that were less talked about were some positive incentives the deal created. Ever since around the time of UFC 71, the outsized role ESPN has in promoting UFC events has been clear. When ESPN heavily promotes individual events through its television and internet outlets, the shows tend to do much better. The ESPN-UFC PPV pact gave ESPN every incentive to make UFC pay-per-views as big as possible because ESPN was the party taking the risk on those pay-per-views. More than the fighters and the UFC, ESPN stood to gain or lose the most if a pay-per-view really hit or flopped. Economic incentives are of paramount importance, and the deal worked to the UFC’s advantage in that regard.

Of course, there was a key potential problem in that setup. ESPN wanted the biggest possible pay-per-view events, but the way to make bigger fights is almost always to spend more money. The UFC is responsible for spending the money to make its pay-per-views as big as possible, but when it comes to pay-per-view revenue, ESPN is the one that profits significantly more or suffers significantly more depending on how well the event does.

That largely did not appear to be a problem for the first year of the deal. The UFC was thriving and, by and large, the biggest fights were still getting made. It was then that the pandemic came along, and all of a sudden, things changed. Every business became concerned with its fiscal outlook given all the uncertainty, and this was particularly important for the UFC because its parent company Endeavor has heavy debt. The biggest variable revenue stream for the UFC had been live gates, and in a blink, profits from those went down to zero. It was just a few months ago that UFC 246 did over $11 million in tickets sold.

It’s no accident that the NBA, with its fortunes tied more to television revenue, has been able to reach an agreement with its players on a return with relative ease, while Major League Baseball, with larger stadiums, more games and its live gates playing a much larger role in overall revenue has struggled mightily to move towards a deal. The lost ticket revenue is the biggest strain for all sports this year.

Those live gates in the last year have been the UFC’s biggest incentive to put on the biggest possible pay-per-view fights. They are now gone, and with them, there’s a significant perverse disincentive for the UFC to not put on the biggest pay-per-view fights. The fighters want to be paid what they are worth to a big event, but that additional value will go to ESPN rather than UFC. When it comes to the biggest events, the UFC would be spending more money and all that additional revenue would go to ESPN.

Make no mistake, that is why Jon Jones, Henry Cejudo, Jorge Masvidal and Conor McGregor are all fighting with the UFC publicly and/or threatening retirement at the same time. Don’t be surprised if these issues pop up with other star fighters in the near future, as well. They all want to get paid for the business they bring in, and the UFC has less incentive than ever to ante up—by a wide margin.

Compounding the problem is that ESPN and the UFC have a contract that lasts through 2025. The primary reason the UFC would want to put on costly fights that mean more to ESPN than the UFC is to keep ESPN happy with the arrangement. Given that the UFC doesn’t have to worry about negotiating a new deal for many years, that’s hardly an imminent threat. The UFC can figure it’ll keep costs down now and worry about making ESPN happy with big shows later down the road.

For those of us who want to see the biggest possible fights, what can be done to create stronger incentives for the UFC to make them? Unfortunately, there is no obvious answer. Asking ESPN to pay even more to put on the biggest fights in the midst of a terrible financial climate when it was implicitly understood the UFC would be doing that anyway doesn’t sound like a pleasant conversation.

It may come down to waiting out top fighters when it comes to their demands, but fans don’t want to wait a year to see Jones or Masvidal fight again. It’s also possible fighters may agree to come back but only against softer competition, as has happened in boxing. Jones vs. Jan Blachowicz is better than nothing, but it’s not better than Jones vs. Francis Ngannou. Sadly, unless something significantly changes, the tumult of the last week in MMA is likely to be a harbinger of things to come. The economics of the sport are working at cross purposes with running the best fights. Advertisement
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