The largest acquisition of a sports organization does not involve the NFL, NBA, MLB, NHL, EPL, La Liga, or Bundesliga. It involves fighting. Monday, WME-IMG announced that it was purchasing Ultimate Fighting Championship (UFC) for a reported $4 billion. It is almost the same price of the Los Angeles Dodgers and Los Angeles Clippers, the two previous largest sports acquisitions, combined.
So how did brothers Lorenzo and Frank Fertitta turn their $2 million investment in UFC in 2000 into a return on investment of 2,000 times in 2016? The Fertitta brothers and UFC President Dana White made a series of decisions that leveraged new forms of media to build a highly devoted, engaged audience willing to pay a premium for more traditional service offerings.
For example, the UFC created called The Ultimate Fighter for Spike TV in 2005, a reality contest show that provided a “six-figure” contract for the winner. At the time, there were few reality shows focused on sports. Boxing had already moved away from cable and broadcast television and instead relied on pay-per-view fights to generate most of its revenue. The UFC made a bet that the more exposure it could gain to its target audience, males 18-34, the better. One excellent way to gain that exposure was to create a show for a channel designed to target this exact demographic.
In addition, the UFC made early, significant investments into social media. White is famous for engaging with people on many different social platforms with content authentic to his direct (and some would say confrontational) personality. White’s openness to communicate directly and authentically with fans and the media was different than how other sports executives engaged with their audiences.
Using innovation and newer communication channels largely accomplished what the UFC hoped for in maximizing the exposure of the sport. With a large, highly-engaged audience the UFC was able to more effectively monetize traditional revenue streams, including charging $245 (on average) for live events in 2014 and making much of its current $600 million annual revenue from pay-per-view events. In addition, a new media rights deal with Fox Sports is projected to be worth $200 million per year starting in 2018.
Some of the implement of this strategy was not fully by choice. The UFC was close to filing bankruptcy in 2005 when The Ultimate Fighter launched. The show was an attempt to save the business. The main way Lorenzo Fertitta and White persuaded Spike TV to broadcast The Ulitmate Fighter was for UFC to pay for all of the production costs. However, the result of this strategy came to fruition with the $4 billion purchase.
ESports has closely followed UFC’s path to success in the way it has used new communication channels to build its audience and is now starting to use this large, highly-engaged audience to monetize more traditional sports revenue streams. In two recent episodes of the StartUp podcast, the Twitch co-founders shared that they discovered a large portion of their audience was using the live streaming platform to watch people compete against each other in video games. Even with the success of YouTube, live streaming was not considered a mainstream communication channel when the original company began in 2007. However, eSports players innovatively used live streaming channels, like Twitch, to build large, engaged audiences that would spend hours watching them compete at very little cost.
Once eSports athletes built audiences through new communication platforms they were able to monetize more traditional sponsorship, in venue, and television revenues streams. These athletes have built large sponsorship portfolios with companies including Intel INTC +0.89%, Coca-Cola , and Nissan Motor becoming heavily involved. ESports competitions have been selling out large sports venues, including 40,000 people coming to Seoul’s World Cup Stadium to watch the finals of the “League of Legends” tournament in Korea in 2014. TBS began broadcasting the ELeague this May with teams competing on larger-scale cable platform for the first time through a deal with WME-IMG. Twitch was acquired by Amazon for $970 million in 2014 because of Amazon’s strategy to focus more on live streaming content and compete with companies such as Netflix NFLX +1.64% in this space.
There is a concern in the sports industry that the influx of new technology will make it more difficult for sports organizations to make money from traditional sources. Technology like Virtual Reality headsets will make it easier than ever before for people to consume sports content without actually having to attend or watch games. What the UFC and eSports have shown is that the emergence of new communication can be the catalyst for sports organizations to maximize revenue in more traditional revenue streams rather than their replacement.
Adam Grossman is the president of the sports sponsorship and analytics firm Block Six Analytics. He is also the co-author of "The Sports Strategist: Developing Leaders for a High-Performance Industry." In addition, he is currently an adjunct lecturer at Northwestern University, where he teaches classes on entrepreneurship and quantitative analysis. Grossman also contributes to Forbes. Follow Adam Grossman on Twitter @adamrgrossman.