Friday, July 11, 2008

Reducing Rivals Revenues in MMA

The UFC recently announced that Anderson Silva will fight James Irvin on the same night that Affliction is set to have their inaugural pay-per-view mixed martial arts (MMA) card. The interesting thing is not that two different MMA groups are offering similar broadcasting on the same night, but rather the UFC (the dominant MMA firm) is offering a quality fight card to be broadcast for free on the same night that the new entrant (Affliction) is selling their card for $39.99.

This is a great example of an economic concept called Reducing Rivals Revenues. In this case, the UFC is offering a substitute entertainment option on the same night that their rival (Affliction) is offering a similar option. So how is the UFC reducing Afflictions revenues? The UFC is offering to air the fight on Spike TV for free as opposed to Affliction is selling the broadcast rights via pay-per-view for $39.99 (US). So, if the two fights are good substitutes, some MMA fight fans will switch from purchasing Afflictions higher priced entertainment option for the UFC's lower priced service. If this happens, then the UFC can reduce Afflictions revenues and maintain a dominant position in MMA.

Yes, but doesn't this also hurt the UFC? It sure does. Since the UFC makes most of its money from pay-per-view and by allowing the broadcast of the Silva-Irvin fight on cable TV instead of pay-per-view, the UFC will not capture those pay-per-view revenues. The UFC will still make revenues from ticket sales and I am sure make some revenue from Spike TV for the broadcast fo the fight. But does this make sense? It does if the UFC believes that the lost revenue to Affliction will reduce the ability of the company to be a viable competitor to the UFC in the future. In order to protect their dominant position in the MMA industry, the UFC is betting that revenues to Affliction will be less with the Silva-Irvin "free" option.

Since 2001, Zuffa - the parent company for the UFC, has held all of the top 20 grossing MMA fights in the state of Nevada, and 25 of the top 27. Gross revenues have improved from just over $500,000 in 2001 to a high of almost $5,400,000 in 2006. Average revenue per attendee among the top 27 MMA events in Nevada has gone from a low of $112 to a high of $514 in 2007. Hence Zuffa (or the UFC) has a significant financial reason to compete vigorously with Affliction in order to protect their revenue streams.

Do you think it will work?

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