Birds of a Feather: Zuffa's Future in Light of WWE's 2007 Financial Results

World Wrestling Entertainment probably deserves more attention in the MMA industry than it receives. The company is the Zuffa's closest corporate comparable, not to mention growing evidence that suggests pro wrestling, not boxing, is MMA's true competition. Furthermore, Dana White is an admitted admirer of Vince McMahon and the similarities between the company's promotional models is undeniable. In many ways WWE is what Zuffa aspires to be.

This month WWE announced its results from the fourth quarter and full year of 2007. The headline number was an all-time record $485 million in full year revenue. That number represents a 17% increase over 2006.

The company posted a EBITDA of $77.8 million, up from $74.3 million last year. Excluding the $15.7 million loss the company took on a feature film, EBITDA would have been $93.5 million, a 26% increase over last year. For comparison, Zuffa is believed to have grossed $190 million in 2006, with an EBITDA of $76 million.

In looking at WWE's finances, compared with what we know about Zuffa's, it's interesting to see just how diversified WWE has become, which is perhaps an indication of where Zuffa's future lies. The company began, much like Zuffa, as primarily a live events and pay-per-view company, however, today those two sources account for only roughly 40% of its total revenues, compared to 75% for Zuffa.

Consumer products and digital media were WWE's growth leaders with each posting its own 24% increase in revenue over last year. Live and televised event revenue was up 8% with much of the increase attributable to increased international touring. Pay-per-view was relatively flat at $94.3 million compared to $93.6 million last year. That number includes Wrestlemania 23 which drew 1.2 million total buys and over 750,000 domestic buys.

The most obvious under developed revenue streams for Zuffa are in the area of merchandising and licensing. Zuffa appears to be moving in that direction with a video game in development and the mass mailing of a merchandise catalog last fall. However, it will be interesting to see how the company handles what may become a difficult situation moving forward as it tries to develop its merchandise business. Unlike WWE where performers get a cut of merchandise sales, Zuffa pays no merchandise royalties to its fighters per the exclusive ancillary rights clause in the standard Zuffa contract. That played a significant role in Randy Couture's dispute with the company and will become an increasingly sensitive issue as merchandise revenue accelerates.

Zuffa also has the potential for substantial growth of its television rights fees, especially if the company is able to establish a successful live weekly format scheduled to debut in 2010. WWE took in $92 million in television rights fees last year, principally for four hours of original weekly programming. In contrast, the UFC is believed to receive roughly $33 million per year in television rights fees from Spike for two seasons of the Ultimate Fighter, four live events, and a handful of new episodes of Unleashed under the terms of its recent contract extension.

Diversifying its revenue streams is particularly important for Zuffa because there doesn't seem to be much room for significant growth on pay-per-view, at least not domestically. It's hard to imagine the company can do much better than the 500,000 per show it averaged in 2006. In fact, many believe that is is unlikely to be able to merely sustain those numbers. Pay-per-view in the United States at this point is simply not a growth business.

Buys for typical shows should flatten out at best over the long term while there is room for growth on the mega shows (with two million looking like the ceiling base on Oscar De La Hoya's last fight). The realities of domestic pay-per-view are likely a big factor in the company's international push. WWE has already developed a very strong international pay-per-view business.

Like WWE, new media and international expansion are also key growth areas. For Zuffa, international expansion still seems a bit premature given that by White's own admission the company has only scratched the surface of its potential in the United States. However, it is becoming obvious that part of the company's urgency regarding international expansion relates to its major new media initiative with Yahoo!. White has consistently associated the two together in public, including in last week's announcement of Yahoo! as the UFC's online pay-per-view distributor.

As discussed before, internet pay-per-view has the potential to change the entire industry, a subject worthy of a discussion all its own.

The comparison between WWE and Zuffa takes on even more significance given a recent report in the Wrestling Observer Newsletter that WWE is at least investigating the possibility of entering the MMA space. This is not a new development, however, it has taken on increased scrutiny in light of rumors that the UFC may be for sale. The company has flirted with MMA before including a meeting with Dream Stage Entertainment about purchasing Pride last year and being solicited by Dana White in 2004 when the Fertitta's were considering selling the UFC.

It is interesting to consider the value of Zuffa in light of the recent sale rumors and the closely comparable relationship between the two companies. WWE has a market cap of $1.28 billion, roughly 16.4 times its 2007 EBITDA. Therefore, using Zuffa's reported 2006 EBITDA of $76 million, Zuffa would be valued at roughly $1.25 billion.

However, it should be noted that 2006 represented the company's best year and all indications are that 2007's EBITDA, and thus value, was significantly lower, perhaps as much as 50% lower. The company has also secured a $350 million secured credit facility since that time, which must be factored into valuation.

Perhaps most importantly, it remains to be seen whether or not Zuffa's current business model, the one that closely resembles the WWE, can be maintained going forward. Most within the industry believe that a model more closely resembling boxing is inevitable and there are growing signs that the company's current promotional model is under attack.

If true, Zuffa's window to become the WWE of MMA may be closing before it was ever really opened.