The Strikeforce Deathwatch May Be Delayed (Updated)

[This was accidentally posted last night while still in rough draft form. If you read it yesterday, please note they I have made several changes and additions. I apologize for yesterdays error, which I blame on Kid Nate - nottheface]

It’s 2011 and the Strikeforce deathwatch continues on the blogosphere, as we await the company’s eminent demise under the massive debt that the company has either accrued, or will soon be incurring thanks to the Heavyweight Grand Prix. Strikeforce’s fate is sealed, all that remains to happen is for Scott Coker to be ritually sacrificed on the steps of the Temple of Kukulkan in Chichen Itza to the sun god Em-wun-gloebul in the year 2012.

But must this happen? Is Strikeforce really doomed to fail? If we look at the past history of other promotions that have found themselves in the UFC’s crosshairs the answer seems to be yes. But this observation could also be a problem of induction, since the death of each previous promotion seems to be as much due to their own missteps and shortcomings as it does from merely coexisting with an angry Zuffa.  For Affliction it was overspending on talent - $5 million a show – and ineffective marketing while trying to make an immediate splash on periodic payperview events.  In the case of the IFL it was running up too much debt trying to convince fans that preferred fighting in a cage and rooting for their favorite fighters to make the switch to MMA teams competing in a ring. Elite XC’s sin was piling up huge debts buying useless promotions and a too costly website all while pinning their fortunes on a "street fighter" with little actual MMA skill. And the tragic collapse of Pride had nothing to do with any actions in the American market at all, but instead a problem native to Japan - the yakuza.

The common denominator in the failures of all of these American promotions seems to be debt. So then, Strikeforce must surely be on the path towards doom as well for one only has to look at the disparity in revenue between the UFC and them to see that they have little chance of success. Again, we shouldn’t confuse the UFC's success with anyone’s failures. The difference in revenue only tells us that they aren’t nearly as successful as the UFC.

So the question for Strikeforce long-term survival seems to be are they losing or making money? Well, without access to their books this is difficult to gage, but by harnessing the power of Google [side note - you kids don’t realize how easy you got it] we can try and determine to the best of out abilities if they are. It might not give us as complete or detailed as answer as we would hope, but it should be suffice to tell us if we need to start planning their funeral or not.

via t3.gstatic.com

First we will need to determine their revenues to even have a modest chance of calculating their survivability. So what were their revenues for 2010:

1. Gate. In 2010 Strikeforce averaged $578,657 at the gate for their Champions events based on the releases for their Miami, Live, Fedor vs Werdum, and Noon vs Diaz events. For their Challengers series it was  $85,516 based on the average from 3 events (6, 7, 11).
2. Television. According to the Florida State Boxing Commission,  Strikeforce receives a $700,000 "Broadcast, Television, or Motion Picture" rights fee from Showtime for each Champions event.weekly.com/cbs/strikeforce-deal-with-showtime-and-cbs-worth-millions/"> Various reports have put the Showtime deal at either $8 million a year or $25 million for three years for 16 events per year (8 Champions and 8 Challengers). This would mean they are receiving roughly $300,000 per Challengers card as well. In addition, Strikeforce has separate deals for the foreign rights with SHINE and SPACE TV. The revenue from foreign distribution was recently put at over $1 million a year.
3. Sponsors and merchandise. The figures that came out from the Strikeforce: Miami show ($8,003 in souvenir sales) doesn’t seem to indicate that there is much to be made selling Strikeforce merchandise. Although with the hiring of Creative Licensing International and their subsequent re-branding we should expect these numbers to increase dramatically in 2011. Still, while common sense may say their are making more off merchandise, their is no actual evidence to say so. As for sponsors, they have a sizable roster of recognizable brands: FullTilt Poker, Rockstar, GoDaddy, EASports, sporting logos at their show. I ran this by a friend of mine who is in the marketing department at Universal and she came up with $4 million dollars a year being a realistic and conservative number. Of, course a portion of that money goes to Showtime's coffers as the distributor of the product.

So we could conservatively estimate Stikeforce's total revenue for 2010 at around $20 million, or $2.5 per Champion/Challengers pairing (more on that later). This is a pittance compared to the $350-450 million the UFC generates, but is it enough to stave off the death?

Now before we get into Strikeforce’s costs let's take a look at what the UFC spends on an event to get an idea of what we should be looking at. For about the Fifteenth time  I’ll be stealing Michael Rome's summary of expenses (as T.S. Eliot wrote, "mediocre writers borrow; great writers steal"):

I’ve done a lot of research into sports overhead, my guess is the UFC is probably spending between $3 and $4 million in overhead costs for the average event not including salaries.

They spend $500,000 on the countdown show, a six figure fee for the arena, between 500 and a million to broadcast in-house, then you have a very high cost of hotels and flights for all their staff and all the fighters, and finally all the money they spend on ad spots.

This is ignoring all the salaries they pay to staff and such, going to assume those as year-end expenses and not event-specific expenses.

Now before we get on to Strikeforce’s expenses let us examine their business model, for there seems to be much confusion amongst the fans about how they operate. First of all, for all practical purposes they are a television promotion, concerned only with making a product for Showtime to air and, more importantly, pay for.  This is the reason why they generally only air the main card and not the prelims, and why there is such a disparity in talent levels between the two, because their focus is solely on the portion that will be aired by Showtime. In fact, the prelims should often not even be viewed as a Strikeforce event, but a separate event held in conjunction with them, for Strikeforce usually does not book these fights, nor are the fighters appearing on them "signed" with Strikeforce. instead Strikeforce leaves the prelims to be handled by a local promotion whom they will team up with when putting on a show in their area. This benefits Strikeforce because:

A)   It lowers their expenses greatly. Not only are the local fighters more affordable, but they also save by having the local promotion handle many of the logistics. Additionally, using these locals saves them greatly on travel and lodging expenses, one of the UFC's major expenses.

B)   When they do air the prelims, in the form of a Challenger card, they are paid for it, so that there is always a return on a fighter's payout.

So what are Strikeforce’s expenses?

1. Payout. Their largest expense is the payout to fighters. Using what has been released by the various state athletic commissions last year their payouts averages were $441,125 per Champions event and $61,950 per Challengers card. Strangely enough, while payout takes up the majority of Strikeforce's expenses they have benefitted greatly by the UFC success in keeping wages down. Of course, this doesn't include any unreported bonuses,  which are very hard to estimate. It does seem likely that a portion of the costs for their highest priced fighters is paid for by Showtime. Also of interest are some of the creative way they offer fighters compensation in their attempts to stay competitive while also keeping costs down. Example: Next time you look at Strikeforce poster, note the fighter's sponsor's logo fully visible on their shorts, or how many times you spot Clinch Gear on a broadcast.
2. Television production costs are handled by their partner Showtime, saving Strikeforce hundreds of thousands of dollars in expenses, although they do pick up the tab for the house show which runs around $30,000 for a Challengers card 
3. When fighting at the HP Pavillion, the arena fee is being paid back directly to their partner, Silicon Valley Sports and Entertainment.
4. As Leland Roling detailed, Strikeforce’s advertising budget is microscopic in comparison to the UFC’s.
5. They also have to pay 2% of their Showtime revenue to Elite XC as part of the agreement for buying their assets.

I've estimated the expenses for Strikeforce in 2010 as being around $7.3 million or $900,000 per Champion/Challenger pairing. Now when comparing this number to the UFC's $3-4 million one realizes how bare bones an operation Strikeforce runs, saving several million per show by handing over the television production and majority of advertising to Showtime, while using local fighters and promotions.

So, for a single show (which I classify as a pairing of a Champions main card and a Challengers prelims) their revenues are $2.5 million while their expenses are $900,000, meaning a gross profit of $1.5 million per show. Of course, this doesn't include numerous other expenses, such as their operating costs, which may be remarkably low considering how Strikeforce has notoriously run by a company with only 12 employees, other unreported bonuses, and any debt payments.

Now should we accept these numbers as accurate? Good god, no. But they do give us enough of a picture, even if it is painted in very broad strokes, that while they may not being doing well by UFC standards they don't seem to have fallen in the same trap that killed those other promotions.

My prediction: Dana will have to hold off on adding a new name to his tombstone for awhile longer.

Addendum

It has been brought up in the comments that what really matters is not if Strikeforce is making money but if Showtime is willing to continue to air MMA. This is correctly the more important question and here is my thoughts on the matter:

There is a simple formula I was shown once for determining if a program is making money for a premiere channel (HBO or Showtime) or not - for every subscriber the channel makes $6.5, and as long as the program costs less than 40% the number of subscribers generated it is profitable. Now I don't know if that holds up anymore or is only applicable to shows likes "Weeds" and "Entourage", but it is all I got so I'm going to use it. Currently Showtime pays out $8 million to Strikeforce, so to reach the profitable state they needs to bring in 250,000 subscribers. If one looks at their Challengers cards as their reference point, it seems likely they are doing so. This also doesn't include the ad revenue that Showtime makes airing MMA, which is probably more than for similarly rated programming.

I also think that Showtime's interest in MMA is also influenced by a desire to get a piece of that payperview market, for as a payperview provider it would be a huge money maker for them, even more so than a successful monthly show. Even if Strikeforce draws 600,000 subscribers a month, Showtime stands to make more on 4 payperviews a year that sell 300,000 or more. Getting on payperview has probably been Showtime's goal since signing Elite XC and I don't think it has changed.

As for claiming that Showtime is overpaying for Strikeforce when compared to other brands on basic cable, I don't think that is accurate. Is HBO overpaying when it spends $5 million an episode on "Boardwalk Empire" or $10 million an episode on the "Pacific" when network TV spends only $2 or $3 million on a drama? Or how about the huge disparity in costs between an HBO Comedy Special and what the Comedy Channel spends? What Showtime is competing with is a $45 payperview product.

When one looks at recent actions - the resigning of stars such as Fedor, Nick Diaz and Robbie Lawler, upping the number of Strikeforce cards from 16 to 20 next year, and the airing of M-1 programming - paired with Showtimes recent growth (which has coincided with the introduction of MMA on their channel) and stated goal of drawing "a younger, male audience with edgier material", I don't think it likely they'll pull the plug just yet.