How the government will analyze the UFC-Strikeforce Merger

Despite being one of the biggest MMA stories of 2011, there has been surprisingly little discussion of how the federal government will analyze the merger between Zuffa (the UFC's parent company) and Strikeforce.   As a former antitrust attorney with the Federal Trade Commission, I can provide something of an insider's view.

The combination between Zuffa and Strikeforce is what's called a horizontal merger. In other words, it's a merger between two companies in the same industry. The other primary type of merger is called a vertical merger, where the companies compete at different levels of the supply chain--e.g., a company that makes steel merging with a car company.

As a horizontal merger, the government would use the horizontal merger guidelines to analyze the competitive implications of the deal.  (I'll abbreviate references to the horizontal merger guidelines as "HMG")  Since Zuffa and Strikeforce have already merged, the government would first look for any direct evidence of anticompetitive effects.  

Typically, anticompetitive effects take the form of increased price or decreased output.  For example, if the UFC raised the price of its pay-per-view fights, or decreased their number, it could be an indication of decreased competition.  The anticompetitive effects need to be "merger specific," which means that, if the UFC was doing something like that before merging with Strikeforce, we can't blame the merger for it.  (HMG 2.1)  This likely means that the concerns raised by the culinary union won't go very far.  If the UFC was getting away with things like automatic contract renewal and right to match other offers, you can't really blame the merger with Strikeforce for them.  But the fact that, before the merger, the UFC lost some top fighters to Strikeforce (e.g., Dan Henderson, Nick Diaz), could cause some concern (HMG 2.2).  By contrast, Bellator's feeding off of discarded UFC scraps shows that they aren't nearly the same level of competition as Strikeforce was.

This also raises the issue that there are at least two levels at which the government must analyze the deal:   effects on the fighters (the monopsony or supply-based level), and effects on the customers (the monopoly or demand-based level).  The customers would include not only fans buying PPVs and watching prelims, but also advertisers and networks such as Spike, Versus, and Fox.  The government will likely conduct interviews with all of the directly affected parties, and examine marketing documents from both the UFC and Strikeforce to try to gauge the various effects of the deal.  The government will look closely to see if the UFC is, as a result of the merger:  1) paying its fighters less or entering into more restrictive contracts; 2) raising the prices charged to networks for broadcast rights; or 3) raising the prices charged for PPVs to end viewers.

If the government can't find direct evidence of anticompetitive effects from the merger, it may try to go through the market definition exercise.  (HMG 4)  Market definition in this instance would be primarily concerned with product market definition (HMG 4.1), e.g., whether the UFC is adequately constrained by other sports, such as boxing, or other entertainment options, such as movies or rock concerts, so that the merger with Strikeforce doesn't matter.  The government would look to determine what would happen if the UFC controlled all mixed-martial arts promotions in the United States (assuming the US is the geographic market), and whether such control would allow the UFC to impose a "small but significant, non-transitory increase in price," also known as a "SSNIP."  Or, on the flip side, whether controlling all MMA promotion would allow the UFC to force a SSNDP on its fighters.  If the answer is yes, then MMA promotion is the relevant market.  If not, then the market includes other products.

I think the answer to product market definition is clearly that MMA is the relevant market.  It seems unlikely that, in response to a 5% increase in prices charged for MMA PPVs (say about $3), people will start watching boxing, pro wrestling, or go see a production of Hamlet.  On the other hand, if the (pre-merger) UFC raised its prices and Strikeforce were putting a good card on network TV, it's quite likely that a decent number of people would choose the free card over the PPV.  On the supply side, it seems unlikely that a fighter would switch to a new line of work if the UFC cut his pay by 5%.  But if Strikeforce were still a viable competitor, a fighter might jump ship from the UFC for a 5% raise.  

Assuming that MMA is the relevant market, the next question is what was the UFC's market share, both before and after the merger with Strikeforce.  (HMG 5)  While the calculations under section 5 of the merger guidelines can get somewhat complex, it seems hard to deny that, despite opinions to the contrary, the UFC has a monopoly.  But it also probably had one before the merger.  The UFC will no doubt claim that, even if the merger decreased competition, it also provided some efficiencies (HMG 10), such as a larger roster of fighters.  

In the end, it's impossible to determine whether the government will find the deal anticompetitive, and if so, what sort of remedy it would insist upon.  But hopefully this article at least provides a bit of insight as to how the government might analyze it.

\The FanPosts are solely the subjective opinions of Bloody Elbow readers and do not necessarily reflect the views of Bloody Elbow editors or staff.