SHARKSPAGE

Strikeforce sale an opportunistic business deal for UFC, strategic business deal for San Jose Sharks parent company SVSE

STRIKEFORCE HW FABRICIO WERDUM CELEBRATED 2010 UPSET OF FEDOR - PHOTO JON SWENSON

GINA CARANO FACED OFF AGAINST 'CYBORG' SANTOS IN 2009 - PHOTO JON SWENSON

STRIKEFORCE LIGHT HEAVYWEIGHT SANSHOU CHAMP CUNG LE IN 2005 - PHOTO JON SWENSON

The landscape of mixed martial arts changed significantly on March 11th, possibly for the last time. UFC parent company Zuffa Inc. bought it’s fifth major MMA competitor after previously swallowing the WFA, IFL, PrideFC and WEC. Given the state of the industry, there will not be a sixth. Zuffa purchased the rival San Jose-based promotion Strikeforce for an undisclosed sum and stated that both would be run as seperate entities until the expiration of the Showtime television contract in 2014.

Will the longstanding Strikeforce brand remain as a viable entity after that point, or could an agreement be made before then to fold it into the UFC? “Who knows, anything is possible and I would never say never to anything,” UFC President Dana White said via a conference call announcing the sale. “Right now Strikeforce will continue to run their shows on Showtime.”

“This is a historical day for the sport of mixed martial arts,” Strikeforce CEO Scott Coker said. “This is something we have thought long and hard about.” The agreement offers tantalizing matchups at almost every weight class for both of the major fight promotions, but it is also the culmination of a business grown and developed in the South Bay. Starting at an early age as a regional kickboxing promoter in San Jose, Coker helped ignite and fuel interest in kickboxing when his company developed K1 programming for ESPN. After a phenomenal kickboxing finale in 2005 that showcased four different flavors of kickboxing at HP Pavilion (Full contact, Olympic, Muaythai, SanShou), Coker and Strikeforce promoted the first ever sanctioned MMA event in California with Gracie vs. Shamrock on March 10th, 2006. The non-televised event drew a then-record 18,265 fans, and prospects for Strikeforce as an MMA promotion exploded.

In 2008, the San Jose Sharks parent company Silicon Valley Sports and Entertainment invested in a 50% stake of Strikeforce. “We got into mixed martial arts, we viewed it as one of the best opportunities for us to use some of our core competencies,” SVSE EVP/CFO Charlie Faas told Sharkspage. “We could use them in exploring a sport where the growth rate was off the charts.” According to both the San Jose Business Journal and Forbes, that growth rate was phenomenal. After earning a reported $4M in revenue in 2006, that figure was expected to increase significantly to around $30M for the fiscal year ending in June according to SJBJ reporter Eli Segall.

As the bottom line grew, so did the global ambitions for Strikeforce, but global ambitions cost money. The UFC invested millions and incurred considerable debt in the early Zuffa years of UFC promotion in North America. That investment was a bet on the heart stopping product inside the Octagon, and a bet on their ability to refine every aspect of their business operation to become as profitable as possible. From The Ultimate Fighter reality show, to web content, to promotion and marketing, the UFC has been a series of case studies on how to operate a fight promotion in a digital and new media environment.

After a very successful 2010, Strikeforce seemed to be on a similar track in 2011. They went large. A contract extention for former Pride FC Heavyweight Champion Fedor Emelianenko, an 8-man heavyweight tournament stacked with top-15 talent, and an attempt to bring North American MMA back to Japan were only a few of the homerun swings Strikeforce took earlier this year. With major Japanese promotions Sengoku and Dream floundering, unfortunately the Japanese debut for Strikeforce fell through. With the country reeling from a devestating earthquake and tsunami, UFC President Dana White said he is not looking to return there short term.

From the business of MMA to the business of hockey, the press conference released details that as early as December of 2010 Silicon Valley Sports and Entertainment was in discussions with the UFC and other suitors to sell their 50% position of Strikeforce. “There was a chance to bring together our organziation and the Zuffa organization to make the sport better,” SVSE CFO Charlie Faas said. “For us, (the sale) made sense economically and sports-wise.” Scott Coker echoed a similar sentiment at the press conference. “I think they wanted to get back to their hockey business,” he said.

Like Zuffa, SVSE is a private company that does not disclose financial information, but Forbes Magazine senior editor Michael K. Ozanian regularly profiles each major professional sports league and each individual team. Those financial profiles are “decent, not great,” according to Faas. The data from Forbes on the San Jose Sharks shows a targeted effort by SVSE to ice a championship caliber team. After averaging a -1.7M operating income from 2001 to 2008, that grew to a -5.5M average in 2009 and 2010. One of the major factors was the Sharks spending to the salary cap, supplementing developed talent with key additions to put them over the top.

“We are icing a team that is appropriate for us to ice. Given the league salary structure, the salary cap, and what have you. We don’t operate under a cap, we operate under a budget,” Faas said. “Sometimes our budget is not capped, sometimes it is different than that. We pride ourselves on spending effective money when it comes to our hockey team.”

According to Forbes, the San Jose Sharks franchise valuation has increased from $148 million in 2001 to $194 million in 2010. That ranks the San Jose as the 18th most valuable team in the 30-team National Hockey League. It is unclear how many variables factor into those valuations, but as a market SVSE and the San Jose Sharks have taken enormous strides to transform the Bay Area into a hockey community. In addition to numerous ice and roller hockey tournaments hosted in the South Bay, some with as many as 200 teams, SVSE and the Sharks have also managed several local hockey rinks and have developed an all ages interest that will only grow moving forward. According to a report recently issued by USA Hockey, hockey participation nationwide has increased from 195,000 players in 1990-91 to 475,000 players in 2009-10. A large segment of that growth comes from the state of California. San Jose hosts the largest ice hockey (4 rink) and roller hockey (3 rink) facilities west of the Mississippi. Despite those grass roots trends, SVSE and the Sharks are still focused on one thing.

“We expect to win a Stanley Cup,” Faas said. “We have still have to meet those expectations.”

The Sharks average approximately 44 regular season and preseason dates at HP Pavilion. During the NHL lockout in 2004, then San Jose mayor Ron Gonzales told Sharkspage it was difficult to determine a firm dollar amount for the impact of each lost game on downtown. During a Stanley Cup Playoff contest, that local business revenue figure would grow substantially. In addition to hockey, MMA and other sports properties, SVSE also drives traffic downtown with an event and concert business that has ranked as one of the top-5 busiest for North American facilities in each of the last three years.

“This company was a partnership with SVSE, which owns the hockey team, they ventured into many different businesses,” Scott Coker said in an interview with Bas Rutten on Inside MMA Friday. “They are trying to bring another sports franchise to San Jose, and to continue to focus on their hockey team.” The note by Coker about bringing in another sports franchise is an interesting one. He could have been hinting at possible NBA aspirations. During the Oakland Coliseum remodel in 1996, the Golden State Warriors played one season at HP Pavilion and earned a 30-52 record. Interest in the NBA has remained strong since that lone season. Earlier this month San Jose Mercury News columnist Tim Kawakami speculated that Oracle CEO Larry Ellison may be interested in buying the league owned New Orleans Hornets and moving them to San Jose.

Encorporating another major professional sports franchise into SVSE’s operation in downtown San Jose would fit into their philosophy more than investing heavily in a major mixed martial arts promotion looking to take their business to the next level. MMA has seen flamboyant and freespending promotions come and go, most recently with EliteXC and Affliction. “All you’ve got to do is go out and raise some cash and jump into the business,” Dana White said at the press conference. “All you’ve got to have is some big balls – some big balls and some money behind you.” Both SVSE and the UFC credited Scott Coker’s business acumen, but the growth prospects and the subsequent investment needed may have signaled a need for SVSE to move on. Strikeforce’s planned growth was not just from San Jose to other venues and/or countries, but also an expansion from premium cable and network television to possibly a pay per-view-model, something that could have taken place with the finale of the Heavyweight Grand Prix tournament. That put Strikeforce directly in line with the UFC’s bread and butter business model, pay-per-view.

The impact of the Strikeforce purchase on the sport of MMA is difficult to completely define, but one thing is certain. The UFC is now synonymous with MMA. “They are their own sport in a way,” ESPN MMA editor Josh Gross recently told Sherdog.com. Whether the purchase is good or bad for the sport is not the right question to ask according to Sherdog.com Editor and radio host Jordan Breen. “It redefines MMA. MMA is composed of tons of unique and disparate parties,” Breen told Sharkspage via email. “It’s tough for mid-tier fighters who lack negotiating power, but it’s great for a fighter like Gilbert Melendez who wants to be able to get a bigger profile and fight better competition.” Breen added that it is positive for one of the fundamental tenants of the sport, determining who is best inside the cage. “I think on the whole, it’s more positive than negative because I prize the ability to get definitive questions about who the best fighter in the world is.”

In his press conference detailing the sale, a press conference which suprised even SVSE who were expecting the official announcement on Monday, White sidestepped questions about competition between Strikeforce and the UFC. He also sidestepped questions about competition with the four major sports leagues and instead focused on the global growth prospects for his company and the talent needed to push the UFC towards those goals. “We need more fighters… we need more guys,” White said. “I don’t think (the NFL, NBA, NHL) are competition. There is demand out there. England, all the guys are pissed off we are not doing enough events over there. We haven’t been to Ireland in a long time. They are going crazy and want an event. Every time we go to Australia we sell the thing out. Every time we are going to these new markets, we are really going through these growing pains right now with the sport and with the UFC.” After putting together 27 events in its first 6 years of operation, the UFC delivered 24 in 2010. Strikeforce currently has about 140 men and women under contract. Crossover fights and fighters on expiring contracts could bolster the UFC PPV ranks as the schedule ramps up in the future.

For now, operations between both organizations will be “business as usual.” Last Saturday at the rock in New Jersey (aka the Prudential Center), the UFC saw the rise of another dominant potential superstar in Jon “Bones” Jones. The flamboyant and wildly unpredictable fighter earned the UFC Light Heavyweight title with a 3rd round TKO of former Pride Middleweight GP champion Maurício “Shogun” Rua. Another Pride favorite, Mirko “Crocop” Filipovic also lost on the undercard with a brutal knockout loss to Brendan Schaub. The former K1 kickboxing champion may be facing retirement. Former UC Davis wrestler and WEC champion Urijah Faber took a step towards his title ambitions with a solid decision win over Eddie Wineland. Business as usual for Strikeforce will mean a rare visit to the Stockton Arena for a Strikeforce Challengers card on April 1st, and the return of Strikeforce Championship MMA April 9th in San Diego. San Jose based Justin Wilcox will face Rodrigo Damm, and Japanese 2008 Olympic Judo gold medalist Satoshi Ishii will meet Scott Lighty in a heavyweight affair in Stockton. On April 8th, Nick Diaz will return to the hexagon against Paul Daley in a WW title fight, and Gilbert Melendez will headline with a LW title defense against the Japanese version of Bonecrusher Smith, Tatsuya Kawajiri.

The Sharks and SVSE noted an additional perk as a result of the sale. In addition to serving as home base for Strikeforce, the UFC may come to HP Pavilion down the line as well. “It would be phenomenal to have San Jose based UFC heavyweight champion Cain Velasquez fight in our building,” Faas said. “This is the home base of Strikeforce, we will continue to hold Strikeforce events here, but we will also have UFC Fight Night and UFC PPV in the future. If you bring in a UFC PPV, you can plan on 16,000 or 17,000 people in the building. It is always an electric atmosphere.”

[Correction] The SVSE revenue figure reported by the San Jose Business Journal has been corrected to accurately reflect their reporting.

[Update] UFC buys rival Strikeforce – Josh Gross for ESPN.com.

[Update2] Sources: UFC’s Strikeforce purchase likely hastened by ProElite Inc. interest – Steven Marrocco for MMAjunkie.com.

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