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A Case Study: Cage-Fighter Capitalists

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Dana White is not a typical CEO. He's brash, sometimes irreverent, and hardly scripted. He's known for sometimes public disputes with employees. And he's never shied away from this reputation. The man's a cage-fighter capitalist.

Hard-earned respect
This should only come as small surprise. White is the chairman and CEO of the Ultimate Fighting Championship, the world's premier mixed martial arts promotion company. He and his partners, the Fertitta brothers, have always pursued a bootstrap approach to business. When the group acquired the UFC name in 2001 for $2 million, it was a struggling enterprise.

At the time, the group consisted of only a small cadre of elite fighters, including Brazilian jiu-jitsu great Royce Gracie. The promotions company had few distribution channels, few advertising or sponsorship deals, troubles with state athletic commissions, and a reputation for rough-and-tumble, no-holds barred fights. It faced something of an identity crisis -- it was too rough for mainstream, but it struggled with retaining a sufficient-enough edge for its core viewership. It needed to change, but the question was how.

What followed was an almost inconceivably successful run, in hindsight. Because, in our humble estimation, the UFC should have failed. The challenges were just too great. Even after patching things up with the Nevada State Athletic Council, returning to pay-per-view television, and growing its audience, the UFC was still running on dreams in 2004.

At the time, the UFC faced the same chicken-or-egg problem. It couldn't secure big sponsors or advertising deals, because it hadn't reached a critical threshold of customers. Recognizing the need, the Fertitta brothers rolled the dice. The company launched a reality series, The Ultimate Fighter, agreeing to front $10 million in production costs in exchange for a slot on Spike TV.

It was a savvy, if somewhat risky, gambit. In exchange for a relatively small upfront cost, a fledgling sport with growing but still relatively limited distribution secured access to the masses. The potential, if successful, was enormous: larger advertising deals and sponsorships, and the possibility of wider syndication (in subsequent TV deals).

The challenger becomes champion
Here's where our interests as MMA fans and business enthusiasts converge.

With the benefit of hindsight, it seems that the show's success was a tipping point. A better-heeled, reputationally advantaged UFC could consolidate smaller promotional companies, attract fighters, and dictate contract terms to fighters -- in effect serving as destination for all things MMA. It facilitated a burst of entropy -- what us investors call snowballs, because they build upon themselves.

Competitors found it difficult to build a fight card. That made it tricky to secure television deals, partnerships, or advertisers at attractive terms. More importantly, they couldn't keep cash in the bank. Recognizing weakness, the UFC and its managers diligently set to work locking up the world's best fighters on attractive contract terms.

And suddenly, the UFC started to look less like an upstart and more like railroads, steel tycoons, and bank giants of the early 19th century -- companies like U.S Steel (NYSE: X  ) and Chase Manhattan Bank (now part of JPMorgan Chase (NYSE: JPM  ) ). By our measure, it's a smaller-scale case study in market dominance.

In the interim, the UFC has acquired and consolidated smaller competitors Pride Fighting Championships, World Extreme Cagefighting, and Strikeforce. Employing this breed of guerilla capitalism, it's built a veritable moat. UFC has become the monopolist. But for Bellator, a competing network on MTV2 (a subsidiary of Viacom (NYSE: VIA  ) ), competitors have virtually vanished. Fighters now have little choice but to go the route of the UFC, and on its terms, because the best MMA fighters are there.

By our measure, the relatively recent addition of partnerships with Budweiser (a division of Anheuser-Busch InBev (NYSE: BUD  ) ) and Harley-Davidson (NYSE: HOG  ) , along with a distribution agreement with Fox (a segment of News Corporation (NYSE: NWS  ) ), cemented that potential.

The story comes full circle
We sat at the UFC's first DC event on Saturday night and found ourselves musing about how times have changed -- but they've not. Having secured a larger-market presence, but still only dominant in a niche sense, the UFC sits at an inflection point not unlike 12 years ago: Should it be content with its position or risk alienating its core audience in the pursuit of ever-greater things?

Michael Olsen and Charly Travers own no shares of any of the companies mentioned in this article. They did, however, consume a few Bud Lights at the UFC event on Saturday night. The Motley Fool owns shares of JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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