364. Inside the Sports-Industrial Complex

[0] When you bleed and sweat and cry with somebody every day, you know, you get to be pretty close to him.

[1] For me, shooting a basketball and seeing it go through the net became just an obsession.

[2] If you want something, you have to be aggressive.

[3] Yeah, we were awful.

[4] When players were traded here, they just couldn't wait to get out.

[5] Oh, I care so deeply.

[6] And I'm not kidding.

[7] And it's stupid.

[8] I have no idea why I care, but I like winning.

[9] And I distinctly remember thinking, like, I'm going to get better at this and I'm going to come back and I'm going to kick your ass someday.

[10] I take esports, yeah, buy e -sports, sell NFL.

[11] You may recognize that voice.

[12] I'm Mark Cuban, and I'm an entrepreneur.

[13] Cuban is also a star of Shark Tank and owner of the NBA's Dallas Mavericks.

[14] When he said he would sell the NFL and take esports, I'd asked him to play a game of buy, sell, or hold with three stocks, the National Football League, the Ultimate Fighting Championship, or UFC, and a basket of e -sports.

[15] So why is Cuban selling the NFL, which is the most profitable sports league in the world?

[16] I just think CTE creates a problem.

[17] CTE being chronic, traumatic, encephalopathy, or the brain damage associated with contact sports like football.

[18] So participation has been dropping the last few years and will continue to drop more.

[19] And, you know, I have an 8 -year -old son.

[20] There's no way I'd let him play tackle football.

[21] If you don't want your child, playing contact football, then, you know, you diminish the viewing in the house.

[22] You know, now he'd much rather play Fortnite and watch football.

[23] Okay, and you're buying e -sports.

[24] So say why, and especially explain to people who can't get their mind around it at all.

[25] What is the appeal of watching?

[26] I mean, there's stadiums being built.

[27] So why do 20 ,000 ,000 people want to go to a stadium to watch other people play video games?

[28] Because once you play, you understand the nuances of, the game and it's aspirational and educational.

[29] So if you like to play League of Legends, it's hard.

[30] But one of the ways to get better is to watch other people play and to learn the nuances and to learn the strategies, particularly given that they change the rules every 90 or 120 days.

[31] And so the e -sports teams have got to practice hours and hours and hours a day.

[32] So it takes a real skill.

[33] It's a real sport.

[34] And you also have to realize that anybody in front of a PS2, Xbox, PC, you know, watching these kids that play in their mind, you know, just like maybe we watch sports growing up, it's like, hey, if they can do it, I can do it.

[35] And so that's the aspirational part of it as well.

[36] There's no physical hurdles.

[37] You can be 4 '1 or 7 foot 1.

[38] And if you've got the hand -eye coordination and the brain processing speed and, you know, anything's possible, you could do it too.

[39] Is e -sports really the future juggernaut Cuban describes?

[40] At the very least, he's putting his money where his mouth is.

[41] Among his many sports technology investments is an esports betting platform called Unicorn.

[42] In this regard, Cuban is not an outlier.

[43] A lot of NBA teams, as well as teams from the National Football League and Major League Baseball and the National Hockey League and Major League Soccer, they are all investing in esports franchises that play games like League of Legends, Fortnite, and Overwatch.

[44] A lot of venture capital firms are investing as well.

[45] The global e -sports market is said to be approaching a billion dollars, up roughly 40 % from a year earlier.

[46] And that doesn't even include the money flowing to the game companies themselves.

[47] Blizzard Activision, which makes Overwatch, reported $4 billion in revenue in 2017 from in -game purchases.

[48] If I had told you 10 years ago that esports would be a booming industry funded by multi -billion -dollar sports organizations, you probably wouldn't believe me. But if I told you 100 years ago that multi -billion -dollar sports organizations would even exist, you wouldn't have believed that either.

[49] Sports, in the very beginning, were a proxy for war.

[50] Here's John Thorne, the official historian of Major League Baseball.

[51] The 30 best men of one side against the 30 best men of another and both sides agreed to abide by the outcome.

[52] Later on, sports became a tool of empire, of colonialism.

[53] A civilizing force, or at least that's what the civilizer said.

[54] Well, we sublimate our martial instincts by pouring them into sport.

[55] We can paint our faces.

[56] We can drink ourselves silly.

[57] We can yell insulting epithets at the umpire or certain players.

[58] And what has sports become these past few decades?

[59] LeBron James agreed to a four -year, $154 million contract.

[60] with the Lakers.

[61] Fox striking a five -year rights agreement with the NFL worth about $3 billion.

[62] Record -chattering deal.

[63] Alvarez signed a five -year 11 -fight deal worth a minimum of $365 million.

[64] Congratulations.

[65] Serena Williams just topped the Forbes list of highest paid female athletes for the third year in a row.

[66] Rockets owner Leslie Alexander has agreed to a deal to sell the Rockets to Houston billionaire Tillman Fertita for 2 .2 billion dollars a record for an NBA franchise.

[67] Yes, sports has become big business.

[68] How big?

[69] So the answer here is actually surprisingly small.

[70] Sports has a social impact that is way, way bigger than its economic impact.

[71] That's Victor Matheson, an economist at Holy Cross and president of the North American Association of Sports Economists.

[72] So the biggest league in the world, in terms of revenue generated, is the NFL, and the NFL generates something like $14, $15 billion a year.

[73] Add in all the other major American leagues, plus the PGA, pro tennis, mixed martial arts, and so on.

[74] You've got maybe $50 billion of pro sports, a few more tens of billions of dollars in college sports, but you're still only up at $60, $70 billion.

[75] That makes spectator sports in the United States roughly the same size.

[76] as the cardboard box industry in the United States.

[77] Now, obviously, none of us, you know, gather around the water cooler on Monday morning saying, hey, man, over the weekend, did you see that awesome cardboard box that American paper just put out?

[78] Of course we don't.

[79] So obviously, you know, culturally, sports is huge.

[80] Okay, so the sports industry punches above its weight in cultural significance.

[81] That seems clear.

[82] One way to think about this is that consuming sports is that.

[83] is really cheap, considering how much attention we give it.

[84] That said, a $60 or $70 billion industry isn't nothing.

[85] It's an industry that offers a select few athletes the chance to become multimillionaires, and it gives billionaires somewhere to park their money that's a bit more exciting than cardboard boxes.

[86] So today on Freakonomics Radio, our hidden side of sports series continues with a look at how this industry works from the ownership and management side.

[87] How does a game become a sport, become a business, become an industry?

[88] We'll get into the economics of a startup league.

[89] It took us about three or four years before we could actually turn it into a real business.

[90] We'll hear how the big leagues are trying to get even bigger.

[91] Right now, one of the commissioners' main objectives is to spread the game globally.

[92] We'll hear what team executives hate about their own sports.

[93] The ends of NBA games is one of my bugaboo's.

[94] I just can't stand the fun.

[95] vowels and timeouts.

[96] We'll learn about an exciting legal development.

[97] Yeah, I think it'll lead to our franchise valuations doubly.

[98] And we'll get into the unusual fact that in sports, your labor force is also your product.

[99] The reality is they are management and we are labor.

[100] Man, they're making a lot of revenues, but not much of that is going into the athletes.

[101] From Stitcher and Dubner Productions, this is Freakonomics Radio, the podcast that explores the hidden side of everything.

[102] Here's your host, Stephen Dovner.

[103] So let's begin, if you would, just say your name and what you do.

[104] My name is Lawrence Epstein.

[105] I'm the chief operating officer at the Ultimate Fighting Championship.

[106] And for those who've never seen a UFC fight, or maybe who don't know anything about the UFC or MMA, mixed martial arts, just describe it.

[107] Mixed martial arts is essentially the sports of boxing, jujitsu, judo, karate, muay, taekwondo, and then both freestyle and de Greco Roman wrestling, all combined into one sport.

[108] And the UFC is a brand name that we operate our promotion under.

[109] Okay, so let's focus on the UFC then.

[110] How often does a fighter typically fight?

[111] We've got currently about 525 fighters under contract, and they fight on average about 2 .3 times per year.

[112] Over our 25 -year history, we've done about 9 ,500 individual bouts.

[113] Okay, what share of UFC fighters are female, and do women ever fight against men?

[114] No, absolutely no women against men, but about 15 % of our athletes are currently female, and that percentage is growing.

[115] So I understand that you recently negotiated a new TV deal.

[116] This is with ESPN for $300 million per year, over five years, $1 .5 billion total.

[117] If you are not a fan of mixed martial arts, you may be wondering how such a league could be so valuable.

[118] Dana White, our president, tells this great story where he says, you know, there's four corners in any city and anywhere in the world.

[119] One corner, you've got a soccer game going on.

[120] Another corner, you've got a basketball game going on.

[121] On the third corner, you've got some guys playing tennis, and on the fourth corner, a fight breaks out.

[122] What happens?

[123] Everybody runs to the fourth corner to watch the fight.

[124] So people, you know, they understand fighting, they get it.

[125] It's part of our DNA, and they like it.

[126] In 2016, the mega -agency WME IMG and a group of private equity firms bought a majority stake in the UFC for nearly $4 billion, billion with a B. Its ringleaders, Lorenzo and Frank Fertita, had acquired the UFC just 15 years earlier for $2 million.

[127] Lorenzo Fertina famously says that, you know, I pay $2 million for three letters, UFC.

[128] see.

[129] And that was really essentially all that was purchased.

[130] I mean, there was literally a box of contracts and there was another box of tapes.

[131] And there was a wooden octagon that had been used over the years.

[132] And, you know, so many businesses talk about, you know, we built this thing from the ground up.

[133] We actually inherited a business that was about 10 stories underground.

[134] And it took us about three or four years to get up to the ground level before we could actually turn it into a real business.

[135] Now, how do you get that done?

[136] Because this was a sport.

[137] that was nearly driven to extinction before it had the chance to get big.

[138] Senator John McCain famously called it human cockfighting, led the charge against it.

[139] So how did you turn that around state by state?

[140] We put together a set of assets that included the economic impact our events were having in regulated markets, the truth about health and safety, you know, whether our athletes were sustaining major injuries or not, and of course they weren't.

[141] Third, we had, and this was the most compelling thing.

[142] We had many of our athletes help us in this process.

[143] And, you know, introducing elected officials to our athletes was key.

[144] And the other factor, which was really, really interesting, was the staff at all of these offices around the world were, are generally young people.

[145] I mean, you've probably been to legislators' offices, and you've got people that are, you know, right out of college, early 20s, mid -20s, they're fans.

[146] They love it.

[147] So they're talking to their Boston.

[148] This stuff is awesome.

[149] These people are cool.

[150] This is something that's fun to watch.

[151] And so, you know, the staffers were absolutely key in convincing the elected officials to ultimately vote in favor of regulating the sport.

[152] But, you know, the whole premise of the original ultimate fighting championship was there are no rules.

[153] It was a no -holds barred event.

[154] And that was just something that we felt, you know, didn't have any sustainability.

[155] You had to have regulation.

[156] You had to have a regulatory environment that looked a lot like the boxing regulatory environment.

[157] And so that's what we did.

[158] So the UFC in state -by -state petitioning made itself legal and legitimate, but it still had one big problem.

[159] You know, we couldn't get on television.

[160] There was no interest in putting us on any television other than pay -per -view.

[161] So we put on these pay -per -view events, and we had to produce them ourselves.

[162] So we actually developed a core competency in putting on these fairly unique events with many times 20 to 24 different cameras.

[163] This practice, interestingly, continues today.

[164] One of the reasons why we are a little bit different than the other sports organizations is that we pay all of the production expenses for our events.

[165] As far as I know, we're the only sort of major sports organization that does it ourselves.

[166] Consider, for instance, the NFL.

[167] When they do a deal with CBS Sports, they just get a check.

[168] And CBS Sports, in addition to paying them billions of dollars every year, they also handle all of the production.

[169] Okay.

[170] So the UFC early on learned how to produce its own events, but they were still a fringe sport relegated to pay -per -view.

[171] So they did what any sensible startup sports league would do.

[172] They created a reality TV show.

[173] You take 16 athletes, you put them in a house.

[174] They do a bunch of, you know, goofy things like you always see on reality shows.

[175] And at the end of each episode, there's a fight.

[176] The winner stays, loser goes home.

[177] The show was called the Ultimate Fighter.

[178] It went on the air in 2005.

[179] We were able to do a deal with Spike Television, and they didn't pay us anything, but they said, we'll let you put this on our air.

[180] We'll give you, not all, but we'll give you half of the ad inventory, and we went out and tried to sell that ad inventory.

[181] We were able to sell no ads at all to any sponsor.

[182] So we took that ad inventory and used it to promote our upcoming pay -per -view.

[183] and any sort of metric that you look at in the UFC, whether it's profitability or the number of fans that we have or ratings, we have this sort of hockey stick type of a graph.

[184] And the inflection point is the ultimate fighter, season one.

[185] The UFC has grown exponentially since then and has the ESPN deal to prove it, but it still relies heavily on pay -per -view as well, distributed via cable and satellite, as well as digitally, via Amazon, and, its own UFC