Why Would Tencent Want to Buy UFC?

What do mobile messaging app WeChat and the Ultimate Fighting Championship have in common? If recent reports are to be believed, they may soon both be a part of Tencent, the massive Chinese internet company that recently splashed $8.6 billion on the creators of hit mobile game Clash of Clans.

ESPN, FloCombat, and the Wrestling Observer Newsletter have all reported in recent days that Tencent is part of a consortium of companies that are in talks with UFC parent company Zuffa about acquiring the mixed martial arts promotion for as much as $4.2 billion. (Neither Tencent nor UFC responded to Motherboard's request for comment.) Keep in mind that Zuffa bought UFC for a paltry $2 million in 2001—this would be quite the return if the deal goes through!

On the surface, the potential deal may sound a little crazy—why would a Chinese internet company want anything to do with a cagefighting organization?—but analysts deeply familiar with Tencent's business tell Motherboard that acquiring UFC could just the kind of savvy move that's made the company so successful in the first place.

"Since games are rapidly evolving toward spectator sports including live streaming and events, it is only a small sidestep to add a sport such as UFC to your portfolio of 'content,'" Peter Warman, the CEO of video game industry research firm Newzoo, told Motherboard. Besides WeChat, Tencent also counts among its properties the wildly popular competitive online multiplayer PC game League of Legends, a title that on its own generated an estimated $1.6 billion in revenue in 2015. Adding UFC to the mix could give Tencent another property with which to sell out large stadiums around China and the rest of the world.

It's not just the allure of potentially selling out stadiums with homegrown mixed martial artists that may have attracted Tencent to UFC. The company, with its ability to effortlessly distribute content to WeChat's nearly 700 million users, would also be able to easily create mobile games based on the UFC brand, potentially opening yet another revenue stream for the company.

"In a sense, you have to think of Tencent as a technology company that's slowly morphing into an entertainment firm," Joost van Dreunen, CEO of video game industry research firm SuperData, told Motherboard. To van Dreunen, that Tencent would potentially acquire UFC is merely an extension of its evolving strategy of importing popular western licenses into China for local consumption. (Among other agreements, Tencent hosts a free-to-play version of Activision's Call of Duty franchise in China.) But UFC is unique in that, unlike other North American sports like football or hockey, mixed martial arts actually has the potential to become popular in China.

"Tencent needs licenses," said van Dreunen. "All of the other major ones that work well in western markets—the NFL? Nobody really cares in China. The NHL? Nobody really cares. The NBA is an exception, and soccer may be an exception, but UFC could really work there."

UFC has for years attempted to grows its brand China, most notably by holding an event in Macau in 2012. In 2013, the company brought over its popular reality show, The Ultimate Fighter, and selected popular Chinese fighter Tiequan Zhang as one of the main coaches on the show. Counting Tencent as its parent company would put UFC on the fast track to Chinese relevance. "MMA? That could actually really work there," said van Dreunen.

For Tencent, the possible acquisition of UFC could also represent the natural evolution of its previous successes: As the largest internet company in China, the best way to continue to grow may be to sidestep into tangentially related businesses—in this case, real life sports.

"Tencent now owns and controls a huge amount of infrastructure and has an enormous audience base," said van Dreunen. "So you have to kind of ask yourself, 'How are they going to continue to grow? Where does a company like Tencent go when it looks to double its audience or user base?'"

The answer to that question may be an eight-sided cage.