IPL Economics

With the brouhaha around the new IPL teams and their steep prices, one wonders if it makes economic sense to buy these new IPL teams or has it something to do with human behavior (ego?) to own and run a team. (As an aside, I was talking to my friend the other day and he made a very interesting point. He said “Accountability in IPL is pretty stunning if you look at it. There are no more excuses like ‘building for the next world cup’, ‘team is in transition’, ‘it’s the process and not results’. The results are pretty instantaneous.”)

The following analysis is a guesstimate of what make up the numbers in these IPL teams, both old and new. It is broken up into two parts –

a) Existing IPL team’s economics

b) New IPL team’s economics

a) Existing IPL team’s economics

When IPL was inaugurated in 2008 with much fanfare, the number of teams were restricted to 8. These teams were owned by Bollywood and Indian Corporates alike. The 8 teams were – Rajasthan Royals (RR), Kings XI Punjab (Kings), Delhi Daredevils (DD), Kolkata Knight Riders (KKR), Mumbai Indians (MI), Deccan Chargers (DC), Bangalore Royal Challengers (BRC) and Chennai Super Kings (CSK). Through a closed auction system, the bid winners were declared, with Mukesh Ambani bidding the highest with Rs. 450 cr ($111.5mn) for Mumbai Indians and Emerging Media Group bidding for Rajasthan Royals at the lower end at Rs. 268 cr ($67mn). The sum total of all bid winners was Rs. 2894 cr. which has to be handed over to the IPL management team over a period of 10 years (in equal amounts).

Let’s look at the two different components that make up Profit for any enterprise. Costs and Revenues.

Costs:

a) The franchises have to pay the bid amount every year, spread over 10 years. The team is then to perpetuity by the owner, without paying any more franchise fee.

b) The franchises also had to bid for different players. Stars like Sachin Tendulkar, MS Dhoni, Rahul Dravid etc. command a premium (close to Rs. 1.5 cr each, every year) while unknown players command the minimum (Rs. 8 lakh every year). Depending on the capacity of owner’s capital and different sponsors involved, various players are bid for and paid in full.

c) The bidders also have to take care of the promotions – television and print ads for the teams as well as star players, to keep the marketing buzz going. This involved, for example, Delhi Daredevils roping in Akshay Kumar for the first IPL season (while dropping him for the 2^nd), while the Royal Challengers chose Katrina Kaif. There were other Bollywood owners like Shilpa Shetty and Shahrukh Khan who were spared the Bollywood expense, but nevertheless had to shell out money for other marketing expenses.

Revenues:

a) Approximately 60% of TV rights revenues is distributed among the franchise owners. TV rights with Sony were renegotiated in the 2^nd season for a record Rs. 8200 cr ($1.6bn) to be spread over 10 years (It was initially Rs. 4000 cr for 10 years. However, basing on the popularity of IPL Season 1, the bid was renegotiated to Rs. 8200 cr for 10 years)

b) Revenues from sponsors (Nokia, Wrigleys, Kingfisher, Pepsi, Reebok etc.)

c) Ticket receipts, selling memorabilia and merchandise etc also called Gate revenue.

The following excel sheet gives a snapshot of the approximate profit/loss for each franchise in IPL Season 2.

(Assumptions: Promotion cost@50% of Team cost, Gate revenue@10% of TV rights revenue, Sponsors revenue on average @30% of TV rights revenue – assumptions made in line with other sports franchises across the world – feel free to disagree)

As seen in the Profit/Loss sheet, inspite of very generous assumptions regarding revenue, 7 out of 8 teams are in the red. The assumption on sponsors revenue might be a bit skewed since Mumbai Indians have the capacity to bring in more sponsor’s revenue while the lesser know Rajasthan Royals might bring in less. Nevertheless, the profit/loss sheet gives us a fair idea of how the franchises fared in IPL Season 2 inspite of low entry cost during the inaugural kickoff.

B) NEW IPL TEAM’S ECONOMICS

Sahara Group and Rendezvous Sport are the two new entrants to IPL. Sahara Group won the bid for Pune while Rendezvous won it for Cochin. The biggest downside for these two groups however is the cost. These two to-gether have paid slightly more than what the other 8 had paid combined in 2008. Sahara paid Rs. 1702 cr while Rendezvous paid Rs. 1533 cr bringing the grand total to Rs. 3235 cr.

Assuming all other parameters remain constant (TV rights revenue have to be shared across 10 teams now instead of 8 but with corresponding increase in matches from 60 to 94 in IPL Season 4, I expect the TV rights revenue to be approximately constant; the Team cost will obviously go up due to higher bids and competition for atleast 3-4 star players), the franchise cost per year is pretty steep.

Conclusion:

With the kind of losses that Sahara Group and Rendezvous are supposed to incur, I wonder what would be the actual cost, if the opportunity cost of investing the franchise fee (say, a corporate deposit @8% per year) is included. To think that the existing IPL teams are making a loss with such a low cost base, it is close to impossible to think that either Sahara or Rendezvous are looking to make money off their IPL franchises in the next 4-5 years unless they come up with stunning marketing strategies and make money off them. Buying a stake in the existing teams would have given them far more leverage in terms of better opportunity cost as well as an already established team than buying a totally new franchise.

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