Winning is not the only thing for IPL franchises
Most people I meet generally have two kinds of queries regarding the commercial aspects of IPL. Some wonder how the franchises, which dole out millions of dollars to 'buy' star players, make money. Others are intrigued by the sky high valuation of these teams quoted in the media. Well, valuation, as any MBA student shall tell you is the present value of future cash flows, which put simplistically are nothing but projected revenue minus projected expenses. I attempt to give a brief breakdown of both.
Revenue sources for IPL franchises
- Share TV broadcasting rights: This is a huge source of revenue for the IPL franchises. Broadcasters have acquired the global broadcasting rights of the IPL for ten years at a cost of well over US$ 1 billion (the broadcaster then re-sold parts of the broadcasting rights geographically). A major chunk these proceeds is equally distributed to the franchises, with the rest going towards IPL and prize money.
- Sponsorship rights: The proceeds from sponsorships of the IPL go towards a central pool and a sizeable percentage of that is distributed equally among the franchises, with the rest going towards IPL and prize money.
- Local sponsorships of the team
-Ticket sales: It is estimated that 80% of total stadium tickets are with franchises with the rest being held by IPL organisers. Proceeds from the sale of gate passes are a major source of revenue for franchise owners.
- Prize money: As mentioned above, a high single digit percentage of the broadcasting rights and IPL sponsorship go towards the prize money for the IPL, thereby adding to the top line of the franchise of the IPL winner.
- Merchandise sales: The franchises sell merchandise like T-shirts and caps through their web-site and other channels. This revenue stream can be a big money spinner depending on the fan base of the team.
- Player Trading: We have seen a lot of players being traded between different franchises in the last two years during the open period of the trading window. Franchises make a neat profit from the 'sale' of these players as they charge a premium on the price at which they 'bought' them.
- Champions League Twenty20: The top four teams in the IPL qualify for the Champions League every year and are entitled to a share in the amount paid for the broadcasting rights.
It is worth mentioning that the government of India also adds to its coffers from IPL by way of direct taxes (TDS on remuneration to players, commentators, umpires etc.) and indirect taxes (service tax on advertising, consultancy etc.).
Expenses for IPL franchises
- Franchise fee: All teams have to cough up10% of the franchise cost every year to the IPL for the next ten years.
- Player costs: This is the major annual expense for all IPL franchises and should account for 35-45% of the revenue in my estimation. In the first auction in 2008, there was a cap of US$5 million per franchise on player bids. Today, it is US$9 million. Hence, franchises have more money to spend on the stars.
- Stadium rent: The franchises have to pay rentals to the local cricket association for the stadium.
- Travel & hotel expenses of the players and support staff
- Marketing costs
- Other overheads: Running an office which will work round the year, not just during the IPL season.
So, is the IPL a recession-proof money maker for its owners as claimed by a few in the past? Maybe, maybe not. It completely depends on the viewer interest measured by TRPs and stadium attendance. A healthy viewer interest shall translate into a higher sponsorship fee (both title and local) as well as greater sale of stadium tickets and merchandise and can send the valuation of the franchises into the stratosphere.
However, I think the owners should definitely consider the following three points if they are to unlock the true potential of their franchises over the next few years.
1. Players are the key to fan loyalty
If one walks into Khan Market in New Delhi these days, he/she can spot many youngsters sporting T-Shirts of IPL teams that are not Delhi Daredevils. Similarly it is not uncommon to find Mumbaikars wearing T-Shirts of Pune Warriors India, Delhi Daredevils and Kolkata Knight Riders (on a lighter note, this can be the next election 'issue' for the Shiv Sena and MNS).
Talking about myself, I am a Delhi boy, have never been to Chennai in my life and don't have high regards for Mr. N Srinivasan. Yet I root for Chennai Super Kings because I am an ardent fan of Dhoni. Many fans in Kolkata shall feel conflicted when Kolkata Knight Riders takes on Pune Warriors India led by their very own Dada. The bottom line is that fan loyalty, by and large, is driven by the Indian star players in various teams and not by cities and profiles of franchise owners (sorry SRK).
With players in their late thirties and even early forties playing the IPL, one can reasonably expect Tendulkar, Dravid and Ganguly to play in the IPL for the next three to five years and the likes of Dhoni, Yuvraj, Gambhir, Sehwag, Yusuf and Harbhajan for the next decade or thereabouts. However the franchises would be well-served to 'create' saleable 'youth icons' for a country that has half its population under the age of 28. This is the very reason why Royal Challengers Bangalore retained Virat Kohli last year. However more of them are required.
Also going after players with a local fan base in the franchise's geography makes a lot of commercial sense. This is where I think Shah Rukh Khan and his think-tank got it wrong. KKR should have 'purchased' Bangladesh batsman Tamim Iqbal in the IPL auctions this year. Tamim, along with Shakib Al Hasan, would have garnered the team a lot of support in West Bengal as well as neighbouring country Bangladesh that has a population of around 150 million people. It would have been a great move from a marketing perspective.
2. NRIs - An untapped revenue stream
In my humble opinion, the IPL top bosses are yet to fully understand what Bollywood and Indian telly artists know only too well - NRIs are an extremely lucrative market for entertainment products coming out of India. Places like Singapore, Dubai, Hong Kong, and US can be ideal locations for monetizing IPL because of the following reasons: large well-heeled NRI population, stronger currency and no national Test team. I am not even going into the sponsorship agreements that the franchises can potentially enter with local businesses (especially the ones run by NRIs) in these countries. Other ways of generating revenue can be events like a 'gala dinner night' with the players with a steep entry price. Trust me they shall be sell-outs.
Well, the proof of the pudding lies in the eating and the sooner than later the franchises shall discover this untapped reservoir of revenue when they host a few 'exhibition' matches in these countries.
3. Relevance of the Champions League Twenty20
I think that the BCCI has erred albeit not grossly when it comes to the Champions League Twenty20, which it launched after IPL claiming that it wanted to take the format across the world. However even die-hard fans of cricket in India were clueless about composition and credentials of the non-Indian teams participating. They got even more confused on seeing some of the international players who play for the non-qualifying IPL teams also making the trip as a part of the international teams. It was hardly surprising then that Bharti Airtel pulled out as the official sponsor of the Champions League after a year, complaining that sponsorship rights were too high.
Is there a solution to this problem? In the short term I recommend including Twenty20 teams from Pakistan in the Champions League. This should ensure good TRPs for matches between them and the four IPL teams that qualify for the tournament. In the longer term the BCCI would need to come up with some out-of-the-box thinking if they are to make a sustainable commercial success of this event.
As far the IPL franchises go, as mentioned above a qualification for the Champions League does bring in additional revenue from a share in the broadcasting rights (along with a possibility of getting the winner's booty). However if the tournament doesn't garner viewer interest, then revenue from ticket sales and sponsorship rights shall dwindle.
In conclusion, don't be fooled by the pensive face of IPL franchise owners when their team loses a match. IPL has a very definitive corporate side to it. If the owners do a good job as businessmen/businesswomen, then they shall be laughing all the way to the bank irrespective of the team's on-field performance.
More about Tanuj KhoslaTanuj is an MBA by qualification and currently works at a hedge fund in Singapore. Prior to this he was a banker in India. Tanuj has written guest columns for finance journals like CNBC, The Asset, The Hedge Fund Journal, Institutional Investor, Risk.net etc. in the past and was also a regular columnist with The Wall Street Journal. He can be followed on Twitter @Tanuj_Khosla. Alternatively he can be reached at firstname.lastname@example.org.
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