The IPL’s financial structuring remains a mystery to the larger public who heard and read about the astronomical sums that a Dhoni or a Symonds was bought for.

Raghuvir Srinivasan

A fortnight is too short a time to judge the success of a concept, especially when it is something as revolutionary as the Indian Premier League (IPL). Yet, those behind the IPL, including the Board of Control for Cricket in India (BCCI), may have enough reason to smile as the tournament enters the second half.

If the crowds that have thronged the stadiums at every single venue, including that bastion of conservatism, Chennai, and the joie de vivre ambience are any indication, then the IPL may have caught the imagination of the masses. The entire concept of IPL is based on the assumption that the public will take a fancy to supporting league teams, as opposed to national teams, and come out in large numbers to watch their favourite stars play, whatever their nationality.

But those behind the IPL cannot breathe easy just yet. It is possible that the crowds that have been thronging the stadiums and tuning in to the television broadcast are doing so, attracted by the novelty of the concept. Will the crowds dwindle once the novelty wears off?

IPL’s bosses and franchise owners must be hoping not because there is big money riding on the League, which, as a back-of-the-envelope calculation would show, has already shot past the $2-billion mark.

The IPL’s financial structuring remains a mystery to the larger public who heard and read about the astronomical sums that a Dhoni or a Symonds was bought for. What exactly are the revenue streams of the franchisees? What are their expenses apart from the cost of franchise paid to IPL and player fees? What are their chances of breaking even in the first year itself?

Robust financial model

The IPL has been structured as a special purpose vehicle of the parent, BCCI. It will franchise eight teams for a start with two more to be added over the next six years, for a maximum of 10 teams only. The eight franchises have been auctioned to the highest bidders who will own them for perpetuity. IPL has bagged a cool $724 million from the sale of franchise rights to the eight teams (see graphic).

The main revenue streams for the franchisees are from the sale of broadcast rights, sponsorship, gate receipts in matches at their home grounds and team sponsorship. All of these, except for the team sponsorship, have to be shared with IPL in pre-determined ratios over the next 10 years.

Broadcast rights: The broadcast rights have been sold by IPL to Sony for $1.02 billion for 10 years in a contract that is linked to the success of the League and to television rating points (TRPs).

In the first two years, 80 per cent of the money earned from the broadcast rights will be shared by the franchisees equally with the rest going to IPL. The latter’s share will increase gradually and by the fifth year, IPL will get to share 40 per cent of the broadcast revenue.

Sponsorship: The title sponsorship fee of Rs 40 crore per annum for the next five years to be paid by DLF will be shared with the franchises. IPL will retain 40 per cent of this with the balance 60 per cent to be shared between the franchisees equally. While these revenues accrue from the central pool to the franchisees, they will generate team sponsorship at individual levels. For instance, Nokia is the team sponsor for Kolkata Knight Riders while Aircel sponsors Chennai Super Kings. This revenue will remain wholly with the franchisees. Some teams such as Mumbai Indians have multiple sponsors in MasterCard, Bajaj Allianz and Royal Challenge, all of which are endorsed on team jerseys.

Ticket sales: The final revenue source, of course, is ticket sales at home stadiums. Each franchise will get seven matches at home and the revenues from ticket sales will be shared with IPL, which will get 20 per cent, with the rest going to the franchisee. There are also other smaller revenue sources such as from in-stadia advertising a part of which will go to the franchisee.

Now to the expenses. The two big ticket expenses are player costs and the franchise fee payable to IPL. The franchise fee will be payable in equal sums over a 10-year period. For instance, the Mumbai Indians franchise, which is the most valuable one in the IPL at $111.9 million, will have to pay $11.19 million every year to IPL.

Next come the player costs which was determined in the auction that was held before the League began.

The franchisee has to pay players who are available even if they are on the bench. Players have a three-year contract with the franchise that bought them but they can be traded at the end of the first year between the franchisees.

Thus, M. S Dhoni, the most valuable player in the League at $1.5 million can, technically, be bought by another franchise, say Kolkata Knight Riders, next year assuming that Chennai Super Kings is willing to part with him. These revenues will go to the individual franchisee. On an average, each franchisee must have spent about $4-5 million in the inaugural tournament on players, coaches and support staff.

The franchisees are also expected to pay for the use of the stadiums for which they have to enter into contracts with the local association. For instance, the Kolkata Knight Riders franchisee, Sharukh Khan-owned Red Chillies Entertainment, will have to pay the Cricket Association of Bengal for the use of Eden Gardens. There are also other marketing costs such as events for promotion of the team, star ambassadors, and so on, which the franchisees have to bear.

Profitable?

The critical question is: Will the franchises break even in the first year itself? The answer could differ across franchisees as the sponsorship models that they have assumed are different. While some of them have gone for straightforward team sponsorship, others have taken sponsors on board as partners. The revenue streams could be different in the two examples. On the expenditure side, the money they have spent on acquiring players and the franchise itself also varies widely. A lot would also depend on the accounting policies that they adopt as, for instance, in amortising player acquisition costs. It would largely be safe to assume though that most of the franchises would end up with a surplus at the operating level in the first year.

Exciting future

But the real action will begin from the next edition in 2009. That is when the franchisees will get a grip on the concept and build on the experience of the first year.

Besides, trading of players could start in right earnest, especially if the BCCI decides to remove the cap of $5 million that is now placed on player purchase. The final proof of the success of IPL will come when the franchisees decide to list their teams. This is a live possibility at least by the third year of the IPL, which is 2010, assuming the concept succeeds.

The more successful teams could be prime candidates for listing, especially if player trading takes off aggressively. That is when the franchisees will feel the need for more capital and what better place to raise it than the stock market.

The example of the English Premier League football teams, a number of which are listed, is there to follow.

That, then, would unambiguously signify the graduation or demotion, depending on which side of the fence you are in, of cricket from a traditional sport to a tool of mass entertainment.

Don Bradman must be laughing in heaven thanking his fate for being born exactly a century before someone thought of IPL and instant, “pyjama cricket”.

Imagine the great Don being auctioned off between a Chennai Super Kings and Kolkata Knight Riders as if a price could be put on his immortal skill!

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(This article was published in the Business Line print edition dated May 9, 2008)
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