Economics of IPL

Now that the IPL saga has come to an end (or started depending upon which part of it you find more interesting: Cricket or controversies) I thought about writing this post to discuss the impact of IPL not just on Cricket but on us as individuals. The most striking thing about IPL has been the figures that we have seen. Before you head into the wrong direction let me clarify that I am not talking about the figures of cheerleaders who had the privilege of dancing in front of almost 40-50,000 people daily (something that even big actresses in Hindi film industry dream of). Though there were some matches where the stadium was emptier than my wallet and add to that some boring display of batting in a couple of matches which made it possible for cheerleaders to take some rest and even play a game of cards in between! However, I am talking about the financial figures which were unheard of in Cricket. One UK agency Brand Finance which put the brand value of EPL at around $12 billion put IPL’s value at around $2.01 billion in 2009 and $4.13 billion in 2010! Surprising thing about this is not the figure but the fact that EPL has been around for a while and IPL is only three-years old! It is difficult not to smell foul play in this as it is quite clear that as far as IPL is concerned it is a valuation game. It started with some moderate figures (have to call them moderate considering the current trends) where the most expensive team was Mumbai Indians ($112.9 Million). Even with players, Dhoni who was the most expensive player got around $1.5 Million which made news for weeks. There was also the concept of icon players who were not put up for auction (thank god we were not subjected to something like "Tendulkar sold for...!"). Icon players got 1.15 times the amount received by the highest earning member of their team. Laxman was one of them but he himself opted out (again thank god he did that as it would have been disturbing to see someone like him get more than Symonds or anyone else for that matter!). However this concept was discontinued from this year (finally sanity prevailed). Second year of IPL saw a few transfers between teams and auction of players like Kevin Pietersen and Andrew Flintoff for $1.55 Million each (i.e. higher than Dhoni). It was the 3rd IPL which saw bids going through the roof for players as well as for the new teams. Figures of these teams were astonishing to say the least: Pune franchise was sold to Sahara for $370 million and Kochi went to Rendezvous Sports World Limited for $333.33 million. So a total of $703.3 Million for two teams compared to $725.5 Million for eight teams! Accordingly these new teams will be paying up huge amount of annual fees: 10% of cost of franchise (very expensive maintenance, I must say, compared to old teams). Third IPL saw Bond going to KKR for $1.3 million and Pollard to MI for $2.75 million (whereas base price for him was just $200,000). Let's just put these figures in perspective: Pollard would get only $7, 50,000 of $2.75 million (a player can't get more than $7, 50,000 according to the rules) and the rest of the money will go to IPL. There was a tie for pollard at $7, 50,000 and then there was silent tie-break (read money-spinner for IPL) where the highest bid was made by MI. So MI got the player all right but the process is such that bids are bound to reach new heights every time there is a tie-break as the maximum price is kept at a relatively lower level inducing all teams to go up to that level and then for the tie-break and the way things are going you can rest assured that there are going to be more and more tie-breaks!

Ad rates went up like anything considering what the sponsors have paid this year compared to the last couple of years. Ad revenues for IPL 1 were around 300 crores, 450 crores for IPL 2 and, reports say, revenues for IPL 3 are around 750 crores. Ad rates were about Rs. 1-1.5 lacs (for a 10-second slot) for first season then it went up to Rs. 2.5 lacs in second and third season saw ad rates reaching the heights of 4.5-5 lacs. The 10-second slots were sold for almost 9-10 lacs for the finals in IPL 3, higher than the Rs 8 lacs for T20 World Cup final between India and Pakistan. One thing to be noted here is that the TRP for the World Cup Final was 9.21 whereas for IPL 3 it was much lower!! (One more example of over pricing) But still things are only going to get better for SET Max next year with the addition of two teams. Even if we assume that the ad rates will remain constant (which is very unlikely) the sponsors will have to shell out more as the number of matches will increase to 94 and according to the rules the sponsors have to buy some minimum seconds per match.

Now look at the impact of IPL on us. One simple rule is if somebody is earning money then somebody must be paying it. Let’s consider this from the perspective of IPL. When someone says that IPL has been a money-spinner for one and all, one question that deserves an answer is who pays them? Delving more into it we realize that money earned by IPL (going into central pool and then getting divided between franchise owners) comes from various sources like Gate receipts, In-stadium or On-ground advertising, Rights sold to Broadcasters etc. Now the money that is generated in the form of tickets is paid by us, which is perfectly fine (though there has been a steep increase in the price of tickets for IPL 3 compared to IPL 1). Now, what about the rest of the money (major chunk of IPL income) that comes from selling broadcasting and advertising rights. SET Max makes money like anything which is quite obvious from the figures given above. Companies (advertisers) don’t agree to pay up huge amount of money to the channel and for on-ground ads for nothing. Whatever money is spent by these companies (for Television ads, In-stadium, On-ground ads) becomes part of their marketing budget, I am sure. This marketing budget is part of an overall cost structure of any product or service. So when the margin on that product or service is decided, it would be over and above all the costs including the unbridled costs of marketing which will lead to a higher price. And surprising thing about all this is that we will be paying up for all this as we only consume all the products and services offered by these companies (read sponsors)!! We may not realize (or should I say mind) this when it will come to us in the form of increased prices. It will be interesting to compute IPL index to track this!

My objective is not to question the business model whose success is quite obvious and I have followed it all through (leaving office early in the name of customer visits!). I am game even if the next season of IPL starts next month! But what I want to convey through this post is that let’s just not consider it a success because of the quantum of money that is getting exchanged between a select few paid by all of us directly or indirectly. Let’s just give some credit ourselves who don’t mind paying that extra bit directly (tickets etc) or indirectly (increased prices of products). So IPL owes its success to us! So we all need to take a call here: Either we all agree to pay whatever is asked for in the form of ticket prices and increased prices of products without questioning it or we don’t (please note that we have no choice but to agree!). From the perspective of a viewer and consumer I just hope that IPL continues and continues for a long period of time. But for that to happen it needs to make sure that there is no overdose of Cricket (come on guys, brace yourselves for 94 matches next year!!) or commentators who can bore you to death with their commonplace comments like “I think they need to take early wickets” or “First few overs are going to be crucial” (especially of people like Atul Wassan who has taken 20-odd wickets in his bowling career at international level but always has some advice for players like Tendulkar!) and that valuation of players and teams are done rationally! Because unless this is done, I feel, it will become unsustainable for franchise, in their race to outbid each other, and for advertisers as well. They should not take the viewership numbers for granted. That is why I feel all the controversies surrounding IPL may turn out to be blessing in disguise for IPL as not many companies would like to be associated with a tainted league. I actually hope these controversies (discussed in detail below) turn out to be true so that IPL may lose a bit of bargaining power with stakeholders helping in turn to keep a check over money being exchanged and overall valuation (which seems exaggerated). This will be good for us (Cricket fans as well as consumers) at least! Till then its game on!
Controversies:

I am covering this topic separately as I don’t want the controversies part to mix with what I was trying to say, which is a different topic altogether. Recently IPL has been making news for all the wrong reasons. It all started with Lalit Modi tweeting as to how he was asked by Shashi Tharoor to not ask for ownership details of Kochi team. Sunanda Pushkar (a friend of Shashi Tharoor) got equity in the company when she was not entitled to it. So she was rightly asked to forfeit it. Then the news channels went crazy discussing ownership details of all teams, with some of then tracing their roots to Mauritius. (The problem with news channels is that when they are good to you they’ll talk about all your virtues even the ones you were not aware of, like they did with IPL and team owners. I remember one channel going to the extent out counting hugs given by Shilpa Shetty to her team members! And after this controversy they started questioning the Mauritius connection of all teams). I believe this is one issue which was blown out of proportion as even some well known companies have been using the Mauritius route of investment for a long time which entitles them to certain monetary benefits. So there was no need to get shocked on hearing this and make an issue out of it. After that, news came that IPL isn’t paying any taxes and working as a charitable organization (this may qualify as the joke of the century) and that it has been using all its earnings to promote the game of Cricket! There were also accusations of match fixing and betting. If all this is proved true then the league may lose some reputation for sure. Till then all is well, almost!
In case you have survived the whole post here’s some numbers for you.

Following information has been taken from newspaper articles and it is by no means exhaustive in fact there are newspapers quoting different figures. There are other sources for income as well for which information wasn’t found. So do share if you have any.

* Icon Player Concept (System removed from 2010)
They earn 15% more than highest earner in their team. Players covered: Sachin Tendulkar, Rahul Dravid, Sourav Ganguly, Yuvraj Singh, Virender Sehwag)
* Money going into the central pool to be divided in ratio of 40:54:6 for IPL:Franchise:Prize Money. Ratio after 2017 will change to 50:45:5.
* Broadcasting rights went to SET Max and WSG for Rs. 8700 Crores for 10 years. They re-sold parts of their rights in different countries.
* Kingfisher paid Rs. 106 crores for 5 years (Ads on Umpires)
* DLF Group US$50 million for 5 years
* Hero Honda $22.5-million for 5 years
* PepsiCo $12.5-million for 5 years
* Vodafone $25 Million (not sure about the duration)
* Rights for Mobile applications went to DCI Mobile Studios/Sigma Ventures of Singapore till 2017 (amount not known)
* Live Current Media Inc. won the rights to run IPL portals
* Contract with YouTube for 2 years
* Theatre rights went to UFO Moviez covering 1700 screens
* licensing deal with Colors for abour Rs. 600 crores for 3 years