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The business model for IPL franchisee
Unread 02-11-2008, 04:41 PM   #1
Chandan
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The business model for IPL franchisee

The cash in the cash cow

The IPL franchisees are paying big money for the privilege of owning teams, but they're not going to be seeing any returns for five years at least. A look at the economics of the league


Ashok Malik

February 11, 2008



Franchise owners like Vijay Mallya will be looking at using the cricket property to promote their other businesses, and as a publicity vehicle AFP


In the mid-1990s, in the first flush of economic liberalisation, the government of India opened up the telecom business. From a state monopoly, private players were now invited to bid for the right to provide basic and mobile telephony in specified circles.

Fantastic figures were quoted. New telecom companies emerged out of thin air. Some were owned by well-known business houses, others by supposed friends of the telecom minister. Everybody was giddy with excitement, but sitting prettiest was the government. It had been promised huge licence fees - and had, essentially, made its millions without lifting a finger.

For the winners of the tendering process, life was less simple. The questions began to roll in thick and fast. Would private telephony be an upper-end service or a mass market one? Would some consumers pay lots of money to make a call, or would charging lots of consumers a fraction be a better business model? How many cell phones would Indians buy, how often, and what prices?

A decade and a bit down the line, the big boys of telecom have become valuable and profitable. Companies and licences have been re-sold; consolidation has sifted the serious players from the dilettante investors. Telecom is one of the key drivers of the Indian economy.

In 1995, however, it was the great unknown. That's exactly what the Indian Premier League is today. Many suspect that a domestic Twenty20 league, with all the attendant razzmatazz, will ultimately come out successful. Yet nobody is betting on specific numbers, on time-frames and on modalities.

The ones with the least to lose are the gentlemen at the BCCI. Legally, the IPL is a sub-committee of the BCCI, and it has already guaranteed itself close to $1.75 billion in television rights and franchise sales figures. The title sponsorship for the inaugural IPL tournament, and the commission from the player auctions - each of the eight franchise teams can "buy" up to four foreign cricketers through IPL - will earn it more. Of course, two-thirds (64 per cent, to be precise) of the central rights money - television and title sponsorship, for example - will have to be shared with the franchisees/clubs. Even so, by the simple expedient of sanctioning a new product, Twenty20 cricket, the BCCI/IPL has earned the cheapest billion in Indian history. Like the telecom ministry in 1995, it is laughing its way to the bank.

Twenty20 (tele)-vision

Is anybody else laughing? Not quite. The franchisees are alternating between grinning and grimacing. The media-rights winner, WSG/Sony Entertainment Television, is frowning. Why? Simply because, however you look at it, for the next three to five years IPL commitments seem unlikely to make money.

Consider the television deal. WSG has promised IPL about $350 million for the first five years and a little over $550 million for the following five years. As such, in the first year WSG is committed to paying IPL $70 million (or, at Rs 40 to a dollar, Rs 280 crore). How much can Sony recover from advertisers? Let's go by industry benchmarks. ESPN Star Sports holds the telecast rights for the current Indian tour of Australia. According to a company executive, for four Test matches, one Twenty20 game and 14 one-day internationals - involving a three-team league and at least two finals - ESPN Star Sports has earned some $ 81 million in ad revenue. About $19 million has come from the Test series, and $62 million from the limited-overs segment.

Do note that the current season is cricket's equivalent of a blockbuster. A star-studded Indian team is playing the world's best Test side and the two World Cup finalists. ESPN Star Sports wouldn't have earned so much if India had been playing Bangladesh and West Indies.

Industry insiders say Sony's initial rate card for IPL matches is offering advertisers a 30-second spot for about $16,500. There are 60 such spots in a Twenty20 game, and in its first season IPL will see 59 games. That means Sony is looking at just under $60 million from ad revenues.

$16,500 per spot is, it must be pointed out, a top-of-the-line rate - the sort advertisers pay for an India-Pakistan tournament final or an India-Australia Twenty20 face-off. For IPL, Sony will almost certainly have to negotiate cheaper bulk deals. One sportscaster executive points out that in the first season Sony should be happy with even about $37.5 million. The chief of a sports management company is more optimistic: "The prime-time exposure, the overall excitement around Twenty20 in general and IPL in particular, the predictability of continued viewer interest, all add up to a substantial value package for advertisers." That aside, he argues IPL will "expand cricket's core consumer group: attract younger audiences, more female consumers".

The bigger conflict could be four or five years away. the franchisees could be pouring in money but not recovering a modicum, and be getting tired of being treated as second-class citizens in cricket's universe. A question could well be asked: "Why should our IPL clubs play second fiddle, in terms of scheduling and branding, to international cricket? We're putting in good money; the cricket boards owe us something, surely?"

That could be right. The first season of IPL is likely to be more extravaganza than pure sport, whatever that may mean in cricket's hedonistic age. Shows by movie actors (maybe Shahrukh Khan and Juhi Chawla performing mid-field just before their Kolkata team comes out to bat); fashion shows in between innings; a draw of lots that has lucky ticket-holders invited to the pitch, and perhaps to a party with the teams later on - the possibilities are limitless.

Franchise fix

How do the eight franchisees see the balance sheet for the first year? From Reliance industries, which forked out $11 million for the Mumbai franchise, to Red Chillies (Shahrukh Khan) in Kolkata ($7.5 million), the eight clubs will pay the BCCI a hefty fee for year one. Further, bidders estimate that another $12.5 million will have to be spent on buying players and running and building up the team.

Where will the earnings come from? Sixty-four per cent of the media and central rights earnings will be equally divided among the eight teams. In the case of the WSG/Sony deal with IPL, this comes to 64 per cent of $70 million - or about $5.5 million per team. The title sponsorship will bring more to the kitty.

Ticket sales, says a franchise executive, could bring in $1.5 to $2 million. Individual clubs will be able to do city-specific deals for team sponsorship and sell a designated slice of in-stadia advertising that could together earn them about another $1.75 million.

There could also be some earnings from corporate hospitality services: selling prime seats and boxes to upper-end audiences, throwing in drinks and dinner and a meeting with the players/entertainers.

Merchandising and licensing are other options. Would people buy Red Chillies-Kolkata Tigers T-shirts or eat at Reliance Mumbai Warriors restaurants? Again, one top sports agent is very optimistic: "Licensing seems to have reached an inflexion point in India. And with the degree of passion that cricket and the teams can generate, we believe that licensing can be a substantial revenue stream."

Nevertheless, one former cricket administrator who has been offered the CEO's job at one of the franchises says that teams should expect to lose in the region of $30 to $37 million over the first five years."

By the end of the third year, some of the franchises could also be budgeting for a new stadium. For the first year, IPL teams will be renting stadia from their state or city cricket associations. "To deliver a quality product to audiences, from family picnic spots near the playing area to food courts and clean toilets," says a franchise executive, "we will need absolute control of the stadium."

How easy will this be? At some point, would it be worth building a new stadium as part of a multi-event entertainment centre, with conference facilities, restaurants, shopping malls and movie theatres thrown in? The Reliance Industries special economic zone in Mumbai is planned as virtually a new city. GMR, the Delhi franchisee, is redeveloping Delhi's airport and has plans for ten hotels and entertainment zones in the environs. Could a spiffy Twenty20 cricket stadium make the cut?

Land prices vary from city to city, but building a new cricket facility in India costs about $45 million, says a BCCI official. At least some of the franchisees will have to factor in that cost.

Show me the money

In Delhi, speculation has already begun as to whether a senior Union minister's son will be signed on as one of the local franchise's four "junior cricketers". The speculation, it must be emphasised, has little to do with the young man's talent. It is about the political leverage it could give the corporate house backing the franchise. In the end, this may only be idle gossip in a cynical city. Yet it does explain that the motivations of the franchise owners could be very different from those of conventional businessmen - and from the expectations of cricket fans, who might wonder why so much is being invested in an untried format.

There are, essentially, three reasons for the bidders to put in the sort of money they are going to have to: to make a sports team a profitable business; to use the cricket property to promote other businesses and as a publicity vehicle; to build the brand and enhance its valuation and then sell. "The individual team owner's perspective on expenses would vary depending on the weightage given to each objective," a sports management firm's CEO points out.



Cricketers such as Shane Warne will fetch top dollar - and the IPL will earn a commission on every such transaction Brand Rapport

For instance, Vijay Mallya (United Breweries, the Bangalore franchise holder) is clearly looking at the second template. From making Kingfisher Airlines the official carrier of the Bangalore team, to using Kingfisher swimsuit calendar models and his racehorses as magnets to draw crowds to an evening's Twenty20 entertainment where Kingfisher will be the beverage of choice, there is much he can do.

At least two of the smaller franchisees, one in the east and one in the north, are already talking of enhancing valuation and selling the franchise at a healthy profit. Resale is permitted after three years. In fact, an international media investor is said to be the "valuation brain" supporting three of the smaller franchises, even if the official owners are marquee names.

ICC versus IPL?

At the height of the Harbhajan Singh-Andrew Symonds controversy, a senior BCCI official said, "In five years we won't need them [the ICC]. IPL will possibly have bigger valuations than ICC." Was it an off-the-cuff remark or was there method in that moment of madness? To put the query another way: will IPL expand the cricket economy or will it cannibalise the current market, eat into the revenues of conventional ODIs and - heresy - Test cricket? Industry observers discount these fears but few are willing to entirely dismiss them.

Even so, one potential problem that IPL bigwigs are content to sweep under the carpet is of how India's Twenty20 league can fit into the existing ICC calendar. This year, the IPL will be played starting mid-April, the off season in India. Yet it will clash almost directly with Australia's tours of Pakistan and the West Indies, and New Zealand's series in England.

Already the buzz is that senior cricketers in Australia would rather play the IPL, and make maybe half a million dollars for a few weeks of work, than travel to troubled Pakistan or even play a series at neutral venues. New Zealand lost Shane Bond to the rebel Indian Cricket League; the bigger, wealthier IPL could have top international cricketers rethinking their priorities, particularly towards the end of their careers. A short, lucrative stint with the IPL may seem a better idea than the usual Test/ODI grind.

The bigger conflict could be four or five years away. By then the IPL franchisees could be doing one of two things. First, they could be running profitable cricket ventures that could be making money or simply be subsidised by the publicity budget of the larger business house that owns the franchise. Alternatively, the franchisees could be pouring in money but not recovering a modicum, and be getting tired of being treated as second-class citizens in cricket's universe. A question could well be asked: "Why should our IPL clubs play second fiddle, in terms of scheduling and branding, to international cricket? We're putting in good money; the cricket boards owe us something, surely?"

Mature sports markets have faced this dilemma. English football, where the national squad is far less than the sum of the Premier League teams, is a case in point. Only this January, the FIFA president, Sepp Blatter, exclaimed, "Look at the big clubs in the Premier League ... it is not the English or British game that is represented. The clubs are international XIs ... But this does not serve football. To serve football, you must never forget the national team." The men who run Manchester United and Arsenal will probably disagree. So will investors who have bought equity in these clubs. In five years or so, a little after the 2011 ICC World Cup is played in the subcontinent, Indian cricket and the BCCI, IPL and its franchises, may have to confront similar conundrums.
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Unread 02-11-2008, 04:47 PM   #2
Chandan
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I've not posted this article in IPL news thread because there were many forummers including me who wondered all along why the businessmen were pouring money in an untried format or model.

Is there anyone here who understands the business economics well? If so, please explain it to me as how these franchisees are going to recover their money back, what extraordinary have they seen in this model that they're willing to pour money into it?

To me, having malls and restaurants etc along with having a stadium with food-courts and family picnic spots are a bit far fetched. But then every business idea seems far fetched to an outsider, isn't it?

What are these business persons going to gain from it? And how does it threaten ICC?

Unread 02-11-2008, 11:18 PM   #3
chanakya
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Quote Originally Posted by Chandan View Post
I've not posted this article in IPL news thread because there were many forummers including me who wondered all along why the businessmen were pouring money in an untried format or model.

Is there anyone here who understands the business economics well? If so, please explain it to me as how these franchisees are going to recover their money back, what extraordinary have they seen in this model that they're willing to pour money into it?

To me, having malls and restaurants etc along with having a stadium with food-courts and family picnic spots are a bit far fetched. But then every business idea seems far fetched to an outsider, isn't it?

What are these business persons going to gain from it? And how does it threaten ICC?
I think team based merchandise will sell.
You can wear a Gilchrist T-Shirt without feeling bad about it to an Australia India game then

Unread 02-11-2008, 11:26 PM   #4
fineleg
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Biz model is 'Build it and they will come' - our fans sure will.

Unread 02-12-2008, 04:20 AM   #5
bunny
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The other thing is many of the owners can advertise their own brands "free of cost". So strictly speaking even if they are making a small loss they will be more than ok with it.

Unread 03-01-2011, 12:27 PM   #6
KXIP001
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thnks for the great information , its helpful to understand the whole business game of IPL
 


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