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Retrofit: The mathematics of IPL – Is it ‘ghaate ka sauda’ for the new owners of Pune and Kochi teams?

Guest Column
Retrofit: The mathematics of IPL – Is it ‘ghaate ka sauda’ for the new owners of Pune and Kochi teams?

Author | Sandeep Bamzai | Wednesday, Mar 24,2010 8:30 AM

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Guest Column<br>Retrofit: The mathematics of IPL – Is it ‘ghaate ka sauda’ for the new owners of Pune and Kochi teams?

Over the last couple of days, the IPL auction has emerged as the hot button subject. Just about everyone has an opinion on it. There are others who are extremely cynical about the entire thing. But what one can run away from, but not hide, is that it is a raving success. For team owners, sponsors, advertisers, broadcasters, viewers, spectators; the IPL economy has a buzz about it. More so because it is back home. Many people have called me and asked me whether Sahara Adventure and Rendezvous have paid too much for the new franchises? Yes, maybe they have, given that Emerging Media (Rajasthan Royals) coughed up $67 million for 10 years three summers ago. Let me do the math for you. At $67 million, the franchise is a steal, for it works out to $6.7 million per year. If you adjust that for today's exchange rate, it is Rs 29.82 crore. Shah Rukh Khan also paid a relatively small sum of money in Season 1 - $75.09 million. Can you make money, well that is the question dominating everyone's mindspace these days? At $370 million, this is the way it breaks down for Sahara. It has to basically fork out $37 million per year. Now that is a lot more than $6.7 million per annum. How do the franchises make money is then the million dollar question. Simple.

The franchise owners are subsidised by the Cricket Board and its extension IPL. This is the way it works: Broadcast revenues for one were subsidising the franchises till the end of Season 2, but in Season 3, Lalit Modi has shown his worth as a marketer. He has worked his numbers in such a way that by clinching a panoply of new deals, he has managed to double the central revenue pool. Each franchise owner was given Rs 67.5 crore from this pool in year 2. But with the catalogue of new deals - YouTube, Colors, Karbonn, Maxx, MRF, vRock, et al; Modi has managed to make this particular revenue stream closer to Rs 130 crore for each team owner. Now, believe me that is a Godsent. So, if Rajasthan Royals has to pay a fixed cost of $6.7 million only and in turn is getting Rs 130 crore from the central revenue pool, then that is a positive start. There are other revenue streams that open up when you play in India, which I will detail in a bit. Of course, there is the operating expenses part, which is equally heavy, but if you are smart and some of these franchises are, then there is no way you can lose money. Entry cost is critical, the lower the better. That way the arithmetic is in the black and not in the red. People who bought the franchises earlier and cheap stand to benefit. But even Mukesh Ambani, who paid the most – $111.9 million or approximately Rs 447 crore – forks out only Rs 44.7 crore as franchise fee annually to BCCI.

What are the major heads that one needs to look at? Revenues and expenses obviously. Under revenues there is - broadcasting rights now read central revenue pool, team sponsors, other income which is gate receipts, in stadia advertising, merchandising sales, media tie-ups and prize money. Under expenses there is - franchise fee, stadia fees, team eco-system expenses, which include sales and marketing employee cost as well as players and support staff payments, team promotion, travel and hospitality cost and other variable expenses. Team sponsorship is also going gangbuster in 2010 and the general average is expected to be closer to Rs 40 crore for each team with Mumbai Indians and KKR leading the way with Rs 50 crore or thereabouts. This is up from an average of Rs 24 crore last year. By making a connect with different social strata, IPL has proved to be a killer application. Another novel concept this time is the in stadia big screen advertising during the games. A very innovative revenue stream. Last year, with the tournament shifting to South Africa, logic suggested that the team owners lost money, but IIFL research said otherwise. I must add that several clubs were given additional handouts by IPL reimbursing them for hospitality and travel expenses incurred in South Africa. While some of these figures are in public domain, others have not been quantified.

What Lalit Modi has done in Season 3 is show us how to skin the cat in at least a dozen new ways. Take the ITV deal for UK broadcast rights, again slice and dice. Ditto for the deal with UFO Moviez, which gave them theatrical rights for the IPL and paved the way for multiplexes to show the matches. Though this has proved to be a damp squib, another revenue stream was added by Modi. Fragmenting and slicing the rights pie, which rested with IPL and Modi have been monetised efficiently. For Season 2, IIFL suggested that each one of the eight sides reportedly made profits, which is a considerable improvement over Season 1 when only Rajasthan Royals, Kolkata Knight Riders and Chennai Super Kings made a profit. And this was contrary to popular perception, which said that all the teams would lose money because the event was staged in South Africa. But the figures revealed a different story. The broadcasting revenues were directed to a central pool, 40 per cent of which went to IPL itself, 54 per cent to franchisees and 6 per cent as prize money. The money will be distributed in these proportions until 2017, after which the share of IPL will be 50 per cent, franchisees 45 per cent and prize money 5 per cent.

IPL signed up Kingfisher Airlines as the official umpire partner for the series in a Rs 1.06 billion deal. DLF coughed up Rs 200 million as title sponsor for five years, while Pepsi paid $12.5 million to become the beverage partner. Of this, $2.5 million went to the eight franchise owners every year. Last season, Rajasthan Royals made a profit of Rs 351 million, while KKR made a profit of Rs 258 million; Kings XI Punjab, Rs 261 million. In 2008, it is believed that teams like Kolkata Knight Riders, Mumbai Indians and Delhi Daredevils earned around Rs 20 crore from ticket sales alone as the capacity of their home stadia was larger. With ticket prices going up, KKR (Eden Gardens), MI (DY Patil stadium), DD (Ferozshah Kotla) are expected to earn in excess of Rs 25 crore this year from gate receipts. According to the report by equity research firm IIFL, Team Jaipur made the highest profit of Rs 35.1 crore in the group matches of the second edition of the tournament. Jaipur had also made the second-highest profit of Rs 14.50 crore in 2008, including the Rs 4.50 crore ($1 million) prize money.

Throw in the prize money sweepstakes and though they don't compare with T20 Champions League, they are sizeable. The winner's purse in 2010 is a hefty Rs 4.8 crore, Rs 2.4 crore for the runners-up and Rs 1.2 crore each for the losing semi-finalists. For those who didn’t get past the league stage, the sums earlier were much smaller - Rs 80 lakh for the team that finished fifth (Kings XI Punjab), Rs 70 lakh for the sixth placed (Jaipur), Rs 50 lakh for the seventh (Mumbai Indians) and Rs 40 lakh for the wooden spooners. The healthy bottomlines are a happy change from Season 1, when besides Knight Riders and Jaipur, Chennai Super Kings crawled into the black due to the Rs 2.4 crore prize money for ending up as the losing finalists. As franchise owners begin to get the hang of the way the system works, the money machine will also chug along nicely. The problem though is for the new franchise owners, who will have to bear the cross of a much higher entry cost - Kochi at $33.33 million (Rs 148.3 crore) and Pune at $37 million per annum (Rs 164.6 crore) For these two new franchises, it could well be like Sisyphus as he attempts to roll the boulder up the mountain. Sisyphus, King of Corinth, was given an assignment to roll a great boulder to the top of a hill. Only, every time Sisyphus, by the greatest of exertion and toil, attained the summit, the darn thing rolled back down again.

So, could be the fate of the new team owners. For the stiff entry cost is the biggest impediment in their grandiose design. Despite the pie having been made more lucrative by Modi, there isn't enough on the table to take away for the newbies. But the early birds have definitely got the worm. And perhaps the cream as well. As they say in Hindi - kya yeh ghaate ka sauda hai? Time will tell?

Here is the break-up for each franchise in season 2. I would like to add a caveat here that though an equity research firm has put out these numbers, one still needs to take them with a pinch of salt:

(Profit/Loss - (Rs Million)

Mumbai Indians

a. Broadcasting Rights – 675
b. Team Sponsors - 240
c. other income - 140
d. prize money - 5

Total Revenues (a+b+c) – 1060

a. Franchise Fees - 515
b. Team Expenses - 200
c. other expenses - 275
Total Expenses (a+b+c) - 990
Net profit - 70

Royal Challengers Bangalore

a. Broadcasting Rights - 675
b. Team Sponsors - 240
c. other income - 135
d. prize money - 22.5

Total Revenues (a+b+c) - 1072.5

a. Franchise Fees - 516
b. Team Expenses - 200
c. other expenses - 275
Total Expenses (a+b+c) - 991
Net profit - 81.5

Deccan Chargers

a. Broadcasting Rights - 675
b. Team Sponsors - 240
c. other income - 135
d. prize money - 45

Total Revenues (a+b+c) - 1095

a. Franchise Fees - 492
b. Team Expenses - 200
c. other expenses - 255
Total Expenses (a+b+c) - 947
Net profit - 148

Chennai Superkings

a. Broadcasting Rights - 675
b. Team Sponsors - 240
c. other income - 185
d. prize money - 12

Total Revenues (a+b+c) - 1112

a. Franchise Fees - 419
b. Team Expenses - 200
c. other expenses - 275
Total Expenses (a+b+c) - 894
Net profit - 218

Delhi Daredevils

a. Broadcasting Rights - 675
b. Team Sponsors - 240
c. other income - 147
d. prize money - 12

Total Revenues (a+b+c) - 1074

a. Franchise Fees - 386
b. Team Expenses - 200
c. other expenses - 255
Total Expenses (a+b+c) - 841
Net profit - 233

Kings Xi Punjab

a. Broadcasting Rights - 675
b. Team Sponsors - 240
c. other income - 143
d. prize money - 8

Total Revenues (a+b+c) - 1066

a. Franchise Fees - 350
b. Team Expenses - 200
c. other expenses - 255
Total Expenses (a+b+c) - 805
Net profit - 261

Kolkata Knight Riders

a. Broadcasting Rights - 675
b. Team Sponsors - 240
c. other income - 189
d. prize money - 4

Total Revenues (a+b+c) - 1108

a. Franchise Fees - 345
b. Team Expenses - 200
c. other expenses - 305
Total Expenses (a+b+c) - 850
Net profit - 258

Rajasthan Royals

a. Broadcasting Rights - 675
b. Team Sponsors - 240
c. other income - 142
d. prize money - 7

Total Revenues (a+b+c) - 1064

a. Franchise Fees - 308
b. Team Expenses - 200
c. other expenses - 205
Total Expenses (a+b+c) - 713
Net profit - 351

All figures are in Rs Million

Other incomes include gate receipts, in-stadia advertising, merchandise sales, and media tie-ups

Other expenses include stadia fees, travel, stay cost and team promotion

Source: IIFL Research

(Sandeep Bamzai is a well-known journalist, who started his career as a stringer with The Statesman in Kolkata in 1984. He has held senior editorial positions in some of the biggest media houses in three different cities - Kolkata, Mumbai and New Delhi. In late 2008, he joined three old friends to launch a start-up – Sportzpower Network – which combines his two passions of business and sport. Familiar with all four media – print, television, Internet and radio, Bamzai is the author of three different books on cricket and Kashmir.

The views expressed here are of the writer’s and not those of the editors and publisher of exchange4media.com.)

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