Posted in Finance Articles, Total Reads: 7344
, Published on 19 September 2010
Indian Premier League (IPL) is a domestic T20 competition held in India once every year. It was the brainchild of Lalit Modi and was initiated by BCCI. The IPL works on a franchise-system based on the football club style of hiring players and transfers. The IPL can be considered as a marriage of cricket, entertainment and business. Under this franchisee based system, an individual/corporate wanting to own a team will have to pay a stipulated amount to BCCI to get the ownership. Tostart with the league would have 8 teams which would be expanded to a maximum of 10 for the next ten years.
The franchisee would own the team for a period of 10 years. The franchisee, can, at a later stage list the team on the stock exchange and trade. Initially critics were sceptical on whether the Indian public would acceptthis kind of a domestic tournament as there are hardly any takers for the Ranji Matches held in the country. However after the completion of the 3 seasons, it can besaid that it is one of most successful brand in the recent times whose brand value is now estimated to be around $4 Bn.
The first auction for 8 teams fetched BCCI $723.9 Mn. However the popularity of the league can be gauged from the fact the second auction for 2 teams fetchedBCCI $703 Mn. So in order to understand what is luring all the corporate to this tournament, we need to understand the financial model of this league. The broadheads under which the revenues and expenses can be categorized into are as follows
Franchisee Fee to IPL
Player Acquisition Costs
Stadium Hire Charges
Sources of Revenue:
Television Rights: The broadcast rights have been sold by IPL to World Sports Group (WSG) and Sony for $1.026 billion for 10 years. 80% of the broadcast rights would go to the franchisee for the first 2 years and the rest to the BCCI. However BCCI’s share would gradually increase and by the fifth year, it would earn around 40% of the broadcast revenue.
Central Sponsorship: The title sponsorship fee of $50 Mn was paid by DLF which would be shared by all the franchisees. The other sponsors include
1.Hero Honda (Sponsorship amount : $22.5 million)
2.Pepsi (Sponsorship amount : $12.5 million)
3.Kingfisher (Sponsorship amount : $26.5 million)
IPL will retain 40 per cent of this and the balance 60 per cent will be shared between the franchisees equally.
Team Sponsorship: In addition to the central sponsorship, the teams can generate sponsorship in their individual capacity. For instance,Nokiais 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 generator is the ticket sales. Each of the franchisee have been guaranteed 7 home matches and the revenue that they can generate from ticket sales will be distributed in the ratio of 80:20 with IPL.
Other sources: There are also other smaller revenue sources such as from in-stadia advertising a part of which will go to the franchisee.
Franchisee fee: This is one of the major expenses for all the teams. Each franchisee has paid different amount ranging from $67 Mn to $ 112 Mn. The franchisee fee will be payable over a 10 year period.
Player acquisition cost: The player value is determined from the auction. The franchisee will be obliged to pay the players even if they are not playing. Players will be on a three year contract and trading between the franchisees is allowed after each year in a pre defined trading window.
Stadium Hire Charges: The franchisee will also have to pay the local association for the use of the stadium
Other Expenses: 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.
Now it brings us to the important question on whether IPL is profitable? Will the franchisees ever break even? The answer would differ as the sponsorship and revenue generating models would be different for different teams. . 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. 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.
However since the teams are not public yet and do not disclose their incomes, it would be difficult to determine on how many of them are profitable. But from the newspaper reports and articles, it can be safely said everyone has achieved operational breakeven and some of them have recorded profits starting from the first year itself.
Now to understand the economics behind IPL better let us consider the average amount each team would be get under each head on the revenue side and how much each team would spend per year.
So from the above table it is evident that the teams can make profits in the long run and IPL is indeed a profitable venture for all the individuals/ corporate who have invested in this league.
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