Analyzing the Economics of the Indian Premier League

The player auction for the 12th edition of the Indian Premier League will be held in Jaipur on December 18, the Board of Control for Cricket in India confirmed

Welcome to CricketNext. I’m Brian/Malavika, and today we’re taking a closer look at the inner workings of one of India’s favorite things - the IPL.

The Indian Premier League had its 11th season this year. I know, it feels like it began just a few years ago and it is already 11 years old. They grow so fast, don’t they? The IPL has been around for so long that two-time champions Chennai SuperKings, who were ousted for two years, made a popular comeback. Their first match in the 2018 season was a classic…Dwayne Bravo’s big hits taking the Chennai Superkings past Mumbai in the last 3 overs…what a way to start the biggest cricketing event of the year! CSK, of course, were crowned champions once again in 2018. As the joke goes, the Chennai has played fewer IPLs than Bangalore and still has more IPL trophies.

Then there were KL Rahul’s blistering innings that saw Kings XI Punjab make a serious run during the initial stages. The perpetual underdogs, Kings XI Punjab, seemed to turn over a new leaf this year thanks to some brilliant displays of batting, but their old demons took over once again as they gave up the chase.

What I’m getting at it is, despite the surfeit of T20 cricket, the 2018 edition of the IPL was a success. There was a feeling that people won’t be as interested in it. India had wrapped up  a gripping series of matches in South Africa in February, and triumphed in the Nidahas Trophy in Sri Lanka. Remember DInesh Karthik’s blitz in the final overs against Bangladesh? Even Sri Lankan fans were supporting India in that final. What a sight that was! So it was expected that the audience might be fatigued by the sheer amount of cricket, given how emotionally invested Indian fans are. But IPL 2018 was a resounding success, indicating that it is a thing unto itself. Not that we’re complaining, mind you.

The official broadcast partner, Star Sports, expected 700 million regular viewers this year and had live commentary in six languages. One got the feeling that everything was bigger this IPL season. Except the scores. There were low scoring contests this year that were fascinating.

Let’s take a closer look at this extremely popular festival of cricket to understand what makes it tick and how it all works.

First, a brief history of Twenty20 cricket:

Like most things cricket, Twenty20 had its start in England. The English cricket authorities, the guys whose job it is to pick cricket teams that hand over the Ashes to Australia on a regular basis, decided to spice up domestic cricket competitions and attract more viewers with a shortened version of cricket. Because, you see, the sponsors were fleeing. Out of boredom, perhaps.

Fans responded by flocking to cricket grounds to watch this fun version of cricket. Soon, we had a T20 World Cup in 2007. But, even among players, Twenty20 was considered a novelty that serious pros smirked at. Test cricket is the real cricket, or some variation of that cliche. I recall all the big shots of Indian cricket skipping the first T20 world cup. Which, looking back, wasn’t a terrible thing for cricket.

The cricket commentariat, the serious commenters who spoke and wrote like their opinions mattered more than most, thought it was a passing fad. Unfortunately for those optimistic folks, India won the T20 world cup. The tournament was a huge hit, with even an India-Pakistan final thrown in. Ratings were off the charts and a new market was discovered.

A gentleman by the name of Lalit Modi, the BCCI’s commissioner at the time, decided it would be a good idea to bring T20 cricket to India, glam it up and have a competition along the lines of the English Premier League. For those that don’t know or care about football, the EPL is the, well, most premier of football leagues. It is played in England, and teams pick players from different countries and clubs, paying big money for big talent. Even if you don’t follow football, you must have heard the phrase Manchester United. That alone explains how successful the EPL is. Lalit Modi wanted that kind of success for the IPL. He named it the Indian Premier League. Does anyone see any kind of similarity in the names? Hmm

Modi wanted to attract larger, younger audiences who wanted to see an exciting sport that also had a collaboration with India’s other passion, movies and celebrities.

The business model goes something like this. The teams, named after cities or states, are owned by corporate houses and bollywood celebrities. Think Mukesh Ambani, Vijay Mallya, Shahrukh Khan, Shilpa Shetty and Priety Zinta. Owners are allotted teams through a bidding process and, once the teams are allotted, cricketers from India and other countries were put to auction. A cap on the maximum amount was fixed to make bidding more fruitful. That meant teams would ‘buy’ cricketers within the maximum amount equally fixed for all the teams. This model was similar to the ones used by- yes, you’re right-  the EPL. They could let go of any player the next year or retain the players by buying them again. Yeah, it reads like they were treating humans like horses but that’s the nature of bidding and cricketers didn’t mind. The IPL has made many players rich overnight.

Eight teams were announced in 2008 with a base price of $400 Million that went on to fetch approx. $723 Million.

The BCCI and the IPL itself would make their money via the auction of broadcasting rights, title sponsorship and corporate sponsorship, ticket sales, auction of franchise rights and official umpire sponsorship. You heard that right. The umpires are sponsored too. You never noticed, did you?

And how would the franchises, the guys who paid the big bucks, earn back their investment? Their sources of income included a share in revenue from broadcasting rights, a share in the sponsorship money, a share from ticket sales, revenue from in-stadium advertising, sale of players to other franchises and revenue from own sponsorship and corporate sponsorship.

In 2008, all revenue was initially directed to a central pool. From this pool, 40% share went to the IPL, 54% to the franchises and 6% was given out as prize money to the players. This was to be the revenue distribution model for 10 years,that is until 2017. The broadcasting rights went to Sony Entertainment Television Network and Singapore based World Sports Group for $1.026 Billion for a period of ten years. Sony-WSG then licensed these rights geographically to other companies around the world.

The IPL was valued at $3.2 billion dollars in 2014 and $5.3 billion after the 10th edition last year. In 2018, we are now in what the BCCI calls the second cycle of the IPL. There’s a new business model including the option for teams to go the IPO route. Let’s take a closer look at the ways IPL has made T20 cricket to a festival of cricket and become a phenomenal success.

Sponsorships:

Around 60 percent of the IPL’s revenue is from sponsorships. Fifty percent of this is distributed amongst the franchises. In January this year, the BCCI invited bids for a maximum of six official partners of the 2018 IPL. There will also be two other partners, for the strategic timeouts - you know, those annoying breaks which are essentially extended ad breaks-  as well as sponsors for the umpires. If there is one thing that the BCCI is good at, it is spotting opportunities for revenue.

Official IPL sponsorships rake in serious money. DLF, the real estate company, was made the official partner from 2008 to 2012 after paying 200 crores. In 2013, Pepsi paid 397 crores to become official sponsor. Pepsi signed on for 5 years but pulled out in 2016 following the spot fixing scandal that saw two teams suspended. Remember Gurunath Meiyappan? And Sreesanth’s weird spot fixing thing? Pepsi walked out because of those scandals.

This brought the Chinese mobile brand Vivo into cricket. Vivo, a part of Chinese manufacturer BKK Electronics that also makes Oppo and OnePlus phones, rescued the BCCI and bagged the sponsorship rights for IPL in 2016 and 2017, reportedly at a price of 100 crores per year. Vivo again successfully bid for IPL rights for 5 years, from 2018-2022, for….wait for it… 2199 crores or 330 million dollars! It works out to 440 crores per year. That’s a crazy amount of money for a company that’s trying to find it’s feet in the Indian mobile market. This profligacy by Vivo left many analysts unhappy but the BCCI wasn’t complaining.

We spoke earlier about sponsors for umpires. Earlier this year, PayTM signed on as the Official Umpire Partner until 2022. PayTM is already BCCI’s title sponsor for cricket in India. CEAT Tyres is the official timeout partner for IPL for another 5 years. The Future Group is also an official partner as is Tata Nexon.

Broadcasting rights

The other big IPL story this year, before the tournament began, was the broadcasting deal between the BCCI and Star Sports. Last year, Star had won IPL rights for a record Rs 16,347 crore or $2.55 billion. The deal holds good until 2023. Star also own the rights for all ICC tournaments - men's and women's 50-over World Cup, World T20 etc.

Media reports stated that Star Sports will enjoy a near monopoly over broadcasting Indian cricket after signing another deal for all of India’s home cricket series as well as domestic tournaments for 6138 crores or ~944 million dollars.

The IPL broadcasting deal works out to over 54 crores per match. As per the agreements between BCCI and the team owners, 50% of this money goes to the franchises.

Star Sports also announced that 34 brands signed on as commercial partners for IPL 2018 - both TV and digital. While Vivo, Coca Cola and Reliance Jio came on board as co-presenting sponsors, brands like Polycab, Parle, AMFI, Make My Trip, Vimal Pan Masala, Asian Paints, and Dream 11 are associate sponsors.

Analysts estimate that the co-presenting sponsors have paid around Rs 80 crores each for the association while associate sponsors are likely to have paid around Rs 40 crores. Sources claimed Star India had set itself a stiff revenue target of Rs 2000 crores for this year’s IPL. Star’s asking price for advertisements is around Rs 10 lakh per 10 seconds. As we mentioned earlier, the network expected to reach an audience of 700 million across TV and digital media.

Viewership for the 2017 edition of IPL is estimated at 535 million. IPL 10 broadcaster Sony had garnered ₹ 1,300 crores from the league sponsorships, while the Star-owned mobile platform Hotstar had sold advertisement inventory worth ₹140 crores.

Further, with the money it raked in thanks to broadcasting rights, as per the IPL contract, BCCI will share 40% of what it receives among the eight IPL franchises. That’s a cool 150 crores per team.

Individual team sponsors

Every IPL team has its own set of sponsors. Dedicated sponsorships play a huge role in generating revenue for team owners. One analysis succinctly summed up the business model - “The IPL promised instant and far reaching visibility to brands. The brands, in turn, poured millions into the T20 league in sponsorships — sometimes with the league itself, but mostly with individual franchises which were less expensive.”

However, more than ten years later, we learn that the teams needed the sponsors more desperately than previously thought. Without the sponsorship deals, most franchises would have been “on ventilator”, as one IPL tracker chose to phrase it.

Team sponsorships are not too different from startup companies attracting VCs. Most of the teams in IPL are guilty of overspending - on talent, marketing, fan-building etc. They seem to have done this while ignoring the bottomline. Startups do that too sometimes, going all out to acquire customers and build a loyal, returning base.

This is where the IPL may have fallen short. Quite short. Successful international sports leagues and teams - like the EPL, La Liga, Bundesliga - have fiercely passionate fan bases that translate into tangible incomes by way of huge ticket and merchandise sales. Think Man U or Arsenal or Barcelona or Real Madrid. However, in India, most cricket fans follow individual players, not the franchises per se. If a player moves to a different team, the fans shift loyalties. Of course, there are exceptions to this – Chennai Super Kings, Mumbai Indians and Kolkata Knight Riders are the exceptions. They have a strong vocal and loyal fan base.

But overall this has hurt franchise profitability across the IPL board. Barring the Kolkata franchise, which is the most valuable IPL franchise, none of the other franchises have been able to convert fan loyalty to profitability. For Kolkata Knight Riders too, the $58.6 million valuation is largely due to owner Shah Rukh Khan’s charisma and popularity as an A-list movie star, more than its players.

Direct sponsorship forms 20 to 30 percent of a team’s revenues. Franchises are usually able to sign on 12-15 sponsors each season. Popular franchises like Kolkata, Mumbai and Chennai are able to sign more. They also command better rates than teams like Delhi, Punjab, and Rajasthan.

The bottom teams sometimes struggle to get sponsorships even at discounted rates. This reminds one of Formula One teams. The teams that don’t do well just fall away because there simply aren’t enough sponsors. Their ability to earn sponsorships depends not just on league performance, but also the talent they have and the locations they play in.

Experts say sponsorship revenues have segregated IPL teams into two halves. Leading franchises earn between Rs 50 and 60 crore through direct sponsorships, while the rest make 30 to 35 crore. This impacts the teams’ bottomline directly.

Ticket sales

Ticket sales are another source of revenue for the teams, accounting for roughly 10% of team revenues. The Delhi franchise claims it had 92% occupancy in the stadium for home matches last year. They also claimed to have the highest number of hospitality seats and already have 400,000 registrations this year.

In 2016, IPL as a whole, generated nearly 160 crore rupees through just ticket sales.

In terms of revenue from tickets, Bangalore with Rs 25 crore, Mumbai with 24 and Delhi with Rs 22 led the field. The BCCI netted almost Rs 10 crore from ticketing revenue.

One of the best things about IPL is the excitement of a local Indian talent bursting onto the world stage. The IPL has catapulted many unknown players to fame. Every edition of the tournament has produced stunning performances from established stars as well as newcomers. When a local cricketer does well for a franchise, the entire city rallies behind the team. This usually led to higher ticket sales.

Merchandising:

Every IPL franchise sells merchandise that includes T-shirts, Caps, Wrist watches etc. And IPL has just about scratched the surface of merchandising. There’s a lot more to come. While sports is one of the largest areas of licensing globally, according to data from International Licensing Industry Merchandisers’ Association, it plays a minuscule role with a mere 1.3% of the total sales of licensed merchandise. In 2016, Indian retail sales of licenced products was at $1.4 billion, of which only $18 million was through sports merchandise. Globally, sports retail sales make up $25.3 billion, which constituted 9.6% of the overall $262.9 billion of global retail sales of licensed merchandise.

The IPL Experience:

The Indian premier League provides regular people an opportunity to be hang out with celebrities and cricket stars and also promises a magical experience while watching an engrossing game of T20 cricket.

The association of movie stars like Shahrukh Khan, Preity Zinta, Shilpa Shetty has helped the IPL draw newer audiences to cricket. The glamour of Bollywood, or even the association of regional movie stars in the various states, has led to undeniably higher visibility and brand value. There are enough videos on youtube that serve as testimony to the craze about movie stars in India . Combine cricket and movies and you have a potent, winning combination in terms of brand recall and visibility.

The Kolkata team, jointly owned by Shahrukh Khan and Juhi Chawla, has been one of the most popular teams. For the burgeoning media industry in India, the popularity of the IPL translates into consumption that is through the roof. The IPL is a ratings bonanza if ever there was one in India. Essentially, 47 days of a large, captive audience. There’s a reason it feels like a 2 month long festival every year. The media loves this windfall and celebrates it unabashedly.

The IPL has come a long way from that famous inaugural match when Brendon McCullum decimated the Bangalore side with his speed-of-light 158. That day set the tone for what would become a spectacular carnival of cricket. IPL 11 kickstarted a new phase, and the tournament looks set to grow much bigger. Let the fun times roll!