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Tuesday, June 3, 2008

The IPL business model

Indian Premier League(IPL) has thrown new model to cricket. The franchise owners have invested huge money to own the team. So where is all this money comes from and where will it go? What’s the ‘business model’ of the IPL? Is there any way the franchisees who have bid millions of dollars a year can make money? Read on…

To get a fix on the answers to these questions, let's start from the source. The IPL /BCCI - has four major sources of revenue. The first is the sale of media rights for the matches, which will fetch the board $1 billion over a 10-year period. The second includes things like title sponsorship of the tournament, licensed merchandise and so on. Put together, these form what the IPL calls "central revenues".

From the sale of media rights, IPL will keep 20% for itself, give out 8% as prize money for the tournament and distribute the remaining 72% evenly between the 8 franchisees. These proportions are valid till 2012, after which IPL’s share goes up in two stages by 2018, with the shares of both prize money and franchisees declining.

The second stream - other central revenues - will be shared between IPL, franchisees and prize money in the ratio 40:54:6 up to 2017 after which IPL’s share will increase to 50%, the franchisees’ share will drop to 45% and the remaining 5% will go for prize money. The third major source is, of course, the amounts bid by the franchisees. The fourth stream comes from the revenues generated by the franchisee rights, of which 20% will be given to IPL.

From the franchisees’ perspective, while the share in central revenues will be a given, they can raise money on their own by a variety of means. These include selling advertising space in the stadium for home matches, licensing products for their team like T-shirts, getting sponsorship for the team uniform, advertising on tickets and so on, apart from the gate money. As already mentioned, 20% of all of this will then go to IPL. What do the players make? Apart from the annual fee contracted with the franchisee, they get a daily allowance of $100 through the IPL season, which lasts about a month-and-a-half. The total amount spent on player fees for an IPL team cannot be less than $3.3 million each year and is actually expected to be significantly higher. In other words, players will earn about Rs 80 lakh or more per season on average, though the amount would vary from one member of the team to another.

Players could also get bonuses from the team owners and perhaps even the prize money that the team wins by virtue of where it finishes in the tournament. But it is for each franchisee to decide whether these payments are made to the players or not. Even in the case of the annual fee negotiated between a player and the franchisee, not all of the negotiated amount may actually go into the player’s pocket.

This is because the IPL is reaching two different kinds of agreements with players when it gets them on board. Under one arrangement — called the "firm agreement", the IPL commits a certain fee to the player. If a franchisee bids more for that player in the auction between franchisees for different players, the IPL gets to keep the excess. Under the other - the "basic agreement" – the player gets whatever is bid for him. Not surprisingly, most players so far have opted for the "basic agreement".

Now that we have the broad structure of the flow of money in place, how does this translate into actual numbers? The bottom line, acknowledge BCCI officials as well as franchisees, will depend on whether the IPL as a concept takes off and captures audiences.

Sources say IPL is guaranteeing $7 million per franchisee from central revenues. But what will come from the local level is anybody’s guess. Even with the right to market just about everything connected with their teams, the industry is not expecting to raise more than $2 million per franchisee each year. BCCI expects the franchisees to earn $1.5 million from gate money in every IPL match, but insiders say the figure is "exaggerated" and that the franchisee will be fortunate to get $1.5 million from 7 home matches at home. In fact, highly charged India-Pakistan one-day matches make around $3 to $4million.

Assuming the gate money is around $2 million for all seven home matches, this means the franchisee in the first year can look forward to total income of about $10 million after paying 20% of local revenues to IPL.

Over this the franchisee has to pay players who are available even if they are on the bench. Players have a three-year contract with the franchise that bought them but they can be traded at the end of the first year between the franchisees.

What can change in this equation to make the business financially rewarding for the franchisee? If local revenues really rise, things could get better. It all boils down to whether the IPL teams can make their cities identify with them.

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