THE RA RA theme in the IPL is sometimes overplayed. With bids of $ 370 million and $ 333.33 million Sahara Adventure and Rendezvouz Sports seem to have paid too much. Why do I say that? Because it will be very difficult for them to make money in the first three years of operation. The exorbitant entry cost means that for Sahara for instance, franchise fee alone will be a stiff $ 37 million or Rs 1.64 billion per annum while for the clutch of investors who have conglomerated to form Rendezvous, it will cost an equally sizeable sum of Rs 1.48 billion per annum or $33.33 million.
The franchise fee is locked for 10 years. Now even with the doubling of the central revenue pool from Rs 675 million per franchise to approximately Rs 1.35 billion this year to each team owner by innovatinmg aggressively and monetising each and every aspect of the rights pie, they don’t cover their cost. Now consider this, from next year, the central revenue pool will be shared by 10 and not eight franchises, which will result in a further fragmentation of the revenue pie. For season 3, Lalit Modi has ushered in a series of inventive measures to augment the revenue pool – licensing deal with Colors, Karbonn, Maxx, MRF, UFO Moviez, ITV broadcasting deal, et al. Modi himself has said that this has doubled the revenue pool.
Last year broadcasting revenues alone brought in Rs 675 million to each team owner, this year Rs 1.35 billion per franchise will total to Rs 10.8 billion being shared equally. This is for eight franchises, by adding two, Rs 10.8 billion will be divided into 10 parts, hence Rs 1.08 billion for each of the 10 owners. Down approximately Rs 270 million each for the original eight franchises.
Peeved? Yes, some of the franchise owners will feel unhappy. This was one of the bones of contention between Modi and his bete noire N Srinivasan, board secretary and Chennai Super Kings boss. Anyway if you are a Rajasthan Royals or a Kolkata Knight Riders, you are sitting pretty, after all you paid a mere $ 67 million and $ 75 million respectively. Ditto for Kings XI Punjab who paid $ 76 million. Break that down into 10 year equated annual payments and it works out to pittance in comparison to Kochi and Pune. Vijay Mallya and Mukesh Ambani who paid $ 111.6 and $ 111.9 million respectively for their franchises also don’t have too much to worry about. Even Mukesh Ambani who paid the most – $ 111.9 million or approximately Rs 4.47 billion – forks out only Rs 447 million as franchise fee annually to BCCI.
So, how do you make money? What does the profit and loss statement look like? Let us look at the Revenues and Expenses heads. 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 includes sales and marketing employee cost as well as players and support staff payments, team promotion, travel and hospitality cost and other variable administrative expenses. Team sponsorship is also going gangbuster in 2010 and the general average is expected to be closer to Rs 400 million for each team with Mumbai Indians and KKR leading the way with Rs 500 million or thereabouts. This is up from an average of Rs 240 million last year. Another dimension which has been added is the in stadia big screen advertising where the spot costs are as high as Rs 600,000 to Rs 700,000. This is more than what Sony is charging for its 10 second spots.
Which begs a question, do any more ways exist of milking this cow? I am sure Modi will monetize every single opportunity that comes his way, but the head room from here on will be minimal. So Rs 1.08 billion plus Rs 500 million sponsorship plus Rs 250 million from gate receipts for some of the sides which have large home stadia. For example Daredevils, Royal Challengers, Knight Riders and Mumbai Indians. Throw in merchandising which is still a nascent industry in India, in stadia advertising and prize money and you have a figure closer to about Rs 2 billion give or take Rs 100 million for each franchise with the more marketing savvy guys making more and the others less.
At Rs 2 billion income, low cost entry franchise owners will still make pots of money, but the two new players will definitely not. Let us understand another important dimension to this cost benefit analysis. There will be fresh player auctions for season 4, sometime later this year. The cap has been raised to $ 7 million, or as Modi says some of the teams ‘will go beserk.’
After factoring in all these aspects, Sahara by forking out Rs 1.68 billion as merely franchise fee cannot make money at least for the first three years. That is precisely why Subroto Roy is yet to take a call on the Indian team jersey sponsorship, for at Rs 20 million plus for each match that India plays, it is going to cost Sahara a bomb.
The broadcasting revenues were directed to a central pool, 40% of which went to IPL itself, 54% to franchisees and 6% as prize money. The money will be distributed in these proportions until 2017, after which the share of IPL will be 50%, franchisees 45% and prize money 5%. The IPL signed up Kingfisher Airlines as the official umpire partner for the series in a Rs 1.06 billion deal. DLF coughed up Rs 2 billion 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.
Last year, IIFL Research pointed out that Mumbai Indians had a sum total of Rs 990 million as expenses, while others were more or less in the same range. If I were to add the expensive entry cost of Sahara and Rendezvous to this mix, then the expenses will be closer to Rs 2.5 billion, given that they will have to rig up an eco system which includes teams, support staff and marketing and sales personnel. At a ball park figure of Rs 2.5 billion expenses, with an income of Rs 2 billion or thereabouts, it is definitely a squeeze.
Perhaps, I have exploded some myths during the course of this treatise. But what remains undisputed is that cricket as a vehicle for high jinks and bulge bracket commerce is still top of the pops.
SEASON 2 (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
