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RETROFIT

The IPL money riddle

Over the last couple of days, the IPL auction has emerged as the hotbutton subject. Just about everyone has an opinion on it. There areothers who are extremely cynical about the entire thing. But what onecan run away from, but not hide is that it is a raving success. Forteam 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 andRendezvouz have paid too much for the new franchises? Yes, maybe theyhave, given that Emerging Media (Rajasthan Royals) coughed up $67million 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 $6.7million per year. If you adjust that for today's exchange rate, it isRs 29.82 crore. Shahrukh Khan also paid a relatively small sum ofmoney in season 1 - $75.09 million. Can you make money, well that isthe question dominating everyone's mindspace these days? At $370million, this is the way it breaks down for Sahara. He has tobasically 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 themillion dollar question? Simple.
The franchise owners are subsidised by the cricket board and itsextension IPL. This is the way it works: Broadcast revenues for onewere subsidising the franchises till the end of season 2, but inseason 3, Lalit Modi has shown his worth as a marketer. He has workedhis numbers in such a way that by clinching a panoply of new deals, hehas managed to double the central revenue pool. Each franchise ownerwas given Rs 67.5 crore from this pool in year 2. But with the catalogue of newdeals - youtube, Colors, Karbonn, Maxx, MRF, vRock et al; Modi has managed tomake this particular revenue stream closer to Rs 130 crore foreach team owner. Now believe me that is a Godsent. So, if RajasthanRoyals has to pay a fixed cost of $6.7 million only and in turn isgetting Rs 130 crore from the central revenue pool, then that is apositive start. There are other revenue streams that open up when youplay in India which I will detail in a bit. Of course, there is theoperating expenses part which is equally heavy, but if you are smartand some of these franchises are, then there is no way you can losemoney. Entry cost is critical, the lower the better. That way thearithmetic is in the black and not in the red. People who bought thefranchises earlier and cheap stand to benefit. But even Mukesh Ambaniwho paid the most - $111.9 million or approximately Rs 447 crore forksout only Rs 44.7 crore as franchise fee annually to BCCI.
What are the major heads that one needs to look at? Revenues andExpenses obviously. Under revenues there is - broadcasting rights nowread central revenue pool, team sponsors, other income which is gatereceipts, in stadia advertising, merchandising sales, media tie upsand prize money. Under expenses there is - franchise fee, stadia fees,team eco system expenses which includes sales and marketing employeecost as well as players and support staff payments, team prom otion,travel and hospitality cost and other variable expenses. Teamsponsorship is also going gangbuster in 2010 and the general averageis expected to be closer to Rs 40 crore for each team with MumbaiIndians and KKR leading the way with Rs 50 crore or thereabouts. Thisis up from an average of Rs 24 crore last year. By making a connectwith different social strata, IPL has proved to be a killerapplication. Another novel concept this time is the in stadia bigscreen advertising during the games. A very innovative revenue stream.Last year with the tournament shifting to South Africa, logicsuggested that the team owners lost money, but IIFL research saidotherwise. I must add that several clubs were given additional handouts by IPL reimbursing them for hospitality and travel expensesincurred in South Africa. While some of these figures are in publicdomain, others have not been quantified.
What Lalit Modi has done in season 3 is show us how to skin the cat inat 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 gavethem theatrical rights for the IPL and paved the way for multiplexesto show the matches. Though this has proved to be adamp squib, anotherrevenue stream was added by Modi. Fragmenting and slicing the rightspie which rested with IPL and Modi have been monetised efficiently.For season 2, IIFL suggested that each one of the eight sidesreportedly madeprofits which is a considerable improvement over season 1 when onlyRajasthan Royals, Kolkata Knight Riders and Chennai Super Kings made aprofit. And this was contrary to popular perception which said thatall the teams would lose money because the event was staged in SouthAfrica. But the figures revealed a different story. The broadcastingrevenues were directed to a central pool, 40% of which went to IPLitself, 54% to franchisees and 6% as prize money. The money will bedistributed in these proportions until 2017, after which the share ofIPL will be 50%, franchisees 45% and prize money5%.
The IPL signed up Kingfisher Airlines as the official umpire partnerfor the series in a Rs 1.06 billion deal. DLF coughed up Rs 200 astitle sponsor for five years while Pepsi paid $12.5 million to becomethe beverage partner. Of this, $2.5 million went to the eightfranchise owners every year. Last season, Rajasthan Royals made aprofit 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 teamslike Kolkata Knight Riders, Mumbai Indians and Delhi Daredevils earnedaround Rs 20 crore from ticket sales alone as the capacity of theirhome stadia was larger. With ticket prices going up, KKR (EdenGardens), MI (D Y Patil stadium), DD (Feroshah Kotla) are expected toearn in excess of Rs 25 crore this year from gate receipts. Accordingto the report by equity research firm IIFL, Team Jaipur made thehighest profit of Rs 35.1 crore in the group matches of the secondedition of the tournament. Jaipur had also made the second-highestprofit of Rs 14.50 crore in 2008, including the Rs 4.50 crore ($1million) prize money.
Throw in the prize money sweepstakes and though they don't comparewith T 20 Champions League, they are sizeable. The winner's purse in2010 is a hefty Rs 4.8 crore, Rs 2.4 crore for the runners-up and 1.2crore each for the losing semi finalists. For those who didn’t getpast the league stage, the sums earlier were much smaller - Rs 80lakh for the team that finished fifth (Kings XI Punjab), Rs 70 lakhfor the sixth placed (Jaipur), Rs 50 lakh for the seventh (MumbaiIndians) and Rs 40 lakh for the wooden spooners. The healthybottomlines are a happy change from season 1 when besides KnightRiders and Jaipur, Chennai Super Kings crawled into the black due tothe Rs 2.4 crore prize money for ending up as the losing finalists. Asfranchise owners begin to get the hang of the way the system works,the money machine will also chug along nicely. The problem though isfor the new franchise owners who will have to bear the cross of a muchhigher entry cost - Kochi at $33.33 million (Rs 148.3 crore) and Puneat $37 million per annum (Rs 164.6 crore) For these two newfranchsises, it could well be like Sisyphus as he attempts to roll theboulder up the mountain. Sisyphus, King of Corinth, was given anassignment to roll a great boulder to the top of a hill. Only everytime Sisyphus, by the greatest of exertion and toil, attained thesummit, the darn thing rolled back down again.
So, could be the fate of the new team owners. For the stiff entry costis the biggest impediment in their grandoise design. Despite the piehaving been made more lucrative by Modi, there isn't enough on thetable to take away for the newbies. But the early birds havedefinitely got the worm. And perhaps the cream as well. As they say inHindi - kya yeh gate ka sauda hai? Time will tell?
Here is the break up for each franchise in season 2. I would like toadd a caveat here that though an equity research firm has put outthese numbers, one still needs to take them with a pinch of salt:
(Profit/Loss - (Rs Million)
MUMBAI INDIANS


a. Broadcasting Rights - 675b. Team Sponsors - 240c. other income - 140d. prize money - 5
Total Revenues(a+b+c) - 1060
a. Franchise Fees - 515b. Team Expenses - 200c. other expenses - 275
Total Expenses(a+b+c) -990Net profit - 70
ROYAL CHALLENGERS, Bangalore


a. Broadcasting Rights - 675b. Team Sponsors - 240c. other income - 135d. prize money - 22.5
Total Revenues(a+b+c) - 1072.5
a. Franchise Fees - 516b. Team Expenses - 200c. other expenses - 275
Total Expenses(a+b+c) - 991Net profit - 81.5
DECCAN CHARGERS


a. Broadcasting Rights - 675b. Team Sponsors - 240c. other income - 135d. prize money - 45
Total Revenues(a+b+c) - 1095
a. Franchise Fees - 492b. Team Expenses - 200c. other expenses - 255
Total Expenses(a+b+c) - 947Net profit - 148
CHENNAI SUPERKINGS


a. Broadcasting Rights - 675b. Team Sponsors - 240c. other income - 185d. prize money - 12
Total Revenues(a+b+c) - 1112
a. Franchise Fees - 419b. Team Expenses - 200c. other expenses - 275
Total Expenses(a+b+c) - 894Net profit - 218
DELHI DAREDEVILS


a. Broadcasting Rights - 675b. Team Sponsors - 240c. other income - 147d. prize money - 12
Total Revenues(a+b+c) - 1074
a. Franchise Fees - 386b. Team Expenses - 200c. other expenses - 255
Total Expenses(a+b+c) - 841Net profit - 233
KINGS XI PUNJAB

a. Broadcasting Rights - 675b. Team Sponsors - 240c. other income - 143d. prize money - 8
Total Revenues(a+b+c) - 1066
a. Franchise Fees - 350b. Team Expenses - 200c. other expenses - 255
Total Expenses(a+b+c) - 805Net profit - 261
KOLKATA KNIGHT RIDERS

a. Broadcasting Rights - 675b. Team Sponsors - 240c. other income - 189d. prize money - 4
Total Revenues(a+b+c) - 1108
a. Franchise Fees - 345b. Team Expenses - 200c. other expenses - 305
Total Expenses(a+b+c) - 850Net profit - 258
RAJASTHAN ROYALS

a. Broadcasting Rights - 675b. Team Sponsors - 240c. other income - 142d. prize money - 7
Total Revenues(a+b+c) - 1064
a. Franchise Fees - 308b. Team Expenses - 200c. other expenses - 205
Total Expenses(a+b+c) - 713Net 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