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There's a lot of silly money flying around in the IPL: Indian players will benefit, but it's a little more complicated for the franchises
March 30, 2010
Midway into season three of the Indian Premier League, the dollar signs have got larger, the hype louder and the gossip and side stories even more complicated. This year's tournament has been almost taken over by the numbers being discussed for next year and the drama being anticipated as the IPL jumps orbits from eight teams to 10.
Two new franchises were sold on March 21. Pune went to the Sahara business group for US$370 million, and the Rendezvous Sports World consortium won the rights to Kochi for US$333 million. That aside, all IPL teams will now be allowed to spend up to US$7 million a year each to recruit players. This would include money spent on direct hiring, retaining some of the players contracted for the first three seasons - subject to rules to be framed by the IPL council - and buying new players at a razzmatazz sequel to the inaugural auction in Mumbai in February 2008. The new cap is US$2 million above the previous one.
What does all this mean for players, franchise owners and for ordinary cricket fans - if they can decipher the IPL's manic deal-making anymore? In the first place, are the massive bids by Sahara and Rendezvous realistic?
Franchises: batting for valuation
A quick assessment by the chief executive of one of the current franchises insists the two new teams will lose "at least Rs 100 crore [about US$22 million] each year for the next five years". The figure could change if the Indian economy grows exponentially and the IPL business model reaches even greater heights, and if the new teams pull in generous sponsors. Yet operational losses of a considerable nature are almost guaranteed in the near term.
So what makes an IPL franchise worth all the money? It is a combination of business and an ego trip. Whether it is football clubs in England or baseball teams in the United States, the decision to purchase a sports team is not always a rational one, driven by profit-loss calculations alone. Often well-heeled individuals or businessmen do it to announce their arrival. When their fortunes decline, they sell to the next billionaire, from the next sunrise industry. The fact that supply is limited - there will only be a finite number of football clubs or IPL franchises - keeps demand robust.
Yet there is also a strong element of business. Some of the better-managed IPL franchises are beginning to turn the corner, though not quite make huge money yet. They are exploiting a strange paradox in India. The Indian economy is today large enough to support and sustain more than one sport. Even so, India remains fundamentally a one-sport society. This means advertisers, sponsors and team-owners are simply over-invested in cricket.
Nevertheless, whatever the public claims of IPL stakeholders, in private, franchise officials offer very modest assessments of profits - if they offer any assessments at all. True, every franchise has gained from the surge in central revenues - revenues that accrue to the IPL as an institution and are divided between the League authority and the participating teams. Yet, in 2011, each franchise's share of central revenue will change from 7.5% to 6%, with the addition of two teams.
In the coming 12 months, the single largest source of income for many of the current franchise owners may well be from the sale of equity. "Every franchise," says an executive at one of the teams, "is ready to sell a stake to an interested investor. Everybody is looking for the right fit." A few franchises (King's XI Punjab is mentioned by IPL insiders) have promoters said to be looking to sell a majority stake and essentially exit the cricket business.
How do you sell a business that is not making money or is barely in the black? This is a function of Twenty20 cricket's two Vs: vanity and valuation. You tickle the potential buyer's vanity and excite him with the option of owning (or owning a part of) an IPL team. Second, you maximise that silly game called valuation. Pune and Kochi have set the benchmark on what a virgin franchise is worth. A franchise that is already established, and has brand recall, city-specific identity, player and local endorsement associations and a certain fan base, could fetch more.
In the end it will boil down to who bargains better and which valuation figure is deemed most credible. Dizzying numbers have done the rounds in recent times. It is sobering to understand that these are often notional figures, driven by what can only loosely be described as wild optimism.
A few weeks ago, the consultancy Brand Finance plc valued the IPL as an entity at $4.13 billion, up from 2009's $2.01 billion. A sports franchise's commercial value has little to do with on-field results, it is often contended. As if providing evidence of this, Brand Finance said in its report that the valuation of Deccan Chargers, the 2009 IPL winners, had declined from $34.8 million at the start of season two to $ 34.4 million at the start of season three.
All this would seem a fair argument. However, in May 2009, a joint exercise by two companies, Intangible Business and MTI Consulting, valued Deccan Chargers at only $11 million. The variation between Brand Finance and Intangible Business-MTI Consulting was as wide when it came to valuing other franchises.
One the eve of the 2010 season, Brand Finance estimated Rajasthan Royals as having a brand value of $45.2 million, well ahead of Mumbai Indians ($40.8 million) and Delhi Daredevils ($40.5 million). By all accounts, Rajasthan Royals is not the best-run franchise. In contrast, both Mumbai Indians and Delhi Daredevils are credited with a solid management structure. Also, any cricket franchise in India's two largest cities is always going to have access to greater revenue streams than a team in Jaipur.
|The Indian economy is today large enough to support and sustain more than one sport. Even so, India remains fundamentally a one-sport society. This means advertisers, sponsors and team-owners are simply over-invested in cricket|
How then can Rajasthan Royals have a brand valuation higher than that of Mumbai Indians and Delhi Daredevils? Would any investor pay more for, say, 20% of equity in Rajasthan Royals than he would for 20% of Delhi Daredevils or Mumbai Indians?
At some point between now and season four, as franchise owners begin to sell or sell out, the IPL will have take off its billion-dollar glasses and read that googly.
Players: batting for bonuses
All in all, the two new franchises are looking at a very expensive 2011. Other than paying their licence fee to the IPL, they will have to spend enormous amounts on brand building, and recruitment of players and support staff. The eight other teams have had a three-year headstart. They will almost inevitably be allowed to retain (subject to mutual agreement) some of their current stars. If the new franchises want to buy out these marquee players, the wage bill will go up that much further.
Indeed, the biggest gainers are going to be the players. In 2008, $1.5 million a season was the highest salary for any one IPL cricketer. That was what MS Dhoni of Chennai Super Kings was promised. In 2009, Kevin Pietersen (Bangalore Royal Challengers) and Andrew Flintoff (Chennai Super Kings) were auctioned for a bit more, but neither has played an entire season.
In 2011, team managers are almost unanimous that the top player salaries will breach $2 million a year and "could even reach $2.5 million". It is also clear that the highest-paid cricketers, by a fair amount, will be Indians.
Again, there are two reasons for this. First, as an IPL team manager says, "It is apparent a franchise's brand identity is determined by local players, especially among Indian or Indian-origin audiences." Big contemporary players from abroad - Pietersen, Ricky Ponting, Michael Clarke - have either shunned the IPL or can only appear when international commitments permit. To them, this is not the priority format of the sport.
The second reason is pure demand and supply. As one franchise official explains, "Ten teams will need 70 Indian cricketers. If each player is to have a back-up, that means 140 cricketers of some quality. Where do you have such reserves?"
For the October 2009-September 2010 period, the BCCI has offered central contracts to 40 cricketers. This list includes Sachin Tendulkar and Suresh Raina, but also Abhishek Nayar, Ajinkya Rahane and Wriddhiman Saha - talented perhaps, but completely unproven at the international level.
Yet, these 40 - give or take a few - are going to corner a significant segment of the US$70 million that the 10 franchises will spend on players in 2011. The best of the lot - Dhoni, Raina (Chennai Super Kings), Yusuf Pathan (Rajasthan Royals), among other proven Twenty20 performers - could make multiples of millions. Even Manish Pandey (Bangalore Royal Challengers) and Manoj Tiwary (Kolkata Knight Riders) could be prized commodities.
However, this will lead to a smaller pool of money being available for the foreign players. Some of them may already be sensing the competition. IPL 2010 has been noteworthy in that cricketers such as Jacques Kallis (Bangalore Royal Challengers), Andrew Symonds (Deccan Chargers) and to an extent even Matthew Hayden (Chennai Super Kings) are doing better (so far) than in previous seasons. At any rate, they have appeared more purposeful.
To some extent, this could be because they have finally got a hang of the IPL. It is more likely that they are taking the whole tournament much more seriously because they realise it's not a one-off, Allen Stanford type circus but in some senses the future of cricket, with real pay cheques. Their performances this year - not the successes or failures of 2008 and 2009 - will decide how badly franchises will want them in the upcoming auction.
Particularly worried and vulnerable are players who are done with international cricket or are close to the end of their careers. In 2008, Symonds went for $1.35 million, Sanath Jayasuriya (Mumbai Indians) and Kallis earned close to a million dollars each, and Adam Gilchrist (Deccan Chargers) signed on for $700,000. In 2011, it is conceivable that all of them may have to settle for less. With no alternatives to the IPL and no Test/ODI career - or only a short one in the case of Kallis - their bargaining power will decline sharply. The fact that there are simply so many foreign players competing for four slots per playing XI will not help. In the mini-auction of 2010, the Pakistani players realised the consequences of this when the franchises ignored them - fearing political tensions - and instead bought alternatives from New Zealand, the West Indies and South Africa.
In 2011, the Pakistanis will be back in contention. They will join a queue of non-Indian cricketers trying to break down the door and get into the IPL living room. All this will make the foreign-player auction even more of a buyer's market.
The same principle will probably hold true for some of the older Indian cricketers who are not quite built for Twenty20. VVS Laxman never does seem to be part of Deccan Chargers' plans. Rahul Dravid would patently be happier doing something else. The probable exception is Sachin Tendulkar. Sahara has indicated it wants him to captain its team and Tendulkar could trigger a bidding war between Mumbai Indians and the yet-unnamed Pune franchise.
Overall, however, a situation where a Yusuf Pathan gets well over a million dollars, maybe close to $2 million, and a Laxman goes unsold is a frighteningly real possibility. The IPL has changed this game and its verities forever.
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