Sunday, November 13, 2011

IPL how big can it get?

In the past two seasons, IPL has managed to create a property that has generated considerable amount of audience excitement and increased media viewership leading to the creation of an economic entity - the benefits of which would be exploited by each component of the IPL value chain namely broadcasters, franchise owners, BCCI and last but not least – players.

With the third IPL edition coming back to India – the so called home of cricket and the fourth edition likely to witness the participation of two more teams there will be an increased interest from a local viewership and fan base perspective and it is also likely to expand the addressable market in terms of advertising revenues.

It is a known fact that the central broadcasting revenues, revenues earned by the BCCI and each franchise from SET Max, the television broadcaster, typically are the largest chunk of revenues at present. The addition of two new teams in the fourth season will increase saleable airtime and consequently advertising revenues for broadcasters since the number of matches will increase from 60 to 94.

In addition, Google has also entered into a two year potential fee sharing agreement with IPL to stream live IPL matches on the former’s video sharing website YouTube, which will benefit the BCCI as well as the franchises. As the popularity of the tournament grows as does the size of the Indian digital advertising market, models such as these, which increase the ability to monetize league rights are not only beneficial to the BCCI but also to the franchises which are expected to receive a share of the revenues accruing to BCCI.

The second source of revenues are central and individual sponsors spending currently approximately INR 150 million to 200 million for each sponsorship slot namely ground sponsor, tournament partner, team sponsor. The expansion of the league coupled with increasing audience interest is expected to increase the value of these slots in future seasons.

Local sponsorships too have added to the topline of the franchisees. In season 2, Chennai SuperKings was able to register 14 local sponsors for their team. Franchises have resorted to two types of sponsorship deals viz: fixed amount and barter deals. The wide reach of IPL, especially in the “hard to reach” youth and males target group and the presence of iconic players and Bollywood stars in the various teams will continue to drive sponsorship income for the individual teams in the future.

In season 1, ticket sales accounted for as low as 7% of total revenues to around 15% of total revenues for various teams. In season 2, most teams had planned an increase in their ticket prices and had intentions of applying a strict “no free tickets” regime. With the tournament moving to South Africa, the efficacy of these strategies could not be tested. Season 3 will witness teams focusing on this aspect and making all efforts to enhance this revenue stream. Internationally, ticket sales account for approximately 15% to 20% of total revenues as a result of premium ticket sales, corporate boxes in addition to normal ticket sales. Infrastructure upgradation to improve the viewer experience is a must and the BCCI needs to work with various stakeholders to make this happen.

Revenues from the sale of theatrical rights for INR 3300 million for a 10 year period and licencing agreement with a leading general entertainment channel would further add to the stream of revenues for the BCCI and each franchise.

Licensing and merchandising is unlikely to be a major revenue stream in the near term. The licensing and merchandising market is at a nascent stage in India. With organised retail constituting only 7% of the total retail market, an important supply chain enabler for merchandising is undeveloped in India.

On the costs side, the franchisee fee payable to BCCI forms a large chunk of operating expense for each team. The franchisees were auctioned to the highest bidders prior to the first season. The auctioned price is payable by the franchisee owners to BCCI over a period of 10 years. Reliance Industries won the franchisee rights for Mumbai Indians for USD 111.9 million which is payable in equal annual installments’ over 10 seasons. However, with the reserve price for the two new teams fixed at USD 225 million each as compared to USD 50 million each for the first auction, the franchisee fee for new teams is expected to be much higher and a major proportion of the total cost for the franchisees.

Player fee is the other major cost element for the teams. With two additional teams in Season 4 leading to increased demand for players and the existing contracts expiring at the end of Season 3, player salary costs will be a key factor that will influence profitability for the franchisees. The current IPL contracts of the players with individual teams expire in 2010. The salary contract rules, post-2010, have not yet been decided by IPL. The IPL auctions of 2008 and 2009 had salary caps of USD 5 million and USD 2 million respectively. As was seen in both auctions, some team owners have deep pockets and are ready to pay large amounts to get big name players into their teams. The salary model that IPL opts post 2010 will be a key factor in estimating operating costs for each franchise.

Overall, the IPL has proven that it has the ability to capture the imagination of not only the Indian public but also the world cricket lovers at large. The challenge for the IPL going forward would be to sustain this early advantage through innovative marketing and targeting of new audiences. Also, key will be the ability of the league to tap revenue streams that have remained largely untapped. The eight current franchises are well placed to benefit from these initiatives over the next 1-2 years and turn profitable.

No comments: