http://articles.economictimes.indiatimes.com/2011-04-10/news/29403398_1_brand-finance-chennai-franchise-iplBusiness lessons from IPL: Franchise model is risk free
TR Vivek, ET Bureau, Apr 10, 2011, 02.39am ISTThe euphoria over the world cup win is yet to die down. Workers at the Wankhede may still be clearing the confetti. MS Dhoni and his mates will only now start to feel the aches and creaks. But a breather for cricketers and fans alike will have to wait.
For, the annual travelling circus called the Indian Premier League—the grand setting of big bucks and bigger egos—is back in town.
As the franchised cricket league enters its fourth season, sailing through a third of the 10-year ownership given to privately held teams by BCCI, there is no better time than now to assess the return on investments made by some of the biggest corporate houses and canniest business minds in India.
A recent joint study by ET and Brand Finance, a global consultancy, pegs the overall brand value of IPL at nearly $3.7 billion. The brand value of top bananas like Mumbai Indians and Chennai Super Kings has shot up to $57 million and $55 million.
Still, there is no ducking the inevitable question: is the IPL making money for the team owners? The big sixes and cheerleaders apart, the IPL still conjures up visions of big money thrown around for ownership in 2008. India Cements won the bid for the Chennai franchise for $91 million.
Reliance Industries won the bid for Mumbai Indians at $111.9 million. And considering that this season's player auctions (telecast live to add to the drama) where some of India's richest pursued Gautam Gambhir and Piyush Chawla with blank cheques in hand, it is easy to assume that the cost of losing would be near-bankruptcy or being denied entry into The Belvedere or The Chambers.
Truth is the IPL business model is remarkable in its simplicity. Indeed, the sources of income for teams are guaranteed and stable, and avenues for expenditure limited and fixed. It is a business that B-school students could run without bleeding money. And it's as risk free as a batsman milking off-spinners for four runs an over in the middle overs of a one-day international.
How it works
When India Cements' vice-chairman N Srinivasan won the Chennai franchise, baffled analysts were eager to grill him on why a manufacturing company that requires high capital expenditure 'fritter' money on cricket.
One analyst quizzed Srinivasan why he hadn't mentioned that the company was going to earmark such a huge amount for a non-core activity when he was trying to raise money from the domestic markets through a qualified institutional placement.
Srinivasan's reply showed a limpid Tam Bram's grasp of the financial dynamics of IPL. "If I can be brutally frank, we only looked at this as a marketing thing. We did not think that
this is an earthshaking event that should cause so many people so much of concern," he said. "Here there is no outflow. This is just a marketing strategy. We are doing something slightly innovative at no cost." Yes, that is right. Running an IPL team costs little.
To begin with, the cost of acquiring a franchise is fairly low. For instance, if Reliance Industries won the Mumbai team bid for $111.9 million, it has to pay IPL only a tenth of that amount. In RIL's case, that is $12 million a year. And that is a team's biggest expenditure. Player wages, fixed at $5 million then, is now capped at $9 million. Logistics and administrative costs account for another $2-3 million
If you are still unimpressed, consider this: teams get nearly $10 million a year from IPL's central broadcasting and sponsorship pool. It is their biggest source of revenue, contributing almost 70% of income. The teams keep earnings from ticket sales, sponsorship deals they strike on their own, and income from merchandise such as replica shirts and sundry souvenirs.
Together, these returns offset the personnel costs. Under Lalit Modi's three-year reign at IPL, teams benefited a great deal as he managed to rope in new sponsors. Modi also introduced a rash of ad breaks, notably the scheduled 10-minute match break anomalously called "strategic time-out".
No prizes for guessing who will miss Modi the most. So even if a team takes only a stab at marketing and adds fans to its ranks, there's a good chance it will be loss free. Or as Srinivasan said, "I have no capital employed and everything is revenue plus. The only capital I will invest is in cricket kits."
It's the core business, stupid
The smarter team owners have been those who haven't chased the mirage of fancy valuations, made tall claims about listing on the bourses, or treat IPL as a significant cash generator. Rather, they have used IPL to grow their bread and butter businesses. Here, the Chennai and Mumbai team owners are shining examples.
"To get into IPL was a very clear, cold analytical decision taken solely with a view to building our brand more extensively and deeply throughout the country," said Srinivasan. India Cements has been trying to break free from its conservative mould, trying to grow beyond its traditional southern markets.
Here, running a successful cricket team captained by Dhoni becomes the calling card when it meets dealers and consumers in the north. The company has offered 1,800 new dealers in Madhya Pradesh, Gujarat and Rajasthan free tickets for CSK's games, coupled with a pilgrimage to Tirupati. The strategy has paid off, says India Cements marketing head Rakesh Singh. The company is now able to utilise every bit of its factories' capacity.
For Mukesh Ambani, the deep-pocketed promoter of Mumbai Indians, the team is a valuable managerial training ground for family. It also gives RIL a platform to extend its corporate social responsibility (CSR) activities. And even India's biggest private company would not mind more visibility.
Brand Finance says Reliance's integration of social and business dimensions gives MI an existence with a purpose, th ereby, creating a healthier sporting ecosystem. The team has partnered five NGOs—Pratham, Ummeed, Akanksha, Teach For India and Nanhi Kali—that work in education for underprivileged children. "Such a unique business proposition offers the brand Mumbai Indians immense ability to attract and associate with global fan base," says Brand Finance India managing director M Unni Krishnan.
After a dismal first year, Vijay Mallya's Royal Challengers Bangalore (RCB) proved to be quick learners and turned the corner. Now, the flamboyant promoter is no longer accused of using the franchise as an expensive hobby horse. Realising that running a franchise based in Bangalore would be impossible without the support of the local Karnataka State Cricket Association (KSCA), the team went on to co-opt its officials. Anil Kumble, captain-turned-mentor for the franchise, is today the president of KSCA.
RCB has now emerged as a well-managed professional club with a strong focus on innovation in fan engagement, merchandising and ticketing. Its substantial investments in developing corporate stands to create a world-class sports-viewing experience has resulted in higher gate receipts and higher margins for every ticket sold. The franchise has become an extension of Kingfisher's tag line "The king of good times".
Teams such as Shah Rukh Khan's Kolkata Knight Riders have roped in professional CEOs with experience in financial services to bolster their chances of success and find a way out of cricketing mediocrity. On-field success can give you bragging rights at a party, or fetch a few million dollars in sponsorship.
The IPL's lesson is this: unless you have a core business that can piggyback on the visibility provided by the tournament, there's no fortune waiting at the bottom of the pyramid, at least for a few years.
AuthorTopic: Economics of the IPL (Read 1380 times)
March 28, 2007, 07:13:32 PM