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Crossing the boundary

With the IPL expanding, teams will need to rejig their revenue strategies, writes Desh Gaurav Chopra Sekhri.

india Updated: Mar 24, 2010 21:24 IST

The much-anticipated expansion of the Indian Premier League (IPL) from eight to ten teams exceeded all expectations and firmly established it as the world’s most-profitable professional sports league. The two winning bids on March 21 — $370 million by Sahara for the Pune franchise and $333.33 million by the Rendezvous Sports World consortium for the Kochi franchise — generated nearly as much value ($703.33 million) for the league as the eight founding teams had cumulatively ($723.59 million) done during the IPL 1 in 2008.

This is, of course, remarkable and there doesn’t seem to be a ceiling on the league’s potential. There is now a benchmark and the bid itself was as much a valuation mechanism for the existing teams as it was an affirmation of the league’s rosy future. While it would be easy to gloss over any concerns relating to the sustainability of the franchises’ revenue model and future viability, one should take a closer look at both.

Using March 21 valuations as a benchmark, it will now cost more than $50 million a year to own a team — significantly more than it costs an existing team today. While for most teams that don’t see a change in ownership, it is an opportunity cost. For the new and the existing teams, which are sold, this is a significant increase in expenses from what teams estimated for the first three seasons.

If this cost increase were to be accompanied by a corresponding increase in revenues then this wouldn’t be such a concern. However, here’s the rub: by expanding the league to ten teams, the proportion of the central revenue pool that each team receives will be reduced from 7.5 per cent to 6 per cent. Unless the future revenues, which the league receives as part of the central revenue pool, increase exponentially the costs will continue to increase but the revenues won’t.

It is even more worrying when it comes to the single-largest revenue stream — broadcasting. Presently, the proceeds are divided between the league and the franchises, where the former’s share is 20 per cent until 2013. It will increase to 40 per cent from the sixth year onwards. On the other hand, franchises will receive 80 per cent up to 2013 and 60 per cent from 2013-18 — lesser fixed percentage that goes towards prize money. With the induction of two new teams not only will the teams’ revenue share be diluted, but, in fact, they will actually have a smaller percentage of the revenue share after 2013.

What this means is that the teams will need to be innovative and focus on collateral revenue streams like merchandising, ticket revenues, local revenue pools and other such initiatives, in order to remain profitable and grow their brands. The likelihood of success of these initiatives is not a foregone conclusion in any which way, and until teams start looking at developing and owning fixed assets like stadiums, there could be some hiccups along the way.

There is no doubt that the league is a global phenomenon and critics who dispute its potential haven’t done their due diligence. The league is sound, has revenue streams that are dependable and consistent and there’re barriers to entry which ensure

that there is unlikely to ever be a competitor who could drive down its profitability. There’s a captive pool of the world’s top cricketing talent, and the nature of cricket is such that a mass exodus of the best players to join a rebel league is unlikely to happen.

At present, things couldn’t be better for the IPL. That doesn’t, however, mean that the status quo will remain in perpetuity. One just needs to adopt a wait-and-watch attitude as the IPL evolves and stabilises. Until then, enjoy the ride and marvel at its success.

Desh Gaurav Chopra Sekhri is a sports attorney

The views expressed by the author are personal