|Shetty and Kundra, Franchise Owners|
You too, I am sure, have heard of the millions of dollars being splurged by IPL team owners, the Vijay Mallyas, the Shahrukh Khans and the Shilpa Shettys.
You must have wondered where all this money is going, and why on earth are teams made up of a few foreign and Indian cricketers, loosely put together seemingly, to play 20 over-matches over 6-8 weeks, worth hundreds of millions of dollars?
If you have some business acumen (or interest), you, like me, must have wondered. How is all this investment going to be recouped?
Regardless of how exciting or tacky the IPL may be to you, fact remains that herein is a business case that's worthy of B-school hall of fame. So let's understand this IPL business model and I promise this will be as basic as a back-of-the-envelope calculation.
Let's start with the sources of IPL revenue: a) broadcasting rights, b) ticket sales, c) sponsorship from corporate houses, and d) franchisee ownership rights.
Take the example of India Cements who in 2008 paid the BCCI $90 million for the Chennai-based franchise Chennai Super Kings (CSK) - a steal, as you shall see. Let's not forget Dhoni alone was worth over 1 million dollars and the entire team likely to be worth an additional $10 million or so.
CSK's brand ambassadors, promotional campaigns, events and other marketing initiatives (cheer leaders!) are worth around US$ 5 million. So that's roughly $105 million in costs, over a ten year horizon.
So how does a franchise owner go about recouping this staggering sum?
For starters, television rights for the IPL in 2008 was worth about 1 billion dollars (a few times more in 2011). Each team got about 9% of that pie over 10 years. So that is 9 million dollars a year and about 90 million over 10 years.
Then come the corporate sponsors (title sponsors and the rest of the brands you see slapped on the team's jerseys). In the case of Chennai, the title sponsors - AirCel and Coromander Super King (a cement company) are each paying around 5 million a year - i.e. 50 million over 10 years.
So CSK then stands to make 50 + 90 = 140 million dollars over 10 years, and this is not taking into account the plethora of the other corporate sponsors for CSK (Reebok, 7up, Wrigley's Chewing Gum, the Hindu, etc).
|IPL Nights: Bollywood meets Cricket|
Now remember DLF is the official sponsor of the IPL (hence DLF IPL). For such sponsorship rights, DLF pays a staggering a $50 million every year, out of which, about seven percent goes to each participating team/franchise. Therefore CSK rakes in another $3.5 million from this pot. So that's an estimated $35 million on top of the $140 already accounted for (total thus far = $175 million).
Ticket Sales are also a huge revenue generator for CSK. The MA Chidambaram stadium with over 50 thousand capacity, assuming 400 Rupees as average ticket price and 80 percent seats sold, makes about $2 million a year (after paying a stadium rental fee of 20 percent of revenue). That's $20 million over ten years.
CSK's revenue then comes to $195 million over 10 years. Add in-stadium advertising through hoardings estimated to be over US$1 million every year and you have $205 million.
Sales of merchandise (t-shirts, caps) is another revenue generator. Reportedly worth about $1 million in 2008 and about 3 million 2011, you have another 30-40 million dollars over 10 years (adjusting for the increasing size of this pie every year).
So CSK's total revenue stands around $240 million over 10 years. A net profit therefore of around $135 million, and this is not even taking into account the increasing cost of ad space, broadcast rights, prize money, ticket sales, merchandise sales, that may take CSK's revenue to over $400 million dollars.
How's that for a business case?
Note: The numbers here are approximate and calculated on the basis of news reports on TOI and HT.