In February, as Sachin Tendulkar was crisscrossing the rain-washed Australian continent playing in the tri-series, he had an unlikely travel partner—a top-ranking Reliance Industries official. Tagging along with Tendulkar from Brisbane to Melbourne to Canberra to Adelaide, the Reliance executive managed to squeeze in regular and intense meetings with Tendulkar in between matches and training sessions. For a few days, he even managed to patch through daily conference calls between the little master and Reliance’s Mumbai base camp at Maker IV, Nariman Point. By February 11, Tendulkar had given Reliance a list of 21 players that Mukesh Ambani should try and buy for his Mumbai team in the Indian Premier League (IPL) player auctions. Against every name in that long list, Tendulkar had also inked the maximum amount Reliance should bid for. India’s best sportsman was talking business.

The results of Tendulkar’s confabulations with Ambani and his team has been out for every one to see. On February 20, Ambani and the seven other franchisees, including some big and flamboyant names like Vijay Mallya, Shah Rukh Khan and N Srinivasan, slugged it out at the player auctions. “When you have such high-profile people competing against each other, there are bound to be some large egos,” Lalit Modi, BCCI Vice-president and IPL chairman, told Outlook Business days before the player auction (See interview: “Each IPL franchise could be worth $5 billion”).

Big egos apart, big money is also involved. Already, almost $1.7 billion has been wagered on the IPL. At the heart of this exciting concoction of sport, money, adrenalin and glitz is a simple, yet brilliant business plan. First, Modi did what BCCI knows best—raise money by selling broadcast rights for the IPL. The Sony Entertainment Television-World Sports Group (WSG) combine bid $918 million for 10-year rights for the IPL—59 matches and 1,177 hours of live action in the first year alone. This was the first chunk of money to come to the table. Modi then leveraged this seed money. He offered to pay out a big chunk of the proceeds from the TV rights to the eight franchises over 10 years. In the first year, 80% of the allocation for the year, declining to 50% in the tenth. This assured and completely risk-free fund flow upped the stakes and egged industrialists to make aggressive bids. The January 24 auction for the franchise rights was a roaring success—eight bidders will together pay up $723.6 million in total franchise fees over 10 years.

Low-risk game

Now, rather than just the BCCI working to promote the IPL, Modi has ensured that a top broadcaster and eight large business houses will have an equal financial interest in making the IPL a success. At the same time, he has spread the business risks across three sets of stakeholders—the BCCI, the broadcaster and the franchises.

First, the broadcaster. For the $918 million the Sony-WSG combine has paid, it will get a minimum of 12,744 ten-second ad spots every year. Sony expects to sell these slots at a card rate of about Rs 2.5-3 lakh each. To put that in perspective, advertisers typically pay a peak value of Rs 3 lakh for a 10-second slot in a test match, Rs 5.15 lakh for a one-day international and Rs 8 lakh for a top-notch Twenty20 international. At a card rate of Rs 2.5 lakh the Sony-WSG combine stands to earn Rs 319 crore in advertising revenue in the first year. “We don’t expect to make more than Rs 300 crore in revenues in year one, and profits will come only in the third year,” says a pragmatic Kunal Das Gupta, Chief Executive Officer, Sony Entertainment Television.

Still, Rs 300 crore is not a bad first-year return on a Rs 3,672 crore ($918 million) investment made over 10 years, especially if there is the promise of a huge upside if the IPL takes off. “If the tournament does well, the ad rates could well cross Rs 8 lakh,” says Rohit Gupta, Head Marketing, Sony Entertainment. He derives his optimism from a new plan—Sony will accommodate only 12 advertisers, with only one brand from each category, for the entire tournament. “We are planning to give a higher share of voice to each advertiser.”

Nevertheless, to de-risk Sony-WSG’s exposure, a spend of $108 million to promote the IPL over 10 years has been guaranteed. “The BCCI has promised that Rs 100-Rs 120 crore will be spent in promotions in the next 30-60 days,” says a leading franchisee who spoke on condition of anonymity. O&M has been appointed as the advertising agency for the IPL. “Highest quality cricket at the local level is exciting,” says Piyush Pandey, chairman, O&M. “The IPL campaign will aim to get public support and pump in a lot of adrenalin.”

Next, BCCI, the promoter-stakeholder in IPL, will get to keep 20-50% of the central pool revenues, or roughly $331 million, and also pocket the $723.6 million franchise fee it has raised from the eight teams. BCCI’s only risks are a loss of face and its ability to sell future broadcast rights might be hit if the IPL fails.

That brings us to the third set of stakeholders, the eight successful franchise bidders. While they have paid anywhere between $67 million (Emerging Media for Jaipur) and $111.9 million (Reliance for Mumbai), they will also receive about $75 million over the 10-year period from assured payments coming from the central pool. This is a rough estimate based on a simple model, though the IPL follows a graded structure. “The IPL business model has minimal risks. Even if the tournament gets a lukewarm response, the franchises are assured of covering 60% of their expenses through the central pool fund,” says Fraser Castellino, Chief Executive Officer, Emerging Media, the Jaipur franchise. “In the worst-case scenario, I may have to write-off $2 million in the first two years. But thereafter, I expect to make $8-12 million annual profit,” says the top ranking official in one of the larger franchises. This apart, each franchise also gets to develop and retain a whole bunch of local revenue streams like gate fees for home matches, and franchise sponsor and uniform sponsorships, among other things (more on all that later). And finally, franchises will get a huge kicker for their brands from all the buzz and visibility that owning a cricket franchise entails.

In the final tally, the IPL has turned out to be a rather compelling and largely de-risked business model. “The English Premier League is a $10 billion business, and I am sure the IPL can surpass them in just a few years,” trumpets Modi, IPL’s chief architect.

But what’s the catch? In some ways, this is like a castle of cards. Spectators and viewers form the base. At the second level is the BCCI, using its might in getting big Indian and international players to play in the IPL. At the third level is the broadcaster, whose $918 million seed money has been leveraged well. At the top of the deck are the franchises. But the foundation of the castle is India’s cricket-hungry public. If they fill up the IPL stadiums and stay glued to Sony’s live coverage, the castle will stand. If they stay away, the castle could come crashing down. If that happens, BCCI will suffer the least, financially at least. Sony-WSG will take the biggest blow because it is the biggest financial investor in the IPL. And the franchises may get away with a few millions in losses.

To lure spectators, the city franchises need to whip up the ‘patriotic’ frenzy often seen in international matches. Unlike other countries like England and the US, where fans exhibit fierce league loyalties, India has very few such examples. Football in Bengal is perhaps the only one. “It is important for franchises to connect with the masses in the cities where they own teams,” says Venu Nair, Chief Executive Officer, WSG.

Some believe the crowds may be slow in coming. “Franchises should be prepared to lose Rs 20-30 crore each year for at least three to four years,” says Shailendra Singh, Joint Managing Director, Percept Holdings. “But the extraordinary thing is that with a 10-year tenure and a billion fans, this could be extremely profitable later on,” he adds. What’s more, once the 10-year contract is over, the franchises could own the teams forever and also continue to enjoy a share of the central and local revenues (the exact ratio will be decided by the BCCI later). Franchises could also earn a windfall by selling players after the first year and perhaps their franchise itself after the third year.

There is widespread optimism among the franchises. “We will definitely break even in year two,” asserts Castellino. “Even if the league does moderately well, the total revenue of the team could easily be $15 million by year two. This could go up by 15-20% year-on-year.”

A businessman’s game

Sources say that Mukesh Ambani was the first in Reliance to spot the business opportunity in the IPL. For the Reliance camp, this is business, not sport. “There are no hobby horses in Reliance, every thing is a serious business,” says a source working closely with the Reliance camp. Echoes WSG’s Nair: “Mukesh Ambani is not throwing money into cricket because he loves the game; it is hardcore business for him.” Sources say that Reliance applied its normal business filters on the IPL franchise too. As a policy, the group does not get into any new business unless it has the potential to generate a return on capital employed of over 35% in the medium term. Sources say that Reliance is convinced that its Mumbai franchise can exceed this target.

Given the nature of its business, United Spirits had the option of treating its investment in the IPL Bangalore franchise purely as advertising and marketing expenditure. But it says it is in this game for profit. “We intend to make this a profitable venture by creating a winning team,” says Vijay Rekhi, President, United Spirits. Castellino of Emerging Media echoes his sentiments: “This is our core business. We run the Leicestershire Cricket Club and also staged UK’s first Twenty20 tournament.”

The economics of sport

Sources say that many entities mounted their bids and drew up their business plan based on just one figure—the assured money that will come to them every year from the central pool of the IPL. Three main streams fill up the central pool. First, the $918 million broadcast rights will flow into this pool. Second is the title sponsorship rights, which have been bagged by DLF for about $50 million for five years. Third are revenues coming from official suppliers.

All put, the money flowing into the central pool may end up well over $1 billion over 10 years. Each franchise will get 5-8% of the central pool funds. This payout will decline gradually from year one to 10. As things stand, this could translate into a cash flow of over $70 million out of the IPL central pool and into the kitty of each franchise. This apart, 16% of the central pool will also be distributed as total prize money, based on league standings, over 10 years.

When the bidding for the franchises was conducted in late January, the bidders had a rough idea of this $70 million-plus assured payback, which gave them the confidence to bid aggressively. This is another example of how Modi has de-risked the IPL business model at each step.

Once the bids were in, most franchises realised another thing—the cost of buying the franchise and players could together account for as much as 85% of their total cost structure. Other expenses will include management and coaching salaries, stadium leasing costs, match day costs like staffing and security, and travel and accommodation for the team.

The franchises have also figured that the $70 million inflow from the central pool was capable of meeting up to 60% of their total expenses. That left about 40% of the cost structure to be raised by what is called ‘local revenues’.

Under the IPL laws, every franchise will have a minimum of seven matches on its home turf. All gate fees or stadium revenues from these matches will be retained by the franchise. To further de-risk this, the IPL decided that no team will be knocked out in the league stage. And four out of the eight teams will advance to the semi-finals. Other sources of local revenues include franchise title sponsorship, shirt sponsorship and uniform merchandising, among other things.

Initially, though, gate fees or stadium revenues will be the biggest component of local revenues. Several optimistic estimates suggest that the seven matches could help every franchise generate about Rs 8 crore ($2 million) in gate fees in the first year alone. Others are more conservative in their projections. “A 10,000 per game turnout and Rs 400 per ticket could raise Rs 2.8 crore over seven matches,” says an industry source. To put those figures in perspective, a seven match one-day international series typically fetches about Rs 35 crore.

 “Some premium tickets to an India-Pakistan one-day international held in Jaipur last year sold for Rs 30,000,” says Balu Nayar, Managing Director, IMG India, a media and sports marketing firm. “But gate revenues in India are quite under-rated as of now,” he adds. The English Premier League, for example, raises $5 billion in match-day revenues. IMG recently consulted for the Wembley Stadium in the UK. The stadium authority had sought to raise 280 million pounds for a renovation exercise, and approached four banks, but none obliged. IMG swung into action and devised a corporate hospitality plan. “We managed to raise 600 million pounds through this,” says Nayar.

Over time, IPL gate revenues could grow progressively as the league becomes more popular and the corporate marketing machinery kicks-in. Expect several innovations like corporate stalls, food and beverage packages and hospitality lounges. “Gate revenues, if linked to corporate hospitality, can become an excellent revenue model,” says Nayar. “The Bangalore stadium has the maximum number of corporate boxes and we are going to try to garner as much in revenues as possible,” says a senior UB Group official.

The business levers

All things considered, there are basically two levers that could be pulled in order to improve the financial performance of an IPL franchise. The first lever is performance on the field. Topping the IPL league tables could fetch a team $3 million in prize money. This could propel the winner to turn profitable at the operating level in the first year itself.

The second lever is the local revenues, since central pool revenues are largely fixed and common across the eight teams.

The more local revenues a franchise is able to generate, the more profitable it will be. “If we do well on the local revenues front, the central pool revenues will account for only 30% of our total income. If we do badly, it will be as high as 60%,” says one franchisee. But much of this will depend on how well local spectators receive this tournament. “The advertiser will sink in money only when he is convinced that this will give him a good return on investment,” says Devraj Sanyal, Managing Director, Percept D’Mark, a sports marketing company.

In order to be successful on the local revenues front, some franchises are planning to integrate their IPL assets into the their mainstream businesses. Sources say that Reliance is planning to push IPL merchandise through its 500 retail stores across the country. UB Group officials say they are planning a major merchandising push that will include cricket attire and jerseys, limited edition bar accessories, autographed photographs and drinking accessories, among other things. The group could also fray its IPL travel costs through Kingfisher Airlines. Deccan Chronicle could derive cross-selling synergies by using its existing marketing machinery and so on.

However, most franchises are planning to set up their IPL assets in separate companies that would function like special purpose vehicles, with their own profit and loss accounts. Sources say this will come in handy as IPL franchises are likely to attract big valuations over time.

“If things go as we predict, each franchise could be worth $5 billion,” declares Modi. That might be an exaggerated expectation. But high valuations for sports franchises are commonplace abroad. Several franchises like Manchester United ($1.4 billion) in football, the New York Yankees ($1.2 billion) in baseball and Dallas Cowboys ($1.5 billion) in American football are in the billion-dollar league.

“This is a front-loaded model,” says an investment banker. “The high capital investment made now will ensure perpetual ownership with huge earnings potential in the long-term,” he adds. The franchises have figured this out. “Two years down the line, we could even list it,” says N Srinivasan, Vice-Chairman and Managing Director, India Cements, who has just named his franchise ‘Chennai Super Kings’. “An IPO is on the cards, but not for the next two to three years,” says Emerging Media’s Castellino.

In some ways, the business model of an IPL franchise won’t be too different from a conventional infrastructure project—big initial investments, long gestation, initial losses perhaps, but good, steady payback in the long run. And if the league lives up to Modi’s expectations, all the players should be scoring at a brisk pace

With inputs from Sriram Srinivasan

Also read: Paul Rawnsley's interview