Indian Problem League: The sheen is wearing off

Kolkata: Was the Indian Premier League (IPL) too overpriced to begin with and by extension, a flawed business model?

Consider this: A franchise has to annually pay one-tenth of the amount it bought the team for to the IPL. So if the Chennai Super Kings (CSK) were bought for $91 million (now Rs. 508.7 crore), it must shell out $9.1 million ( Rs. 50.87 crore) each year. The salaries cap of $9 million ( Rs. 50.3 crore) per year means a franchise will not pay more than that amount to its players. And, according to a study, every year a franchise spends around $2 million ( Rs. 11.18 crore) on logistics during the tournament. That means CSK spend around $20 million ( Rs. 111.82 crore) every season.

In turn, the IPL gives each franchise around $10 million from television rights and sponsors. The franchises also have rights to gate sales and money from co-sponsors they can rope in. And we are talking of cricket here, with top-class international flavour. So on the face of it, there is very little chance of such a model failing.

The flip side

But there's another side. Except for three teams Reliance-owned Mumbai Indians, CSK, owned by India Cements' vice-chairman and cricket board president N Srinivasan and the Kolkata Knight Riders (KKR), most other teams are struggling to cope.

"Look at Rajasthan Royals, Kings XI Punjab, Deccan Chargers; even Royal Challengers Bangalore have problems. Even with KKR, it was the image of Shah Rukh Khan that has made the difference. Last year, Pune Warriors earned about Rs. 25 crore as gate receipts because there was huge interest among the public. There is no guarantee the team will get that kind of support every year," an IPL team official told HT on condition of anonymity given the sensitive nature of the issue.

For reigning champions KKR, co-owner Shah Rukh Khan overwrites all economic models. He is a brand by himself and that helps explain why KKR have made net profits of around Rs. 125 crore over the past five years.

For most others, things are a lot bleaker.

If you ask someone to name two co-sponsors of a particular franchise, chances are that you might not get an answer. That, experts feel, is because there is very little top-of-the-mind recall for the co-sponsors.

"Then there are many sponsorship restrictions due to the branding issues of the big players. That means the smaller sponsors don't get the kind of returns they are looking for," the team official said.

Consumer connect

"All said and done, the League goes on for just 44 to 50 days. That is not enough to get consumers to stick to products. For this model to sustain well that window of the League will definitely have to widen. But then with the International Cricket Council not creating space for the League in their Future Tours Programme, it is unlikely that the League can be lengthened," said Anup Abraham, who was part of the sports management faculty at IIM Shillong.

More the merrier

"The English Premier League and the Uefa Champions League go on for almost nine months and then, there are transfer windows which keep fans interested. Effectively, fans are connected to a particular club for almost the whole year. IPL franchises will have to increase their connect even when the League is not on. Otherwise, it will always be a very tough ask for them to generate the required amount of funds every year. It's too overpriced considering a window which is not even two months."

That may well be the case but the economics of sport is also very different. For example, even as Manchester United incur heavy losses each year, their fan base increases and banks eager to finance them. While floating their IPO, the club claimed to have 659 million supporters and 26.9 million Facebook fans.

It signed a $559 million ( Rs. 3125.3 crore) shirt sponsorship with Chevrolet, generated $181.1 million ( Rs. 1012.53 crore) in broadcast revenue, sold tickets worth $171.2 million ( Rs. 957.17 crore) and sold 2 million jerseys last year. Even then as of March 31, 2012, the club was $666.2 million ( Rs. 3724.72 crore) in debt.

Deccan Chargers were acquired for $107 million (now Rs. 598.25 crore) in 2008. The owners plan to sell it for pretty much the same amount after five years. So even as a UK-based brand consultancy firm valued that the IPL brand rose to $4.13 billion ( Rs. 23090.9 crore) in 2010, the question remains as whether this business model has the scope of the franchises making money at all?