Economics of IPL

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					           “A STUDY ON
EFFECT OF IPL ON INDIAN ECONOMY”


    A PROJECT REPORT SUBMITTED

               TO




  SUBJECT: ENGINEERING ECONOMICS



            APRIL 2010
                                INDEX
Sr. No                        Chapter Name   Page No
  1      Introduction                           3
  2      Sources of Revenue                     4
  3      Marketing Strategy                     6
  4      Financial Details                      7
  5      SWOT Analysis                          8
  6      Effect Of Recession                   11
  7      Effect on Indian Economy              12
  8      Bibliography                          13




                                                       2
1.     Introduction

The Indian Premier League (often abbreviated as IPL), is a Twenty20 cricket competition
initiated by the Board of Control for Cricket in India (BCCI) and supervised by BCCI Vice
President Lalit Modi, Chairman & Commissioner for IPL. It presently includes 10 teams
"franchises" consisting of players from different countries. It was started after altercation
between the BCCI and the newly-created Indian Cricket League.

The Indian Premier League's brand value was estimated to be around $4.13 billion (over Rs
18,000 crore) in 2010. According to global sports salaries review IPL is the second highest-paid
league, based on first-team salaries on a pro-rata basis, only second to NBA league. It is
calculated that average salary of IPL over a year is £2.5 million.

In this paper a brief discussion is done about the marketing strategy, sources of revenue; effect
Recession on IPL, Effect of IPL on Indian economy & various other financial details.




                                                                                               3
2.     Sources of Revenue

2.1 Sponsorship:

India's biggest property developer DLF Group paid US$50 million to be the title sponsor of the
tournament for 5 years from 2008 to 2013.
Other five-year sponsorship agreements include a deal with motorcycle maker Hero Honda
worth $22.5-million, one with PepsiCo worth $12.5-million, and a deal with beer and airline
conglomerate Kingfisher at $26.5-million.


2.2 Television Rights


On 15 January 2008 it was announced that a consortium consisting of India's Sony Entertainment
Television network and Singapore-based World Sport Group secured the global broadcasting
rights of the Indian Premier League. The record deal has duration of ten years at a cost of US
$1.026 billion. As part of the deal, the consortium will pay the BCCI US $918 million for the
television broadcast rights and US $108 million for the promotion of the tournament. This deal
was challenged in the Bombay High Court by IPL, and got the ruling on its side. After losing the
battle in court, Sony Entertainment Television signed a new contract with BCCI with Sony
Entertainment Television paying a staggering Rs. 8700 crores (87 billion) for 10 years.


20% of these proceeds would go to IPL, 8% as prize money and 72% would be distributed to the
franchisees. The money would be distributed in these proportions until 2012, after which the IPL
would go public and list its shares (But recently in March 2010, IPL decided not to go public).


 Winning Bidder            Regional Broadcast Rights                    Terms of Deal
         Sony                     Global Rights, India              10 years at Rs 8700 crores
       One HD             Free-to-air HD and SD television in     5 years at AUD 10-15 Million.
                          Australia. Owned by Network TEN.


                                                                                                  4
2.3 Gate Receipts


In Season-I, ticket sales accounted for as low as 7 per cent of total revenues to around 15 per cent
of total revenues for various teams. In season 2, most teams had planned an increase in their
ticket prices and had intentions of applying a strict "no free tickets" regime. Internationally,
ticket sales account for 15 per cent to 20 per cent of total revenues as a result of premium ticket
sales and corporate boxes in addition to normal ticket sales.




2.4 Team Auctions



Eight franchises have collectively generated US $723.59 at an auction on 24th January with big
industrialists and bollywood stars securing key city franchises. Top three money spinners were
Mumbai franchise (bought by Anil Ambani’s Reliance India Ltd) for US $111.90 million,
Bangalore franchise (bought by Vijay Mallaya’s UB group) US $ 111.7 million, and Hyderabad
franchise (bought by Deccan Chronicle) for US $ 107 million.




                                                         Cost (in US$
City        Franchise Owner
                                                         millions)
Bangalore Vijay Mallya’s UB group                                111.6
Chennai     India Cements                                          91
Delhi       GMR Group                                              84
Hyderabad Deccan Chronicle                                        107
Jaipur      Emerging Media-led consortium                          67
            Shah Rukh Khan’s Red Chillies
Kolkata                                                          75.09
            Entertainment
Mohali      Preity Zinta, Ness Wadia & team                        76
Mumbai      Mukesh Ambani’s Reliance India Limited               111.9

                                                                                                  5
6
3.      Marketing Strategy

What makes IPL about marketing is its concept itself. It not began with cricket but with what
consumer wants of cricket. A product is nothing but an intensification of all that is pleasurable
about the thing. An object or an idea becomes a product when its existence becomes all about
becoming desirable for consumption.

In converting something into a marketable product we make it easily accessible, we bring
together all the bits that the consumers really like and we package it attractively so as to seduce
the senses. With IPL cricket now officially belongs to the people who can pay the owners, the
sponsors, the spectators and the viewers.




3.1 Time line of IPL:
From the time the auction started there was a huge buzz which was created, much like the launch
of any product. IPL across various media platforms, including television media. Newspapers,
mobiles and the internet. Further there was a talk too to promote it at an international level and
the whole BCCI campaign was around fun entertainment and total paise vasool, a clear
positioning strategy. Taking the whole marketing concept further, IPL also had its shares of
controversies all adding to spice of IPL.

It has repackaged the sports into entertainment product with a view to maximize eyeballs. The
league caught the fancy of people across the world with outstanding response from the non-
cricketing countries too. It was the media who has lapped up the product and taken its places.
Every single market has appreciated the product. Thus IPL is said to be the Marketing Success
of the Decade




                                                                                                 7
4.       Financial Details

IPL- an already a US$2b property was essentially an attempt to sell cricket as a reality show. The
concept is yet to evolve and revenues though hard to predict would be numerous. It is likely that
the three top teams could easily do revenues of Rs 3 billions per year in next three four years and
all the teams are likely to turn profitable after two three years. Their Operating Profit Margins
could range from 15- 20 %. Value unlocking for teams would happen through listing and P/E
participation.

Cash Flow statements

In financial accounting, a cash flow statement, also known as statement of cash flows or funds
flow statement, is a financial statement that shows how changes in balance sheet accounts and
income affect cash and cash equivalents, and breaks the analysis down to operating, investing,
and financing activities.

The cash flow statement is intended to

     1. provide information on a firm's liquidity and solvency and its ability to change cash flows
        in future circumstances

     2. provide additional information for evaluating changes in assets, liabilities and equity

     3. improve the comparability of different firms' operating performance by eliminating the
        effects of different accounting methods

     4. indicate the amount, timing and probability of future cash flows




                                                                                                  8
4.1    BCCI’s Financials

The IPL is regarded as a special purpose vehicle of the parent, BCCI. BCCI will generate the
maximum profit from IPL.



Cash Flow statement for BCCI
                                  Year 1                             Upto year 10
Promotion cost                    (Rs. 100 crore)                    (Rs. 432 crore)
Franchises fee                    Rs. 2894 crore                     Rs 289.4 crore
Earnings from central pool Rs 83.4 crore                             Rs. 1456 crore
revenue
Net Cash Flow                     Rs. 272.8 crore                    Rs. 4750 crore




4.2    Franchise’s Financials

Average cash flow statement of franchises in 1st years

                                                    Year 1

Avg Franchisee fee                                  (Rs. 36 crore)
Players cost                                        (Rs. 20 crore)
Other cost                                          (Rs. 14 crore)
Share from central pool revenue                     Rs. 41.7 crore
Average share of price money                        Rs. 1.5 crore
Earnings from local pool revenue                    Rs. 6.4 crore
Net Cash Flow                                       (Rs. 20 crore)
As we can see from the table on an average the franchises have suffered a loss of Rs 20 crore in
the first year. But in upcoming seasons the revenue will increase and the teams will be in profit.




                                                                                                     9
While the central pool revenue for the first year is Rs.417.2 crore, the 80% allocation for eight
franchisees works out to Rs.333.76 crore, which will be shared by the eight franchisees. The
allocation for the franchises from the central pool revenue will decline to 50% in the tenth year.
Over 10 years, each franchisee will receive around Rs.300 crore from the central revenue pool

Each franchise will have a minimum of seven matches on home turf. Gate fees/stadium revenue
from these matches will be retained by the franchise. Estimate based on 10,000 spectators per
game at Rs.400 per ticket working out to Rs.2.8 crore for seven home matches.




5.       SWOT ANALYSIS


5.1 Strengths
        The Indian Premier League (IPL) is based upon the Twenty20 cricket game which should
         be completed in 2 ½ hours. That means that is fast-paced and exciting, and moreover it
         can be played on a weekday evening or weekend afternoon. That makes it very appealing
         as a mass sport, just like American Football, Basketball and Soccer. It is appealing as a
         spectator sport, as well to TV audiences.

        The IPL has employed economists to structure its lead so that revenue is maximized. The
         more unified the sport, the more successful it is.

5.2 Weaknesses
        Twenty20 has been so popular that it could replace other forms of cricket i.e. damage the
         game that generated it.

        Some fans will also have to pay for travel to the ground. There may be large queues for
         the most popular games. There may be some distance between where the fan lives and the
         cricket ground.

        Stakes are very high! Some teams may not weather short-term failures and may be too
         quick to get rid of key managers and players if things don't go well quickly. Famously,
         Royal Challengers Bangalore (RCB) sacked their CEO Charu Sharma for watching his
         team lose 6 from their first 8 games.




                                                                                                10
      Some teams have overpriced their advertising/sponsorship in order to gain some short-
       term returns (e.g. Royal Challengers), and some sponsors and are moving their
       investment the more reasonably priced teams.

5.3 Opportunities
      Since it has a large potential mass audience, IPL is very attractive as a marketing
       communications opportunity, especially for advertisers and sponsors.

      The league functions under a number of franchises. Each franchisee is responsible for
       marketing its team to gain as large a fan-base as possible. The long-term success of all of
       the franchises lies in the generation of a solid fan-base. The fan-base will generate large
       TV revenues.

      Different fans will pay different amounts to watch their sport. There will be corporate
       hospitality, season tickets, away tickets, TV pay-per-view and other ways to segment the
       market for the IPL.

      There is a huge opportunity for merchandising e.g. sales of shirts, credit cards and other
       fan memorabilia. Grounds can also sell refreshments and other services during the games.

      Marketers believe that the teenage segments need to be targeted so that they become the
       long-term fan-base. Their parents and older cricket fans may prefer the longer, more
       traditional game. The youth market may also impress on their parents that they want them
       to buy their club's merchandise on their behalf - as a differentiator or status symbol.

      Franchise fees will remain fixed for the up until 2017-18, which means that the
       investment is safe against inflation which is traditionally relatively high in India.

5.4 Threats
      The level of competition that the Board of Control for Cricket in India (BCCI) can
       generate determines long-term viability of the league. If the level of competition drops,
       then revenue will fall. For example, if the top names in cricket cannot be attracted to
       India, the appeal of the game will fall. Often getting hold of the big names is a problem -
       Australian domestic cricket runs concurrent with the IPL and if players move form
       Australia to India to follow the money then their domestic game will be hit. This is
       known as 'Free Agency.'

      If the franchisee's fan-base does not generate income then they may not have the cash to
       pay the salaries of the best players. However, if you invest in the best players and they do
       not win the trophies, then you may not see a return on your investment. It won't be a
       quick return on investment - so owners need to be in it for the long-term.


                                                                                                11
   Franchises are very expensive. The most expensive franchise - Mumbai Indians - was
    bought by Mukesh Ambani for $111.9 million, whereas the lowest priced franchise -
    Rajasthan Royals was picked up by Manoj Badale for a mere $67 million.

   The most highly priced teams may not be those that have the early success. Revenues will
    come from the most highly supported teams.




                                                                                         12
6.      Effect of Recession

India has posted a GDP growth (revised) of 9.0 %; the present inflation rate is 8.1 %. The
Government is jittery...the common man is upset...the middle class is squeezed between rising
prices and increasing lending rates (especially those who had taken home loans). All these have
not affected Indians from watching Indian Premier League Cricket Matches for forty four days
continuously over the TV or in the stadia. People do not hesitate paying Rs.1000/= for a ticket.
The expected TV viewership for today's final is about 50 million in India alone. The IPL has
viewers all over the world, especially the cricket playing countries, and where people from
Commonwealth Countries live.




                                                                                             13
7.      Effect of IPL on Indian economy

                The Indian Premier League has made the BCCI richer, the broadcasters are
smiling, and the fans aren't complaining either. As for the franchisees, some are still wondering
when they are going to break even, but the others are happy with the eyeballs and the brand-
building. With two more teams set to join next year, TOI-Crest tries to make sense of the
economics of the IPL:

          The key attraction, of course, is the presence of virtually the who's who of the game;
there may be a few who are not here in flesh and blood, thanks to their national commitments or
injuries, but their minds and hearts are surely here. Nobody wants to miss the IPL action, or
perhaps the mega bucks.
Yes big bucks.



               And that is precisely what raises the big question: Can the IPL sustain itself? Is
there enough money and interest in the market to keep it going, year after year, day after day?
As the cynics point out, sooner or later, the fatigue factor will set in: how much cricket can you
take anyway?

        If the last eight days are any indication, however, the fans are not yet done: they still
want a piece of the IPL cake. Stands are packed for almost every match; the clamour for
complimentaries and tickets is only rising; the crowds in front of television sets are just not
disappearing. These might be early days though; give it another week or two and it will probably
become another part of our lives, a not so important one. Of course, interest will peak again as
the tournament enters the final phase, when the rush for the semifinal spots becomes frantic.

        As the world watches with astonishment, another set of important questions rears itself:
who is making the big bucks really? The players? Yes. The BCCI? Definitely. The television
channel? Probably. The franchises? Maybe not.

"The inaugural match at the DYP Stadium on March 12 notched up a TVR of 10. In 2008, it was
5 while in 2009 it went up to 7," reveals an expert. Clearly, the ratings are improving by the year.
More significantly, "The overall ad-spend during IPL telecast is expected to rise from Rs 5 billion
in 2009 to Rs 7 billion this year. "We expect the gross profits of all teams to be in the range of
Rs 190 million to Rs 430 million," says the India Infoline report


               The bigger problem will arise when two more teams are added into the IPL
family. At a base price of $225 million, the new entrants will really have to scrounge around, just
to break even. As the final price is expected to go up to about $250 million, it is only likely to be


                                                                                                   14
a bitter fight for the last penny in the market.



          "I don't really know how sustainable it is going to be to buy a franchise at such a high
cost,"' says Aluri Srinivasa Rao, Managing Director of Morgan Stanley private equity. Rao,
incidentally, had fronted the bid for ICICI ventures in 2008 when the first ever bidding for
franchisees took place. He eventually backed out though. "In 2008 itself, with a base price of
$50m, we thought that franchisees would not be able to break even, even after the first four or
five years. Now, at $225m, I don't see how the cash flow is going to add up," he argues.


               When the IPL becomes a 10-team affair, there will be as many as 28 matches
more to contend with. The overall tally will go up to 94; that is not so significant in itself. The
problem is that the window allotted for the event is not going to change: all the games will still
have to be completed in 45 days. In simpler terms, it means two matches per day, and on
occasions three too. If you thought six hours of cricket was too much, what do you make of 11
hours in a day?

        The real killing, however, will be made by the so-called cheaper teams: their valuations
have already gone up impressively. For Rajasthan Royals (bought for $67m), Kolkata Knight
Riders ($75m) and Kings XI Punjab ($76m), the overall valuation of the tournament going up by
almost 200 per cent is something to be really happy about.

          . As per the original revenue allocation plan, the franchisees were guaranteed 80 per
cent of the television rights money for the first three years. Funnily, the money was divided
equally between all the teams, irrespective of the amount they paid to become the owner. The
same goes for the new teams, who are expected to shell out anything up to $ 250 million.

         The BCCI is, of course, laughing all the way to the bank. Its profit for 2010, according
to reports, is expected to touch the Rs 700-crore mark; that works out to over 25 per cent higher
than what it made last year and 37 per cent more than it made in 2008. By bringing in the likes
of Google (YouTube.com), a flurry of mobile companies and a general entertainment channel
too on board, IPL commissioner Lalit Modi seems to be milking the cash cow all the way.

         SetMax (now Multi Screen Media) too announced that it is expecting revenues to the
tune of Rs 650 crore this year - a claim substantiated by experts; it had apparently sold almost
80 per cent of its inventory even before IPL III began. The IIFL report too underlines that this
year more than just one franchise might show a profit. After all, individual sponsorships per
franchise, in-stadia advertising and media tie-ups have shot up. Maybe, there is a method
behind all the madness at the stadiums. Maybe, the numbers are really adding up.




                                                                                                      15
                Mumbai The Maharashtra government will levy entertainment tax on T-20
matches conducted by the Indian Premier League (IPL) in the state. A decision to this effect
was taken at a meeting of the state cabinet chaired by Chief Minister Ashok Chavan today,
official sources said. While the quantum of tax for matches held in Mumbai will be 25 per cent of
the revenue generated from the event, for those played at venues located within the jurisdiction
of other municipal corporations it will range between 15 and 20 per cent.



                  Meanwhile, reacting to the state government’s decision IPL Chairman and
Commissioner Lalit Modi told reporters at a media conference that the league had no issues
over it. “It is not an issue at all. If there is an entertainment tax, we will pay it,” he said. The IPL
had held the auction for the third edition of the league here yesterday.Owners of the franchises
include a leading Bollywood actor, one of the world's richest men and a Formula One team
boss.



                The commercial success of the first edition saw the IPL contribute close to 1
billion rupees ($19.65 million) to the exchequer last year, but the BCCI does not expect to make
much profit during the second edition due to huge extra costs involved.



               The Board of Control for Cricket in India (BCCI) wanted to stage the event
overseas after failing to get government clearance for security cover as the tournament's dates
clash with the country's general elections.



                The IPL, which involves many of the world's leading players, was a huge success
in its inaugural edition in cricket-crazy India last year, primarily because it is structured around
city-based franchises with a fan base in home and away matches.



               Some analysts feel the shift would eroded sizeable value from the Indian market
for the second edition, adding to the woes from the global economic downturn.



                The BCCI has reportedly sanctioned an initial $10 million to the league to cover
the costs of the switch and is willing to triple that sum. It is also ready to underwrite a part of the
franchises' expenditure. Indian media has speculated the loss of revenue to small ancillary
firms, merchandising companies, local sponsors and entertainment companies alone could be
between 500 million and 750 million rupees. The loss from gate receipts is estimated at over
500 million rupees.


                                                                                                       16
VIEWS OF THE EXPERTS REGARDING EFFECT OF RECESSION ON IPL.


Ness Wadia: Every business has to adapt to its external environment and King's XI will do so
without compromising on quality or delivery in all that we do.
Tim Wright: Delivering an outstanding in-stadium experience is crucial. We intend to put more
into that this year.


Manoj Badale: Franchises know they are still in the early stages of investing. We are not
immune to recession, which will affect sponsorship and financing capacity; but we should not
forget that over 80% revenues are guaranteed.


B Vanchi: Recession will impact IPL. IPL is a business and it is unlikely that it will remain
unaffected by the economic situation. I expect franchises to be restrained in their spending and
show-casing of the event.


R Balachandran: Key directions and foundation were set in the first season. Now some fine
tuning and adjustments are needed. The need for adjustments and changes are not
fundamental, but only incremental.



CALCULATION OF BRAND VALUES:

Brand values are a reflection of a brand‟ s ability to generate future income. So this is a
forward looking study that uses historic performance and future trends to predict future
activity. The actual brand valuation calculation is relatively straight forward. It attempts
to derive the amount the brand owner would be willing to pay for its brand if it did not
already own it. This approach is called the relief from royalty methodology as it
calculates how much the brand owner is relieved from paying by virtue of owning the
brand. The more complicated parts are the components that contribute to the
calculation.

These three stages illustrate the process, simply:




                                                                                                17
1. FORECAST SALES
Last years‟ historical sales data was gathered for each franchise brand. Despite their
relatively short existence we have assumed that the brands have indefinite lives in line
with the lives of brands in more established sport franchises such the English Premier
League –11 of the 12 original members of The Football League formed in 1888 are still
running. The compound annual growth rate (CAGR) is adjusted to reflect the brand‟ s
long term ability for growth. This reflects more accurately a brand‟ s growth prospects
based on its current and historical performance.

2. ROYALTY RATE
To determine the strength of the brands, each brand was scored on three measures of
brand strength, provided from qualitative panel data –owner equity, awareness and
perception. Each brand was also measured on hard data including heritage, popularity,
salience, loyalty, price premium and IPL record. The average of these two total scores
(panel brand score and hard brand score) was then positioned between a royalty rate
range. This determines a unique royalty rate for each brand. The royalty rate appears to
be a simple percentage but in fact this hides the depth of understanding required to
determine a rate that reflects accurately the profit/cash flow generated by the brand
alone –separate from other elements of product delivery.

3. DISCOUNT RATE
Future sales are then multiplied by the royalty rate and reduced at the relevant tax rate.
They are then discounted to calculate the net present value of those future cash flows.
The discount rate reflects the time value and risk attached to those cash flows and for
the purpose of this exercise a 14% discount rate has been applied.




BRAND SCORES


RANK                        BRAND                                     SCORE


                                                                                         18
01                             DELHI DAREDEVILS                                  55%
02                             KINGS XI PUNJAB                                   54%
03                             CHENNAI SUPER KINGS                               53%
04                             KOLKATA KNIGHT RIDERS                             52%
05                             MUMBAI INDIANS                                    51%
06                             ROYAL CHALLENGERS BANGALORE                       50%
07                             RAJASTHAN ROYALS                                  47%
08                             HYDERABAD DECCAN CHARGERS                         44%




8.      CONCLUSION:

IPL is a monumental incident which is indicating where the world economy is heading towards
21st century. India is taking the driving seat slowly. The IPL is one of the indicators of it. Finally
we Indians found the formula to make money, though for this a free outflow of cash was there
but still it is a great revenue generating game. IPL soon might be turn out to be the super bowl of
India. A player can earn from one session of IPL as much amount of money which he could earn
for playing international cricket for five years. It is an indicator of the future of Indian economy
which is rising slowly.




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9.   Bibliography

    Issues of Times of India

    Issues of Business Today

    http://en.wikipedia.org/wiki/Indian_Premier_League

    http://casestudy.co.in/economic-recession-effect-on-bollywood-
     and-ipl/2010/02/04/




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