Jhakas | Sanjay Jha
I saw the characteristic pugilistic propensities (or is it ingrained hubris?) of Mr Lalit Modi, IPL Commissioner yesterday when he said. "The IPL has nothing to do with recession".
Frankly, he had reason for that casual condescension. We had two large deep-pocketed spendthrifts ready to let loose their thick wallets; the unfathomable mystery called Sahara Group (US$ 370 mln) and a newly concocted consortium born with the "blessings of Shashi Tharoor" called Rendezvous World Sport (US$ 333 mln). Continue reading below
Together they accounted for a bizarre bid, a staggering amount of US $703 mln almost matching the aggregate contribution of the initial franchisees. I guess for Sahara maybe this investment is truly an adventure sport from the look of it.
But may be, it is time to ask Mr Modi the same questions that he himself superciliously poses to his numerous desperate property-hunters: "Show me the money, Mr Modi?"
WHY THE NEW FRANCHISEES HAVE MADE A DODO DEAL?
It is simple arithmetic:
TOTAL COST/EXPENSES (for eg Sahara Group) for first year
Franchise Fee: USD 37 mln per year (acquisition cost over 10 years)
Player costs: USD 5 mln (assuming an average of all franchise pay-outs)
Stadium hiring costs: USD 1 mln (for 9 matches)
Travel, boarding and lodging: USD 500,000
Coach/Support staff/admin expenses: USD 500,000
TOTAL COST: USD MLN 44,000,000
TOTAL REVENUE:
TV/Media Rights: USD 7.2 mln (divided now between 10 teams from 2011)
Central sponsorship revenues: USD 3 mln (60% share from pool)
Local sponsors/hospitality: USD 2.75 mln (estimated average of past two IPL editions)
Gate-money: USD 1.8 mln (assuming 30000 paid tickets sold for Rs 300/- over nine matches @ an USD/INR exchange rate of 45/-)
In-stadium advertising: USD 1 mln (these are usually sold as package to local sponsors)
Merchandise: USD 250,000 (liberal projection)
TOTAL REVENUE: USD MLN 16,000,000
LOSS: USD MLN 28,000,000
Now the hard fact is that the loss will not just be huge in the initial period but will accentuate as player fees will rise on fresh auctions and free trading and other costs increase on pure inflationary changes. I forecast sustained losses for both Sahara and the Kochi speculators.
The revenue upsides are very limited and local advertising can at best muster a few key brands. No astute brand manager wants a clutter, so a natural ceiling on revenue emerges. Moreover, the no-compete clause is now a given pre-requisite for product advertising.
Merchandising has a long way to go yet in India and is currently floundering, and at best, is just a seasonal summer sale during IPL. Moreover, in a territorial city-centric team the market gets automatically restricted.
BOTTOMLINE:
Sahara and Rendezvous will make huge "operating losses" and as a standalone business entity they will have pressures on their net worth itself. One assumes that they have bought the franchise as a platform for showcasing their "other" business proposition (like Vijay Mallya for example). But the truth is that it is a losing business deal, irrecoverable losses will make it unsustainable. It is a commercially illogical investment.
From my calculations on EXISTING FRANCHISEES (as an average) it is pretty obvious that:
IPL franchisees are NOT profitable, even the existing ones.
Their TOTAL COSTS would range between: USD 12 mln (Deccan Chargers/KKR to USD 19 mln for Mumbai Indians). Their revenues would be in the range of USD 10 mln to USD 15 mln in the first two editions of IPL.
From my rough calculations, only the low-cost franchise owners such as Rajasthan Royals, Delhi Daredevils, Kings XI Punjab and KKR will be breaking even or making a nominal accounting profit, but they will all be on negative cash flow.
They are totally dependent on IPL's central pool for pure survival in the initial 10-year period.
Even those who have just about broken even (like KKR for instance) they will go into deep red the moment they share the central pool with two new franchisees from 2011.
The IPL business model ensures that even after they break-even (after 5 years) they are unlikely to experience a significant growth in net profits as city-based teams have a limited market size of penetration.
With franchisees getting a declining share from the 6th year onwards, they will face financial pressures forcing sell-outs, either partial or fully unless their local sales is high, which is extremely unlikely.
Part equity sale and new owners taking small stakes will happen for infusion of cash.
Teams that continue to be laggards on the championship table will face huge financial crunch as they will not attract big advertisers.
Increasing matches from 60 to 94 next year is meant to increase TV revenue, but will accrue to the benefit of the broadcaster not the franchisee. Viewer-fatigue looms large like an ominous shadow on IPL 4.
Diminishing revenue share from the central pool will add massive cash pressures on all business owners. Is that why Modi is continuously making innuendos about another edition of IPL?
There are those who argue that at the end of the 10th year the franchisee will be profitable as he will have no more financial obligations to IPL but by that time IPL will probably corner the central pool of revenues as well. So is the gestation period a 10 year wait for real profitability? How many owners are willing to fund a loss-making operation for just two months of ego-trip and Page 3 razzmatazz?
Perhaps the biggest risk that IPL, BCCI and Lalit Modi are taking is their arrogant belief that cricket can be sold and sold till the cash-counting machine collapses in India. It will. But by then there may not be enough to count.
