IPL Math: Decoding the economics of the most expensive cricketing event

In 2008, when the financial crisis devastated thousands of businesses across the globe, India’s cricketing association called the BCCI came up with a game plan, the potential of which were perhaps unknown to them at the time. Yes, we are talking about the Indian Premier League, which commercialized the explosive T20 format of the game, and turned cricket into a profitable industry by giving birth to an entirely new business ecosystem. But behind this successful business model is a carefully planned and well-executed strategy that mobilizes massive amounts of working capital along the right vectors.

Pandemic perplexity?

So why did we remark that BCCI was perhaps unaware of the money-making potential of the IPL? Check out BCCI’s revenue from the IPLs, starting from 2008, up until the last year. What we see is a massive jump in revenue, and that too, in the year when most businesses were struggling to sell to even a single customer. One thing is clear – the IPL economy wasn’t unaffected by the pandemic – on the contrary, it was strengthened. What’s behind this seeming contradiction?

BCCI’s revenues from IPL
BCCI’s revenues from IPL

According to a Wall Street Journal report, advertisers were expected to spend more on digital marketing when the pandemic hit, and the lockdowns sent everyone quarantining at home. At home – that’s the keyword here. While the pandemic might have forced down the shutters on shops and barriers on transit channels, what it also did, was to take more people online. With the physical channels of navigating the world lying closed, everyone was suddenly on their phones and computers for longer than usual – to be precise, people were consuming digital media 25 percent more compared to the pre-pandemic levels.

The ins and outs of IPL finances

This is where the IPL comes in – in 2020, IPL was the first major cricketing event to be broadcast after the lockdowns were announced. While some media articles cited the lockdowns as a concern for the upcoming IPLs, BCCI wasn’t convinced – instead, it simply made arrangements to contain the spread of the virus, and made over 200 extra room bookings for stakeholders testing positive during the event. Ticket sales were on the ground, VIVO had retracted from its title sponsorship, and yet, BCCI’s revenues from the 2019-20 IPL season were north of 4 thousand crores.

This gives us some insight into the IPL economy – real money comes from all the eyes and heads that are fixated on the screens. There is another observation that will confirm this – if you look at the participating franchises’ sources of income from the IPL, you will see that prize money forms a minuscule part of the big picture. Then ask yourself – why do the team owners want their teams to win – and if not win, to make it to the finals? This is where the real cost of losing comes into sight.

When an IPL match is broadcast, displaying a 10-second advertisement between the matches costs 12.5 lakhs – and this money is distributed between the two participating teams and the BCCI. Moreover, winning the finals also boosts the brand value associated with the team – and in turn, generated greater advertisement revenue for the franchises.

chart showing how IPL generates money
Note: Figures are based on estimates

When the team owners bet on the players at the beginning of the season, they are essentially mobilising their capital to last them the longest in the race. That’s the real reason why the players with a good track record attract better prices.

But this is not all – there are other significant sources of revenue from the IPLs – remember when we talked about where the real money-generating potential of the IPLs comes from? Imagine if, instead of the lockdowns, India underwent a nationwide power blackout during one of the IPL matches. The estimated losses resulting from such an event would be in crores. This also means that when people are glued to the screens, every inch that they lay their eyes upon is essentially up for grabs for advertisement. From jerseys to caps and stadium seats to stumps – every square inch generates revenues from advertising. This revenue is again split between the BCCI and the participating teams in the match.

Working capital: The real elephant in the room

Expenses for franchises

We talked about how the IPL generates revenue, but hardly laid eyes on what goes into making them happen in the first place. In addition to hundreds of agreements being signed between stakeholders, franchises pay for the cost of hosting their players, coaching them, renting the stadiums, and the players’ auction prices too. In this process, the team owners essentially end up running a business in expectation of profits. Below are the typical revenues of franchises from the 2015 season, for example.

chart showing the expenses incurred by the franchises during IPL

Revenues for franchises – major sources

chart showing major sources of revenue for franchises during IPL

And guess what – most remained unprofitable until very recently when the broadcasting rights for the IPLs were sold at a whopping 16,000+ crores in 2018. In fact, 2018 was the first time when all the franchises generated a profit regardless of whether they made it to the finals or not. In other words, it took over 11 years for the BCCI to make IPLs profitable for the major stakeholders. This story reeks of the power of setting working capital to motion along the right levers and betting on the right opportunities. But what are some of the impediments to this process?

From the teams’ perspective: The Key to Profitability

While the expenses of franchises vary depending on the team composition, the season and the going rates for players, there are a number of other factors that go into making a team profitable. For example, KKR has remained profitable even in the seasons in which it lost, while RCB, with some of their expensive picks from the auctions, failed to generate revenues in positive figures. Now comes the question of the importance of the auction strategy – and we ask, isn’t picking the best and the most expensive players assuring you of the highest profits, because you have the best chances to win with the best players?

Firstly, best chances don’t equate to certainty. And secondly, we haven’t even talked about the limits of the potential revenue from a season, for a franchise. In other words, if the range of value that can be extracted from the revenues is limited, then optimizing the expenses becomes critical to profitability. This demonstrates that making a franchise profitable depends on more than picking the right players – the trick is in setting the capital into motion in the right direction.

The challenges of organizing at scale

Remember when we were talking about the last IPL season being financially, one of the most successful ones in the history of IPL? You might already be aware of the venue of the 2020 IPL seasons – but have you ever wondered about what it took, to shift the venue of an entire tournament that involves players and stakeholders from across the globe to a different country at the last minute? Here are some highlights:

1. Getting all the players from their home countries to the venue – amidst the travel and isolation restrictions of the pandemic.

2. Arranging testing equipment and making plans for emergency scenarios like players and staff falling sick in a different country – in fact, this type of planning was being called business continuity planning by the likes of McKinsey and BCG in the post-pandemic world. IPL 2020 is an excellent example of the same.

3. Arranging flights to transport over 1200 stakeholders to the venue, which required private planes – because many airlines had ceased operations during the pandemic

4. Getting visas of all stakeholders ready within a few weeks – when most countries were still planning their entry and exit directives during the onset of the pandemic

5. Arranging a bio-secure bubble to avoid transmission of the infection

challenges faced by BCCI while organising IPL in 2020

Despite these challenges, the BCCI and other stakeholders jointly mobilized the resources, keeping the target value in sight across all points – after successful arrangements, the 2020 season did sell for 4,000+ crores after all.

Working Capital + The Right Opportunities = A Massive Growth Engine

There is another important lesson to be learned here: BCCI started the IPLs as a sideshow when most of its earnings came from the distribution of media rights for broadcasting India’s participation in ICC-sponsored events and other national and international cricketing events. But in the last few years, the income from these sources has been dwarfed by the revenues generated through the IPLs. This demonstrates the monetary value of bringing the right pieces together in digital media – for IPL, this was the thrill and action of cricket amongst India’s audiences, and their love and excitement for their favourite movie stars. The result? The average Indian saw their favourite cricket and bollywood stars joining hands and feeling the same thrill that they did together on the screen. Was this the real reason behind KKR’s success with staying profitable through most of the IPL seasons?

That’s perhaps a different discussion for some other time. But setting your capital to work in the right manner across the best business opportunities can drastically alter the outcome of your business operations. That’s what we do the best for you – come to CredAble, and allow us to open new doors for your business at scale.

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