IPL's economics demystified

The first season of the Indian Premier League (IPL) is underway and there is a lot of hoopla and excitement surrounding the league and the games. The Board of Control for Cricket in India (BCCI) auctioned eight franchises for a sum of $724 million (Rs 2,896 crore); the Chennai Super Kings bid Rs 6 crore for Mahendra Singh Dhoni; Ricky Ponting played under his old enemy Saurav Ganguly; Ishant Sharma, who just played his first international season, will make Rs 3.8 crore for six weeks of work; and Bollywood figures such as Shah Rukh Khan and Preity Zinta have thrown their hats into the ring. All of this has raised eyebrows not only in India but around the world.

While the stakeholders have come up with revenue projections and their rationale for investments on this scale, this central issue has to be addressed: what will drive the success of this league? And how can it be achieved? Drawing on our experience as economists, and based on observations about the development of sports franchises around the world, we offer our two paise worth to this debate.

What is sports economics?

Economists have for long been fascinated by markets and how they work. In recent times, economists have trained their sights on addressing the peculiarities of the sports market and the field of sports economics has evolved.

Sports provides an ideal testing laboratory for economists for the following two reasons. First, the availability of rich statistics collected as a part of the sporting/competition process, and secondly, contrary to popular perception, sports appeals even to the tribe of dismal scientists.

What will drive the success of the league?

The simple answer to this question is demand. The fan base determines demand, and demand translates into revenues, profits and franchise value in that order. The league will be financially viable if the entertainment that is packaged, marketed and sold is what the fans demand.

In the long run, interest in IPL matches will be determined by the level of competition in the league. The professional sports leagues in the US, such as the NFL (National Football League), have striven over the years to ensure “parity” as the price a viewer is willing to pay is directly related to the enjoyment he gets from watching a game.

Therefore, it is in the interest of the league organiser, BCCI, to ensure an adequate level of competition that will sustain demand and determine the long-term viability of the league prevails.

The number of teams in the league, the structure of the league— relegation system versus a single-tier system—number of games in a season, end of season playoffs and tournaments, salary caps, and free agency are all factors that will contribute to the level of competition in the league. This is an area that has been well researched by economists, and, in fact, the BCCI has used the services of sports economists to structure the league. In the US, the structure of the sports league has been observed to be important: the more unified structure of NFL has been more successful in marketing the sport than the less unified one of MLB (Major League Baseball).

How can the franchisees contribute to the success of the league?

Functioning within the league structure created by BCCI, the franchisees have to engage in activities that strengthen the demand-generating fan base. The league will be financially viable only if franchisees take and implement value-maximising decisions.

Understanding what viewers want from an IPL match and how much they are willing to pay are imperative to franchise value maximisation. a) Understanding of consumer behaviour should drive pricing and seat allocation IPL fans will be of different stripes.

Some might want their team to win no matter how lopsided the game is, while some may wish to see keen contests notwithstanding the outcome for the home team; some may want a match with heavy hitting, while some others may want to see celebrity players.

Similarly, the paying capacity of fans differs. A franchisee who can discern this and price access according to the fans’ willingness to pay will maximise his revenues.

Decisions regarding seat allocation in the stadium—daily tickets versus season tickets versus box seats— and pricing of seats in various sections of the stadium stem from a good understanding of consumer behaviour.

In allocating stadium seating, the franchisee is basically rationing quality and quantity of seats. In terms of the shape of a cricket stadium and angles from which the game is viewed, cricket is closer to baseball than any other sport. In the US, with regard to quality and ticket pricing, baseball stadiums vary in the number of different quality segments. This is a big deal for baseball because there are many games, and they don’t generally fill up. Entry into the quality seats must be policed. Policing costs increase with the number of defined sections, and, therefore, policing costs determine the optimal number of sections.

The total amount a fan is willing to pay for a game is not just the ticket price, but the cost of transportation to the ground, the time spent travelling to the stadium and back, standing in queues inside and outside the stadium, etc. Some fans may be willing to incur these nonmonetary costs in exchange for a cheap ticket. A prudent franchisee will separate the wheat from the chaff and target fans who are willing to pay a higher price for the tickets if these other costs are reduced.

When a fan purchases a ticket, he is purchasing the rights to watch the game and to consume amenities at the stadium such as concessions and refreshments. The way these amenities are priced will significantly contribute to revenues.

Economists refer to this as two-part pricing, and it is very commonly used in sporting events in the US. b) Rearing a fan base is crucial to tap into other revenue sources The key to a franchisee’s long-term success is the rearing of a solid fan base. An ardent fan base creates various revenue opportunities—primarily, revenues from the sale of merchandise and television revenues.

Teams with a large fan following command higher television revenues. In an interesting model, teams have used the media to build fan bases in the US. For instance, Atlanta Braves baseball games are broadcast on TBS; and Chicago Bulls basketball games through the Michael Jordon era were broadcast on WGN, to name two.

One strategy to build a strong fan base for IPL will be to target the 10- to 12-year-olds who grow into adulthood supporting their favourite teams and players. They do not carry the baggage that adults carry in terms of biases towards other forms of cricket and, being impressionable, they have the ability to influence the consumption patterns of their parents. c) Team composition and valuation of players should fit into the fans’ demand profile The question that a franchisee has to answer is how cost-effectively he can provide the entertainment demanded by his fans. Team composition should reflect the demand of the fan base—whether they demand celebrity players, local players, foreign players, hard hitters, etc.

This, in turn, determines the value that a team places on a player and the price it is willing to pay. This is a scientific process and not merely an ad hoc exercise. For instance, the Boston Red Sox, under its new management, has used quantitative analysis of player statistics for decision making and has become one of the most dominant teams.

While projections are being made about potential revenues and breakeven points, all of this will be a moot point if the organisers of the league and the franchisees do not consider the human element.

It is not about gazing at a crystal ball but about doing your homework and truly understanding what your fans are demanding.Dr Tamara is the Managing Director of Nathan Economic Consulting India Pvt Ltd (Nathan India), Chennai, a wholly-owned subsidiary of Nathan Associates, Inc. a US-based economic consulting firm (rtamara@nathaninc.com) Dr Maloney is Professor of Economics at the John Walker Department of Economics, Clemson University, US, and a Principal Consultant at Nathan India (maloney@clemson.edu)