EAMSA 2015 Competitive Paper

1. Introduction:

Elite sports, the way we know it, have had a large fan following for more than a 100 years. The modern Olympics starting in 1896 was a turning point in organized elite sports across different types of sporting events. As the Olympics have evolved they have taken in more sports under its umbrella. Individual sports have had their own specialized events at regular intervals. These include the annual Wimbledon tennis tournament that started in 1877 and the Football World Cup held every four years that had its first edition in 1930.

Initially elite sports people were amateurs for whom sports was a past time and not a profession. Over the years professionalization of sports took place as sports people converted what used to be a past time into a full-fledged profession. This led to the formation of a large number of professional sports leagues around the world and sports became a business with owners of sports teams on lines similar to owners of companies. Sports as a business opened up different ways to monetize the purchasing power of sports fans and led to the creation of a variety of different revenue models.

The advent of professional sports leagues happened in Europe and North America. Europe developed professional sports leagues in football that included the English Premier League (EPL), La Liga in Spain, Bundesliga in Germany and Serie A in Italy. In North America the professional sports leagues revolved around the sports popular in that part of the world. These included Major League Baseball (MLB), National Basketball Association (NBA), National Football League (NFL), and National Hockey League (NHL).

Professional sports leagues in Asia are a much more recent phenomenon. One of the first successful and popular professional sports leagues in Asia was the J. League for football that started in Japan in 1993. , which has a huge elite sports following was a very late adopter of professional sports leagues. The first league to be successful in India was the (IPL) for cricket that was started in 2008. This has been followed by other successful professional sports leagues that include the League (HIL) for hockey started in 2013, the (ISL) for football started in 2014, and the Pro League (PKL) for Kabaddi started in 2014. All of these subsequent sports leagues have been inspired by the success of IPL and their business models are very similar to that of the IPL. This paper will analyze in detail the business model of IPL, by far the largest and most popular professional sports league in India. The business model will be analyzed in terms of the different revenue streams that capture directly or indirectly buying capacity of the fans. The business model of IPL will be compared with that of EPL, a large open league from Europe, and NBA, a large closed league from North America. This comparison will provide insights about the areas where the IPL can develop to increase revenues and fuel growth of the league.

2. Background

The term league has many different meanings in different areas around the world (https://en.wikipedia.org/wiki/Professional_sports_league_organization). Usually a league is a group of sports teams that play each other during the season. It is also often used for the name of the governing body that oversees the league, as in England's English Premier League or America's National Basketball Association. Since most European football clubs participate in different competitions during a season, regular-season home-and-away games are often referred to as league games and the others as non-league games, even though the separate competitions may be organized by the same governing body. Sports leagues are a very strong and popular business model in Europe and North America but now it is also gaining in popularity in the emerging economies.

Professional sports leagues are organized in two broad categories. One category originated in Europe and refers to open leagues characterized by a tiered structure using promotion and relegation to determine participation in a hierarchy of leagues or divisions. The other category originated in North America and refers to closed leagues characterized by its use of franchises and closed membership. Both of these systems remain most common in their areas of origin, although both systems have now propagated worldwide. Figure 1 shows the professional sports leagues basic ecosystem, common to both open and closed leagues.

1 Clubs/ Franchise

Advertiser Players

Leagues

Broadcaster Fans

Sponsors

Figure 1: Professional sports leagues ecosystem

2.1 Open leagues:

The league structure for football in England has been adopted for football in most other countries, as well as for many other sports in Europe and across the world. A league has a number of clubs, where a club fields a team. The features of the system are:

 The existence of an elected governing body to which clubs at all levels of the sport belong  The promotion of well-performing teams to higher-level leagues or divisions and the relegation of poorly performing teams to lower-level leagues or divisions  Matches played both inside and outside of leagues

European football clubs are members both of a league and of a governing body. In the case of England, all competitive football clubs are members of The Football Association, while the top 20 teams also are members of the English Premier League, a separate organization. The 72 teams in the three levels below the English Premier League are members of still another body, The Football League. In conjunction with other countries' governing bodies, it also sets the playing rules and the rules under which teams can sell players' contracts to other clubs. The rules or Laws of the Game are determined by the International Football Association Board. The English Premier League negotiates television contracts for its games. However, although the national league would be the dominating competition in which a club might participate, there are many non-league fixtures a club might play in a given year. In European football there are national cup competitions, which are single elimination knock-out tournaments, are played every year and all the clubs in the league participate. In addition,

2 the best performing clubs from the previous year may participate in pan-European tournaments such as the UEFA Champions League, operated by the Union of European Football Associations. An English Premier League team might play a league game one week, and an FA Cup game against a team from a lower-level league the next, followed by a League Cup game against a Football League team, and then a fourth game might be against a team from across Europe in the Champions League.

The promotion and relegation system is generally used to determine membership of leagues. The league does not choose which cities are to have teams in the top division. Most commonly, a pre- determined number of teams that finish the bottom of a league or division are automatically dropped down, or relegated, to a lower level for the next season. They are replaced by teams who are promoted from that lower tier either by finishing with the best records or by winning a playoff.

2.2 Closed Leagues:

Professional sports leagues in North America comprise a stipulated number of teams, known as franchises, which field one team each. The franchises have territorial rights, usually exclusive territories large enough to cover major metropolitan areas, so that they usually have no local rivals. New teams may enter the competition only by a vote of current members, where typically a new place is put up for bid by would-be owners. This system is often called a "franchise system." It was introduced in baseball with the formation of the National League in 1876, now called Major League Baseball (MLB), and later adopted by the other North American leagues such as National Basketball Association (NBA), National Football League (NFL), National Hockey League (NHL), and more recently Major League Soccer (MLS).

Although member teams are corporate entities separate from their leagues, they operate only under league auspices. As a result of these restrictions, teams from North American closed leagues almost never play competitive games against outside opponents. National Hockey League (NHL) and National Basketball Association (NBA) teams have played against European hockey and basketball teams in pre-season exhibitions. The North American leagues, rather than any sport governing body, determines the playing rules and scoring rules of its game, and the rules under which players join and change teams.

The teams are organized with a view to each major city having a team to support. Only the largest cities such as New York, Chicago or Los Angeles have more than one team. These teams are referred to as franchises. Even though they are not technically franchises in a business sense, the league is

3 organized in a way that assures teams continued existence in the league from year to year, which fosters an ongoing connection with the team's supporters. On occasion a league may decide to grow the sport by admitting a new expansion team into the league. Most of the teams in the four major North American pro sports leagues were created as part of a planned league expansion or through the merger of a rival league. Only a handful of teams in the National Hockey League, for example, existed before becoming part of the NHL. The rest of the teams were created as expansion teams or as charter members of the World Hockey Association, which merged with the NHL in 1979.

The best teams in a given season reach a playoff tournament, and the winner of the playoffs is crowned champion of the league, and, in some cases as world champions. American and Canadian sports leagues typically have such "playoff" systems. These have their roots in long travel distances common in US and Canadian sports; to cut down on travel, leagues are typically aligned in geographic divisions and feature unbalanced schedules with teams playing more matches against opponents in the same division. Due to the unbalanced schedule typical in US and Canadian leagues, not all teams face the same opponents, and some teams may not meet during a regular season at all. This results in teams with identical records that have faced different opponents differing numbers of times, making team records alone an imperfect measure of league supremacy. The playoffs allow for head-to-head elimination-style competition between teams to counter balance this.

3. Professional Sports Leagues in India

The oldest running and most popular professional sports league in India is the Indian Premier League (IPL), a closed league for cricket. Based on the success of the IPL, other closed leagues have been started for other sports modeled on very similar lines as the IPL. These include the (HIL) for hockey, the Indian Super League (ISL) for football, and the (PKL) for Kabaddi. This paper will focus on the IPL since it is representative of all professional sports leagues in India.

The Indian Premier League (IPL) is a closed league founded in 2008 by the Board of Control for Cricket in India (BCCI). It is a twenty-20 cricket league where 20 overs a side matches are played between different teams. It is contested bother sports. These are the etween eight franchise teams representing various Indian cities. The league runs in India between April and May. IPL is the most

4 watched twenty-20 league in the world and in the year 2010 it became the first sporting event on YouTube.

The IPL runs as a double round robin league where each team plays another team twice, on home game and one away game. At the end of the double round robin league, the top four teams make it to the playoffs. The playoffs are structured in a variant of knock-out matches. The first and second ranked teams play a qualifier match against each other with the winner qualifying for the finals and the loser getting another chance. The third and fourth ranked teams play an eliminator where the loser gets eliminated and the winner plays a qualifier match against the loser of the first qualifier between the first and second ranked teams. The winner of this match then becomes the second team to qualify for the finals. The finals are played as a one match knock-out with the winner becoming the IPL champions for that season.

3.1 IPL Ecosystem

Figure 2 shows the IPL ecosystem.

Franchise

Advertiser Players IPL

Broadcaster Fans

Sponsors

Figure 2: IPL’s Ecosystem

3.1.1 Franchise: (http://www.iplt20.com/ ):

Franchise pattern of a closed league is followed and it became a huge successful format for BCCI, the founder of the league. Its franchises represent different cities from India. In the year 2008 when IPL was launched, there was a bidding process for different franchises. The franchise bids were for rights to field a team in the IPL for a period of 10 years after which a fresh bidding process would take place

5 for the ward of franchsies. The winning bidders for the eight franchises were announced on 24 January 2008. While the total base price for the auction was USD 400 million, the auction fetched USD 723.59 million. Super Kings, Daredevils, Kings XI Punjab, Knight Riders, Indians, , Royal Challengers and were the founding clubs of the new professional league. On 21 March 2010, the league was expanded to add teams from (Pune Warriors India) and Kochi (Kochi Tuskers). The base price was USD 225 million for each of the new franchises. The Pune franchise was sold for USD 370 million and the Kochi franchise for USD 333.3 million. The expansion franchise auction fetched total USD 703 million.

Subsequently the Kochi Tuskers franchise was cancelled due to irregularities discovered later in their bid. The Pune Warriors and Deccan Chargers franchises were also cancelled due to the inability to pay the franchise fees within the stipulated period of time. The Deccan Chargers franchise, which was from , was replaced by the Hyderabad Sunrisers franchise that was awarded through a fresh bidding process. As a result, the IPL that started with 8 franchises and then expanded to 10 franchises is back at 8 franchises.

3.1.2 Players: (http://www.iplt20.com/ ): IPL specifies a maximum purse that each franchise can spend on player acquisition. The amount of money that can be spent on building a team is, therefore, regulated and even franchises with deep pockets cannot exceed that amount. A franchise can acquire a player through the annual auction, by signing domestic uncapped players, through trading, and by signing replacements. Players in an auction have a reserve price that they demand and then teams bid for these players. A main auction is held every three years where a large number of players are bid for. Players that are acquired in this main auction get a three year contract and are released into a fresh auction process in the main auction after three years. The franchises have the option to retain a limited number of players as per regulations set by the IPL, in which case the retained players do not go into the main auction after three years. The retained players instead get a fresh three year contract as per the terms agreed for retention. Smaller annual auctions are held every year outside of this three year cycle of the main auctions. In the smaller annual auctions players who are not with any of the franchises can make themselves available for acquisition. These could be players who did not get acquired in a previous auction or players who had earlier not participated in the auction. In addition, these smaller annual auctions can also include players who have been released from their contract by the franchises who

6 had earlier acquired them. Players acquired in the smaller annual auctions get a contract for a time period till the next once in three years main auction. If a player is injured for the rest of season then the franchise has the right to replace the player for that season and can acquire a player for the same contract amount, from among players who were not sold in the auction. In the trading window, the player can only be traded with his consent. The franchise will have to pay the difference between the old contract price and the new contract price. If the new contract is worth more than the older one, then the difference will be shared between the player and the franchise selling the player. Signing domestic uncapped players refer to players who are not eligible to be in the auction on account of them not having been selected for India and not having been part of any IPL franchise in the past. These players can be signed by a franchise outside of the auction process through mutual agreement.

3.1.3 Sponsors: (http://sports.ndtv.com/indian-premier-league-2015/features/240555-sponsors- bullish-in-indian-premier-league-2015 ) IPL garners about 250 million eyeballs every year on an average, which has been increasing every season on an average of 5%-10%. The IPL has around 12-15 on-air or associate sponsors, most of whom have fought tooth and nail for IPL space The presenting sponsorship for which the cost lies between USD 10 million while the Associate sponsorship for a year is between USD 4.5 million to USD 5.5 million. As e-commerce industry is booming in India for the last few years, we saw a lot of E e-commerce companies have used the sponsorship route to showcase their brands. This is the event which catches most of the Indian eyeballs. They will promote their brands either through sponsoring the league, teams, prizes like man of the match, best catch of the match, best moment in the match etc. The biggest sponsor is the title sponsor for the league. For the first five years the DLF, India’s largest real estate company was the title sponsor and for the next five years it became Pepsi. The next biggest sponsors are the team sponsors for the individual teams. Other sponsorships include those for the umpires and match officials, prizes for special player achievements in each match and the entire league, and the strategic time-out that happens twice in every match.

3.1.4 Broadcaster: (http://www.espncricinfo.com/ipl/content/story/330881.html )

Sony Entertainment Television signed a broadcast rights contract with BCCI for USD1.57 billion for 10 years. Sony then re-sold parts of the broadcasting rights geographically to other companies. It is officially broadcasted on Set Max and on Times Internet and later it sold rights to “” for live streaming in India. IPL became the first sporting event which was shown live on YouTube too. Out of

7 the total broadcast rights fees, IPL will keep 20% for itself, give out 8% as prize money for the tournament and distribute the remaining 72% evenly between the 8 franchises (http://timesofindia.indiatimes.com/home/sunday-times/deep-focus/Does-the-IPL-model-make- sense/articleshow/2734443.cms .)

3.1.5 Fans:

Fans are the life blood in any league’s ecosystem. They are main source for generating money. The objective is to make the league popular among the fans to bring them into the stadium and to make them watch on television, because the TRP depends on the number of viewers and the advertiser’s money also depends on that as well. As the league progresses the fan base increases so the league’s revenue also increases. Fans contribute to the gate money, stall rental, they are the main viewer so that the advertising rate is becoming very high now a days. Since fans are the central characters in the leagues, the main thought behind the IPL was to make it a city based franchise model as cities would give them large fan bases. It, therefore, focused on the main cities in India from different parts. As the success of the IPL increases the committee started to arrange matches in different cities too to increase the fan base. BCCI come up with an idea of building a fan park during the IPL in the major cities where there are no matches (for example, Fan Park in Bhopal). Just to increase the revenue and have the game reach out to all the corners of the country IPL has already taken few initiatives and lot more to come in the future. In IPL we can see that as more viewer watch the last four league match the advertising cost become higher for those matches and still the advertisers search for a place to promote their brands. In the play offs and in the final also we can see different and higher rates; this leads to more income for the broadcasters and for the IPL too.

3.1.5 Advertisers

Advertisers are one of the important players in the IPL ecosystem. This is the main source of income for the broadcasters. . The advertisement rates have seen an increase every year and in the most recent season it was between USD 0.07 million to USD 0.08 million for 10 seconds of TV commercials. The high advertisement rates are not only good for the broadcasters but it also helps the franchises earn more revenue. It is in the interest of the broadcasters to have the fan base increase as it allows them to command higher advertisement rates.

3.2 IPL Revenue Model:

8 The major source of revenue for IPL is neither sponsors nor stadium ticket sales but media rights. Other sources of revenue for IPL are title sponsorship, the sale of franchises and licensed merchandise and products. A part of the revenues so raised are retained by the BCCI, a part distributed as prize money and the remaining is divided equally among the franchises based on a pre agreed model. (http://www.quora.com/How-do-IPL-franchises-earn-money )

Franchise Sponsors

Broadcaster Gate Money IPL

Figure 3: IPL’s revenue model

3.3 Franchise revenue model (http://www.quora.com/How-exactly-do-IPL-team-owners-earn-money-and-revenue-Is-there-a-team- that-has-been-making-profits-since-the-IPL-was-launched )

Gate Money Merchandizing

Sponsorships Prize Money

In stadium Broadcast Franchise Advertising/ Rights Stall rentals

Figure 4: Franchise’s revenue model

Franchises get a share of the broadcast rights sold by the IPL. The franchises in turn give a share of their gate money to the IPL. Their share of the franchise rights often constitutes 60% of the total

9 revenue base of the franchise. Franchises get sponsorships for brands that get displayed on their Jerseys, helmets, kit bags, etc. The merchandizing revenue stream has not yet been developed by IPL franchises as it contributes to be a very small portion of their revenue base. Trading of players is a very insignificant activity and is not even a revenue source for IPL franchises worth considering.

3.4 IPL Ecosystem Cash Flows: Figure 5 shows all cash flows occurring in the IPL ecosystem emanating from different revenue streams.

Sponsors

Other Prize Title Team Sponsors Sponsors Sponsors State Boards

Gate Money

In Stadium Advertising/Stall rentals

Merchandizing Prize Money

Advertiser Media Rights Broadcaster IPL Franchises s Shares from Revenue Media Rights

Bonuses on the basis of team’s position

Firm Agreement Basic Agreement Per Day Salary

Contract Fees

Personal Prize Players Money

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Figure 5: IPL Ecosystem Cash Flows

4. Discussion: The IPL completed its 8th season recently. It is a very young league compared to established and mature leagues like the EPL and NBA. Table 1 shows a comparison of the IPL with the EPL and the NBA across certain broad parameters. IPL EPL NBA League Type Closed League Open League Closed League Number of 8 Franchises 20 Clubs 30 Franchises Clubs or Franchises Broadcast Money is distributed Money is distributed to the No money is distributed Revenues among the franchise clubs on the basis on their among the franchises. equally. finishing position in the league. Gate Revenues It is shared between Most of the clubs own their Franchises have to share franchise, state board & own stadium so they do not the amount with the IPL in a particular ratio. have to share the revenue NBA. generated from gate money. Merchandising Not well developed Well developed by some Very well developed at clubs franchise level as well as league level Sponsors Title sponsors, team Title sponsors, Team Title sponsors, team sponsors, Umpire sponsors. sponsors sponsors, Strategic time out sponsors, man of the match sponsors, man of the series sponsors. Player Maximum 5 All Players All Players Retention Policy after contract expiration Revenue Broadcast fees and Broadcast fees, Merchandizing is a very Sources sponsors main sources sponsorships, and gate large contributor. of revenue. Gate money money are sizeable sources Broadcast fees, not very significant of revenue. Merchandizing sponsors, and gate Merchandizing is is a significant contributor. money are all sizeable miniscule. contributors. Internalization Fan base is very small Fan base is large all over Fane base is large all outside India the world over the world

11 Table 1: Comparison between IPL, EPL, and NBA

The growth of the IPL in the future will be driven by learning from what works for the more established larger leagues like the EPL and NBA. The restrictions on the number of players who can be retained by an IPL franchise at contract expiration may come in the way of franchises building their teams over a period of time and delivering consistent performance. If the team performances are not consistent, fan allegiance will be affected, which will in turn affect development of a significant merchandizing revenue stream. Like in the NBA, the IPL should also promote merchandizing in addition to the individual franchises. This will help grow the merchandizing revenue base, which currently is miniscule. Internalization of the IPL may be a challenge as cricket is nowhere near as popular worldwide as is football or even basketball. The number of cricket playing countries in the world is, however, growing with the efforts being made by the International Cricket Council (ICC). IPL should, therefore, actively target fans in all cricket playing countries, specially those that do not have a professional league of their own. Over the next few years, the Board of Control for Cricket in India (BCCI) plans to expand the IPL by adding more franchises. This will add to the total revenue base of the IPL since sufficient demand seems to exist among fans for more cricket in India, where cricket is by far the most popular sport.

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