Buyer power in Industries - IPL vs franchises - 2009

Industrial Organization & Competitive Strategy

Buyer Power in Industries

IPL: BCCI & the Franchisees

4/27/2009

Rajesh Ramadoss (29)Sandeep Vadnere (36)


April 27, 2009


Introduction

After the emergence of the Indian Premier League, BCCI secretary Niranjan Shah had grandly announced: "Indian cricket is now worth a billion dollars every year." So where is all this money to come from and where will it go? What’s the ‘business model’ of the IPL? Is there any way the franchisees who have bid millions of dollars a year can make money?

IPL has indeed lived up to its hype for the first 2 years as the TRP ratings have consistently been high.

Market StructureThe BCCI owns the rights of IPL. It has sold franchisee rights to certain groups. There are 8 franchises which vie for the revenue with IPL.

CompetitionThe IPL faces competition from mainly the ICL apart from other events & TV shows.

ICL International Cricket Popular International sporting events(Tennis Grand Slam, Hockey

World Cup) Other popular TV Shows Movies National Football league(I-League) and other domestic football

tournaments

Top Dog Strategy: By debarring players in the ICL from international tournaments, IPL has been successful in avoiding big names getting linked with the ICL. BCCI has used its financial muscle to prevent ICC from recognizing the ICL.

BCCI has also used its unique offering to attract big international names to the league.


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Revenue ModelThe IPL - read BCCI - has four major sources of revenue. The first is the sale of media rights for the matches, which will fetch the board $1 billion over a 10-year period. The second includes things like title sponsorship of the tournament, licensed merchandise and so on. Put together, these form what the IPL calls "central revenues".

From the sale of media rights, IPL will keep 20% for itself, give out 8% as prize money for the tournament and distribute the remaining 72% evenly between the 8 franchisees. These proportions are valid till 2012, after which IPL’s share goes up in two stages by 2018, with the shares of both prize money and franchisees declining.

The second stream - other central revenues - will be shared between IPL, franchisees and prize money in the ratio 40:54:6 up to 2017 after which IPL’s share will increase to 50%, the franchisees’ share will drop to 45% and the remaining 5% will go for prize money. The third major source is, of course, the amounts bid by the franchisees. The fourth stream comes from the revenues generated by the franchisee rights, of which 20% will be given to IPL.

From the franchisees’ perspective, while the share in central revenues will be a given, they can raise money on their own by a variety of means. These include selling advertising space in the stadia for home matches, licensing products for their team like T-shirts, getting sponsorship for the team uniform, advertising on tickets and so on, apart from the gate money. 20% of all of this will then go to IPL.

Years 1-2 Years 3-4 Years 5-10 Years 11-Revenues Franchise BCCI Franchise BCCI Franchise BCCI Franchise BCCITitle Sponsorship 100% Television Revenue 80% 20% 70% 30% 60% 40% 50% 50%Sponsorship Revenue 60% 40% 60% 40% 60% 40% 50% 50%Web Rights 80% 20% Team Sponsorship 80% 20% Gate Receipts 80% 20% In-stadia advertising 80% 20% Merchandise Sale 80% 20% Advertisement on tickets 80% 20%


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Major Expenses Franchise fee to IPL Player acquisition cost Stadium hire charges Marketing/Promotion costs

Buyer Power

Key ResourcesThe key resources required for conducting the tournaments are

1) Grounds2) Player3) Television Rights.

Unlike, the current year, the IPL tournaments are likely to be held in the Indian sub continent and especially in India. All the grounds in the country are owned either by BCCI or the clubs affiliated with BCCI. So essentially, IPL being an arm of BCCI controls these grounds.

The players are bought by the franchise for a period of 3 years and hence they remained contracted to the teams for the same period. Also the since the parent body BCCI, runs the cricket in the country, they essentially are able to Hold them up.

As the television rights are sold on a year to year basis, there is no RSI made either by IPL or by the television companies. Hence nobody has power over this relationship.

Power StructureNow with the understanding of the resources and their control by the IPL, let us see how IPL is able to manipulate its Suppliers (ICC , Other Cricket Boards, Players) and Buyers (Franchise, Media) to eradicate competition altogether and remain a Monopoly.

ICC – The International Cricket Council


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This is the governing body of the Cricket in the world. Because of the latest power shift due to the amount of money generated to the game from the Indian Subcontinent and India in particular, BCCI was able to promote its Premier League and make ICC ban the rival ICL promoted by the Zee group. After 2007 world cup fiasco, when ICL had launched its tournament as an alternate for BCCI’s monopoly for cricket control in the country, BCCI had used its money and muscle power to force ICC to ban the tournament. This was feasible because of BCCI’s position of strength as the richest sporting body in the world.

The ICC is supposedly the Regulators of the economy and here they have chosen to side with the monopoly. One reason for this could be the money which BCCI had promised to spend in developing the game in the lesser known parts of the globe.

Other Cricket Board

Generally, the Market Share is the normal measure for the buying power of a firm. In the case of BCCI, the measure is actually the money which it wields and the sources for generating this money, which is the Indian Public.

When the Indian government refused to provide adequate security measures for the organizing the IPL 2009 tournament in India, Mr. Lalit Modi was able to finalize an alternate venue in another country within 24hrs. In fact there were two different countries that were willing to organize a tournament with such a short notice. This is a indication of the enormous power that BCCI holds when compared to other Cricketing boards. The fact that these matches would be held in Indian time zones rather than local ones is further evidence to these buying of IPL/BCCI.

Players

Even though the Players are paid by the Franchise and not by IPL, the IPL still hold an indirect power over them.

a) Any player, who joins the rival ICL organization, is banned for life from playing for their country. The irony is that this is not only applicable to the Indian players but for all players from all over the globe. They are able to enforce this through their power over ICC.The Pakistani players who joined the ICL team over a tiff with their board the PCB, are finding it difficult to represent the Pakistani team, inspite of their approval by the PCB. The ICC bluntly refused to entertain any such thoughts to discourage any further players from taking part in the ICL.

b) The money that the players earn through this tournament is so huge that some players are risk their international career to make some big money through IPL. Chennai Super King’s player Andrew Flintoff’s decision to play in the first few matches despite a persisting knee injury has


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raised questions from many experts. They believe that the lure of quick money has made players jeopardize their International career. Flintoff, would now be off for minimum six weeks, and hence would have to sit out the West Indies tour to England and the prestigious Ashes against Australia.

Effect on Competition

Thus wielding their Buyer power in the market, IPL wing of BCCI has been successful in eradicating the ICL competition. What started as a successful alternative to BCCI was short lived because of the quick move by BCCI to with hold all its Key resources and create a Hold up for the competition. Further, the economic downturn made sure that ICL couldn’t compete with IPL and had to close down its operations after season 3. The ICC, which plays the role of a regulator, saw that the allocative efficiency of the Monopoly BCCI would be much better than trying to regulate them. Hence they allowed BCCI to practice monopolistic practices is removing competition and ensuring that Cricket could be gained in the process.

SummaryAlthough theoretically, the power can be said to rest with the franchisees currently, over time the revenue model tilts towards the IPL. Nevertheless the revenues would certainly increase with time and the franchisees would continue to have an upper hand for some time.

But those behind the IPL cannot breathe easy just yet. It is possible that the crowds that have been thronging the stadiums and tuning in to the television broadcast are doing so, attracted by the novelty of the concept. Will the crowds dwindle once the novelty wears off?


April 27, 2009

Buyer power in Industries - IPL vs franchises - 2009

Economy & Finance

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