IPL and the free markets delusion

If I was given $10 for every time I was sold the narrative that IPL is a triumph of free markets and capitalism, I would have retired by now. Since I have been given this lecture by so many people, some eminent and some not so eminent, I started taking the whole notion a bit seriously. I thought of the IPL as a great idea. Maybe if I can raise enough capital, I can even think about setting up my own league and give IPL a run for its money.

While I was doing my groundwork for the venture, I came to know that only BCCI and its subsidiary associations can sell cricket in India. The last time someone else tried it, it was clinically destroyed, it seems. But sticking to the true principles of free markets, BCCI did offer a one-time amnesty for players who had taken part in that even-If-I-say-the-name-I’ll-be-in-trouble league. It seems to be a new brand of free markets, this.

So, there’s only one seller of cricket in India, and by virtue of being the sole seller, BCCI is also the only buyer of cricketing skills as well.  That sounds like as far away from free markets as possible. Hang on, apparently I am missing the point is what I am told. At a macro-level it may be some strange concoction of monopoly and monopsony, but come a level further down and you’ll see capitalism in all its glory.

In a moment of inspired genius, BCCI reduced the number of teams from 28 (as is the case in Syed Mushtaq Ali Trophy) to 8 (eventually 10…er…9), stripped them of all its players, and allocated them to various cities. Then, it invited the poster boys of Indian capitalism to come and split the teams amongst themselves. That’s it. The masterstroke. Suddenly, an auction made Cricket richer than ever before. In a matter of few hours, Indian Cricket was assured of a little more than $720 million. Forget the invisible hand; this was wealth creation by pure magic. No, the wealth creation had nothing to do with the large number of foreign players being allowed to play in a domestic tournament in India for the first time, or that all the Indian superstars who were otherwise too busy or too tired to play domestic T-20 leagues were brought back to where they started. It is all because of the auction.

But what did this rich people’s club actually pay the millions of dollars for? An intangible idea called a city franchise for which they will put together a team and represent that region over 10 years. And then? Players are auctioned off to the highest bidder to help them put together a team. So, is the player the seller of his skills or is he himself the commodity here? If he’s the seller of his talent, does he have a choice to say ‘no’ to the highest bidder, for whatever reason? No. Either you are in IPL or not. Within that, there’s no choice. So, he’s a commodity. I am glad I am not part of a similar job market.

Let us look at it from the perspective of the franchise owners. How enterprising can they get with their teams now? The biggest source of revenue, the broadcast rights, is centrally auctioned off by IPL (BCCI), and a part of that is distributed to all the franchises on a fixed ratio – must be a tribute to Nehruvian India, I guess (Take that Mr. Guha, that emphatically establishes the ‘I’ in IPL). So, it doesn’t matter what team you pick in the auction, how many superstars you have, how much you succeed on the field, and thereby how much you contribute to the TV audience/revenue, your share is fixed.

It doesn’t stop there. There is a cap on a team’s budget for spending on players too. Ask why? Because IPL has the noble objective of creating an evenly contested league – oh, wasn’t IPL supposed to be a celebration of Capitalism?

So, IPL will sell its title rights, franchise rights, broadcast rights, the fours, the sixes, and all the other centralized rights to the highest bidder, but the players have to bear with a budget cap enforced on their employers. There are further caps on uncapped Indian players, defined catchment area for each franchises, an RBI priority sector burden styled requirement to carry a certain number of U-22 players as well. So, outside of private ownership and big money, there is not a semblance of the principles of free markets in IPL. And big money as such has nothing to do with free markets, but it’s a convenient narrative fallacy in India, because of the correlation between our stupendous increase in living standards and opening up of the economy in the early nineties.

In fact, we haven’t even come to the point of sustainability of the revenues yet. There’s hardly any due diligence done on the franchise owners. While you may know the faces that own teams, there is little detail available on the legal entities behind ownership. What about loyalty? How long will fans throng the stadium and rally behind their teams, if the players are completely shuffled every 3 years? And the conflict of interest is so obvious that it’s funny to even point it out these days. There were 8 teams, then they made it 10, then they threatened to knock out 2, and eventually knocked out 1 – and then one team threatened to walk out, only to come back soon after.

More than half the advertisements are illegal as per the laws of the land, and the entire empire of IPL is built on the foundation of broadcast rights sold by factoring in the illegal advertisement revenues too. There are reports from IT Department every 6 months about the scrutiny of some IPL transaction or  the other. If a Fund manager had taken on so much risk to earn the kind of returns that the IPL franchises do, he would have been stripped of his previous year’s bonus, leave alone being rewarded for his current performance.

It is not my contention that sports bodies should operate in a free market framework. I am merely pointing out that not every excess in IPL can be refuted with the logic that it’s the market’s choice.  And wealth creation can’t be the only objective of a cricket body. Yes, IPL makes money. But why? At what cost? What is the motivation for honorary members to work towards maximizing the revenue of an organization in which they have no stake? Which economic theory explains this relationship? I understand the CEO of a publicly listed company trying to maximize shareholder’s wealth, but why, a society with members working for charity?

What is the point of Cricket? Why does it exist? Does it exist to make money, or should it make money to exist? If it exists to make money, why would it waste premium real estate on an activity with such low returns? They could have knocked down the Wankhede/Brabourne stadium and built sky scrapers instead – the annual revenue of that alone would have exceeded the BCCI surplus from all its international cricket, IPL and the champions league put together. So, clearly it should make money for its existence and not the other way around.

BCCI may be a not-for-profit society, but that only means profits can’t be taken away from the society, not that it shouldn’t aspire to make profits. So, how much money should it make? Not just cricket, any sport, should strive to make as much money as possible without diluting the ecosystem. Is IPL doing that? A glance at the TV screen while the IPL is on is enough evidence against it. It  is raping the senses of its patrons. The richest cricket tournament ever provides the least pleasurable viewing experience to its audience. Players are being put through a punishing schedule year after year. It sucks two months out of the already packed calendar from international cricket, which puts the larger game in jeopardy. Is the money that it makes so important for IPL to put its patrons, its resources and the game at large through such a tumultuous time?

What does it do with the surplus generated? Does it have projects to invest it? Is it developing the game at all? Show me a semblance of it. We haven’t invested in projects out of the surpluses earned in the pre-IPL days, so, what are we going to do with the additional funds? If it’s just going to be earning interest in the bank account, why come so close to crippling the entire system for that? The last year’s annual report shows an actual surplus of INR 118.76 crores against a budgeted surplus of INR 11.56 crores. What’s the point of overshooting budget by more than a 100 crores and yet leaving your patrons with an annoying viewing experience, and pit players against a punishing schedule and enticing money?

Any sport has to have enough surplus to reward its players handsomely, invest in development projects, treat its patrons well and give them the best possible experience. And on top of it, the sport needs to build an adequate buffer for a rainy day. Beyond that, it need not (dare I add, it should not) exploit every inch of commercial potential at all; and surely not if it hampers any of the primary objectives. For instance, Wimbledon’s surplus last year was a little more than two times that of IPL. Hypothetically, if you have to sell IPL and Wimbledon in the market today, would Wimbledon fetch only two times the price of IPL?  Would the amount of surplus even come into the picture? So, even from an economic standpoint, the name of the game beyond a point is valuation, and not surplus.

That is the essence of managing sports: Money-making is only incidental to the larger objective of building a fine, credible, healthy, and financially sustainable ecosystem. Now, how does one explain this to BCCI, if they don’t understand it already?

— Mahesh  (@cornerd)

14 responses to “IPL and the free markets delusion

  1. You have left out the biggest reason for why the IPL exists in the first place, though – the League-That-Must-Not-Be-Named. Until the creation of the ***, the BCCI had a generally negative attitude toward T20 cricket, even after India’s Misbah-aided victory in the inaugural T20 world cup. The IPL exists only because “Company A” launched the *** and threatened to take away a good number of players from the game a la Kerry Packer in the 70s.

    • Who told you that India did not have interest in T20? It is the T20 WC win in 2007 that created the league in 2008. Dime to Dollar that you are not an Indian fan but an Aussie or an English fan itching to join the anti-BCCI bandwagon and sing a chorus to blogs like this, with posts that elude all logic.I would not consider ICL as a competition to IPL. It was a fly that was waiting to get Swatted! You are trying to sell a cricket league that calls itself Indian Cricket League and you pit bunches of mediocre players(either retired or discarded ones) against each other named after Metros in India , Bangladesh and Pak. It was doomed to fail. Can you name the captains of all teams in any edition of the ICL? IPL has gained success primarily because it was based to attract fans and the best players from the current crop of international cricket. If you want to gain fan loyalties in India you have to build city-base franchises. IPL succeeded in correcting ICL’s innumerous mistakes and then used ICC’s laws to put ICL out of its misery.Besides it is not approved by the BCCI and is a rebel league. According to ICC regulations you should not play in leagues not approved by the board or risk being banned. Did you know that cricketers like Tony Greig have been outlawed for joining Kerry Packer’s league and were only allowed to come back into the main fold only after they ended ties with the league? SO if the English and Aussies do it, its fine, but if India does it its wrong? My final assessment is that you are as pathetic and illogical as the author(if not more).
      @Author of the blog
      All these BCCI haters are like dogs barking at an elephant and it wouldn’t matter to the elephant what so ever. One final word. If you want to build a league , you should build a strong business model around good cricket and this is way to do it. Even if the IPL does fail in the future(which is unlikely for the foreseeable future) the author, who evidently thinks so highly of himself would at the most be able to build a gully cricket league. If you have to choose between, AB Devillers and some kiddo Ranji player or some long-gone cricketer, who would you chose to watch?

  2. Indian Hayek

    Cricket is just one of many sports and one of many forms of entertainment in India. Considering BCCI/IPL a “monopoly” is simply wrong. Sure they enjoy a high market share among the various sports/entertainments but they surely don’t force you to follow & enjoy only cricket. If someone manages to create a successful hockey league in India or Pakistan manages to build a successful cricket league and host it around IPL, viewer interest in IPL may go down. We can’t blame BCCI/IPL for lack of alternatives or substitutes.

    BCCI is just lucky to be in a great business at this time of our existence. May be football will catch on in 25 yrs that cricket may only have a marginal existence then.

    IPL as a company obviously wants to have a competitive league not because it is a noble thing to do but simply to maximize viewer interest and thereby maximize revenue. Cap on player salaries & other restrictive rules on franchises thru pre-agreed contracts is quite normal in a free market franchising business model. Franchisor always controls the franchisees. Imagine McDonalds, Subway.

    If you assumed how IPL is an annoying experience for everyone involved but couldn’t explain how it still manages to make money, may be your premise is wrong. Viewing public and advertisers obviously seem to enjoy it. If you can’t understand why/how that is, I’d blame your imagination not the viewing public or the advertisers.

    I’m not saying IPL is the poster boy of Indian capitalism. But it is not as anti-capitalistic as you make it out to be.

  3. @Indian Hayek,

    So, by your definition, nothing is a monopoly in the world. Oh, Microsoft not only competes with other PC, but also humans, paper, machinery etc., therefore it can never be a monopoly. China may be completely controlled, but treat it as a firm in the larger global market. Even if all of earth is centrally controlled, you’ll argue that Earth is just a firm in the larger market of solar system….

    Of course, who’s denying that BCCI is lucky to be in the right place at the right time.

    My point is never against equitable distribution of resources or a competitive league. This point is merely to point out the irony of associating all things IPL with free markets. You *may* have a super successful league without being a free enterprise, without having private ownership, without giving the resources the luxury of choice. Did I ever argue otherwise? But that doesn’t mean it’s a triumph of capitalism. That is the limited scope of my argument.

    IPL is a success despite its annoying experience. It’s a success because it pits the best players in the world against each other for two months in Cricket’s biggest market. Not because Ambani owns a team, Bollywood is all over the place or those beautiful intrusive ads on TV crop up all the time much to people’s delight.

    It is anti-capitalistic. But that is no slight. What is a slight though is that it is a success at the cost of diluting the ecosystem – players, fans and the game at large. Again, my point is IPL is such a great idea that it could be very successful without pushing itself to the limits, without bastardizing itself, without having only revenue maximization as its only goal.

  4. before you could misinterpret and jump on me – Microsoft is just an example of a company which *can* be a monopoly in its industry and not *is*. Point is Monopoly can’t defined at the universe level!

  5. Can there be a privately owned Railways in India? No. That is a monopoly. Can you start another private cricket league in India ? Surely you can. My point is there is no monopoly without a State/Govt conferring those rights on an entity. I’m pretty sure IPL/BCCI would be the first to distance themselves from Indian govt. ICC isn’t anointed any divine rights either by anyone. You can start a parallel ICC for all they care. Will you be successful ? I doubt it. Are ICC a monopoly ? Definitely Not.

    There was ICL before the IPL. I would concede IPL as a monopoly if they got Govt of India to pass a legislation to bar ICL from conducting business. No. ICL shut down because they couldn’t attract players & viewership. Why would good players choose IPL over ICL? No one forced them to sign up with IPL. If ICL had dangled a bigger enough carrot, I’m sure lot of players would have chosen ICL over representing teams in ICC sponsored events(national teams). May be ICL could have even won over some of the national boards & ICC by giving them a piece of the pie.

    Similarly no one forced us to avoid watching ICL. The fact that IPL was able to attract players shows the sound “fundamentals” of the business BCCI are in. Like I said, they are lucky for now. You never know in future.

    If IPL didn’t attempt to maximize its revenues, it won’t be capitalistic. From what I see, they certainly appear to be interested in making as much profit as possible. Their cash resgisters will continue to ring only as long as they make IPL worthwhile viewing. We don’t know if IPL will continue to be successful in future though. To sustain their success, they will have to listen to fans like you or may be even hire smart people like you. If they go bust, may be you should see it as an opportunity to start your own league.

    As a fan, you may want to see changes in how IPL is run. And how it is governed. Fair enough. But I will disagree with your understanding of how IPL fits into a free market framework. You appear to be the one deluded.

  6. LittleMonster

    Brilliant, top-class exposé.

    The BCCI is a monstrously corrupt, brazen, self-serving entity, a classic symptom of the openly corrupt society India has morphed into over the years.

    The sad thing is that the BCCI is run by top-level politicians linked to the current regime in New Delhi, and will continue to be, as long as there’s money to be made.

    These folks are only interested in short-term money making, and if it ruins the game, then so be it.

    The only hope for cricket’s salvation is if the judiciary (top-level courts) decide to act against the open corruption. Even a regime change in New Delhi will not help, the new regime will be more than happy to partake of the plunder.

    A really sad state of affairs, and an ugly but accurate reflection on India.

  7. “What is the point of Cricket? Why does it exist?”
    To be bet on. That’s why it was created, anyway.
    Now it’s progressed from that to entertainment (which it was in its essence, I guess). Like a TV network. TV networks have different shows to cater to the needs of its audience. IE, Tests, ODIs, t20.

  8. haha that cricket as a spectator sport came into being because of the betting potential is a great trivia. But, that’s about it. Why has it sustained for as long as it has? Progressed to entertainment? It has always been that way.

    If someone just reads this comment and not the piece, he would probably think I have made a case for completely abandoning T-20s. My point is not about that at all. It’s about the rationale behind Cricket’s extraordinary drift towards its new new thing.

    The analogy to a TV network is wrong on many levels. Outside of state run TV networks, all other networks have a primary objective of maximizing firm value/shareholder’s wealth. Sports org don’t work like that. Purely as a series of economic transactions, all forms of cricket have pathetic return on assets. Would a TV network use real estate for studio whose opportunity cost is 100 times more than the value of content they produce using that space as studio? Will never happen. So, you can’t equate cricket with that.

    The question is not about the existence of T-20 but about the excess. Forget the excess of T-20 impacting other formats. I am talking about impact of IPL excess on IPL itself. Why should cricket’s richest tournament offer the worst viewing experience in all of sports. Why are there so many shady deals? In fact, there’s even a case to be made for cricketers being shortchanged here. They deserve a bigger portion of the commercial success than the cap on team’s purse provides for. The justification for everything can’t be “it makes money”. How sustainable? At what cost? What is cricket doing with that money? These are critical questions to be asked.

  9. Pingback: What makes the IPL successful? | Today Sport Channel

  10. All there is to say is that cornered you forget that IPL exists because people want to consume it. If it was such a pain for both players and consumers it simply wouldnt exist.

  11. “Can you start another private cricket league in India ? ”

    Apparently not. The laws of cricket are the intellectual property of ICC and ICC has given BCCI a monopoly over the use of the laws in India. Kerry Packer had to change the laws of the game for broadcasting his game. ICL also had to change its laws.

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