Tag Archives: Market forces

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)

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