Sunday, February 17, 2008

The business of cricket: The $2 billion Indian Premier League

Recently, India officially created the Indian Premier League for cricket. Its a bit like the soccer premier league in the UK, the NBA and the NFL in the USA. Since India is a cricket crazy nation, I expect that some of these teams will take on the brand, valuations and cache of global brands like the Yankees, Manchester United and the Lakers.

Its unprecendented, because the league overnight has become worth $ 2 billion. Sony Entertainment paid $1 billion to acquire the rights for the next 10 years. Owners have pumped in another $1 billion to buy each of the 8 teams. I am sure this number will rise to 20 teams, as other cities get in the game.

The money has been used to "acquire" (not sure what this means) and auction 80 international players. (Note: In international cricket, there are 8 teams of note, and 11 players per team, so basically all the top world players will probably be here). I wouldn't be surprised. Several players will make a million dollars for 44 days of work. Quite attractive.

When you want to see where the money is in sport, follow the TV rights. India controls the money in world cricket, simply due to its population, and when a person gets into the Indian cricket team (the sport has 11 players on a team), he becomes an instant millionaire, as the franchise deals are significant.

While Australia may be the world's best cricket team, 17 million viewers means that Aussie cricketers won't get rich playing cricket at home. Neither does anyone (even in England) pay attention to the irrelevant 4-day county matches in England, where top star was paid $1.6 million.

However, the Indian cricket league will change all that, and its a long-overdue development coming twenty years after Kerry Packer, the Aussie, created a rebel league in Australia. This one, unlike that, has real money and will result in a giant sucking sound, pulling top-ranked cricketers from around the world, to play in India. Its just a beginning, but NBA-style long-term contracts will start to dominate the sport, once the game gets underway.

Cricket is an eccentricity the world does not understand. How can one play for 5 days and yet not produce a result. The game changed when we went to the 50 overs-a-side, 1-day games. However the new format introduced this year to the YouTube generation has been the real hit that will drive adoption. Twenty20 is twenty overs a side, and gets done in 3.5 hours. Everyone gets it, because we all grew up playing 20-over matches. We understand the excitement and the tension of twenty overs, and the recent World Cup (that India won) shows it. Superbowl and Baseball games are 3-4 hours long.

The Indian Premier League has announced the following owners of the new teams (valued from $50MM - $100MM)

  • Mumbai ($119MM) - Mukesh Ambani’s Reliance Industries

  • Delhi ($84MM) - GMR Group

  • Kolkata ($76MM) - Bollywood icon Shah Rukh Khan’s Red Chillies Entertainment

  • Bangalore - Vijay Mallya’s UB Group

  • Hyderabad ($107MM) - Deccan Chronicle

  • Jaipur ($67MM) - Emerging Media

  • Chennai ($91MM) - India Cements

  • Mohali ($76MM) - Film star Preity Zinta and Bombay Dyeing scion Ness Wadia

VC and PE firms like DLF Private Equity, Temasek, India Value Fund, Macquarie Bank, Deutsche Bank and ICICI Venture wanted to get in the race. I guess these valuations were out of control for these teams.

For sports teams to return their significant investments, they require stadiums, significant investments in buying players, a good merchandising and ticket-selling strategy, and ultimately a winning track record. In the US, teams move to the towns that will subsidize their stadiums. I doubt this will happen in India, so fiscal discipline is more likely.

Sports is not great business for its owner as investments, but its good for the ego, and sports team prices will rise significantly with the fortunes of India's emerging billionaires. If we look at the US and UK for lessons, this has been a low cash-flow business because of the significant amounts of money that need to spent to buy the best players, and the amounts needed to build stadiums. However, valuations remain high, because owning sports teams are a dream for the mega-rich, and I suspect that in India, if the league is executed right, that it won't provide venture returns, but it'll do decently with at least 2x-4x for its investors. We'll have to wait on the red herring from a public IPO to learn about the business.

Its going to all lie in the execution. For now, let the games begin.

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