Saturday, January 23, 2010

The IPL, Sports Business etc.

I hope the brouhaha over the non-inclusion of Pakistanis in the IPL has died down by now. If not, I seriously hope it does soon. Mercifully, I'm not in India right now or I'm certain the ceaseless talk over the 'controversy' would have done my head in. So I'll spare you, dear readers, any discourse on the 'Pakistani-injustice' -- suffice to say, the IPL is a private enterprise, and the respective owners did what they had to do to avoid risks that, in their minds, are very real. [Had they thought Australians were risky and chose not to bid on any, then they are perfectly entitled to do so.] And that's all I intend to say on it.

I'm more drawn to this piece by Amit Varma where he briefly shares his thoughts on the auction system in place currently. I'll quote an excerpt here:

And I don’t get this whole business of auctioning players. Why can’t the franchises just negotiate with players on their own? Why do we need the BCCI in the middle, distorting price signals?

If I remember correctly, Lalit Modi had once argued that the auction system and the spending caps in place are necessary so that a franchise like the Mumbai Indians, flush with Mukesh Ambani’s money, can’t buy out all the good players, thus killing the competition. But such a state would be unsustainable

And he goes on to give two scenarios to back up his claim. [I suggest you read them and come back to this.]

He makes one point that I agree with [so let's get that out of the way]: questioning the existence of the minimum wage. I don't get the point of the base price. I'm more in favour of having a soft base price limit, wherein, a player has the right to reject a contract if offered lower than $100,000 (or whatever the base price may be) if he feels it's ridiculously low for him.

Where I disagree with him is his overall premise that the IPL is essentially a collection of businesses that are competing with one another, and that the IPL's governing body is unfairly butting in by creating these artificial limits on spending. A problem with this assumption with regard to the business of the IPL is a false notion that Lalit Modi's committee, artificially 'distorts the market' with enforced limits in order to create competition -- painting it in a mildly negative light.

I don't see a contradiction here though. My premise is that the IPL is a business entity, and much like McDonalds' the various IPL clubs are its franchises. The IPL is a product on the whole that needs to be sold -- the ratings etc are on how engaging the IPL is as a contest and a tournament. TV rights are also sold this way, instead of individual franchises selling them. So in order for a product to be fair, engaging and exciting, a semblance of competitiveness needs to be built up -- which is why parity is necessary for the success of a sporting product. And in order to do that, they will look to the model that gives them the best hope of avoiding a single dominant team scenario.

The US, for all its capitalist-centric economy, has socialist sporting structures. The NFL, during its yearly draft, gives the side that performed the worst in the previous season the best pick in the first round. The NBA and MLB follow their own version of equitable revenue/talent distribution to ensure every franchise has a shot at legitimately rebuilding. The products are American football, Baseball, Basketball, first and foremost, and Dallas Cowboys, New York Yankees, LA Lakers then. And it's due to this, that regardless of winning or losing, the franchises are guaranteed to stay reasonably sustainable businesses -- as long as the league draws in enough eyeballs to ensure TV companies pay the advertisers. Indeed, the individual franchises have to maximize their revenues through attendances and merchandising, which keeps them motivated enough to perform on the field. But more on individual franchises a little later in this post.

The exception to this rule however is the world's most popular sport: football (soccer). Football comes closest to the sporting equivalent of laissez faire businesses because the clubs are allowed to buy practically anyone without regard for wage caps or transfer fees, as much as they possibly can. Which is why you see dynasties in the really big leagues. Manchester United have won 18 First Division titles -- six out of ten this decade alone. And eleven, since 1992. The top four this decade in the Premier League has almost always included Man Utd, Chelsea, Arsenal and Liverpool (with Everton finishing fourth once). If you go to Spain it's been worse, with Barcelona and Real Madrid's shadows looming large over the top two spots -- mostly.

The thing is, the value of these clubs (especially Premier League clubs) have sky rocketed over the years, inviting foreign investment and ownership. However, the revenue streams don't necessarily justify the amount spent on acquiring the club. About 4 clubs in the 20 clubs that are in the English Premiership turned a profit last year. Manchester United the season before last, despite reaching the Champions League final and winning the Premier League, reported a loss of about $40m. (In terms of making money, this is as close a best case scenario as a club can possibly get in football.) The reason they turned a loss was because of the significant interest payments their owners had to pay because they saddled the previously debt-free club now with aout £700m of debt. (Yes, pounds, not US dollars) This is a shockingly poor and irresponsible business model. [Man Utd could, in theory get away with it, but the business model hedges on a period of sustained success: read win Premier League titles frequently and reach deep into the final stages of the Champions League. Assuming their most successful manager at the ripe age of 68 is still in his job till 2017 which is when they have to pay off their debts.] The trend, of late, has seen owners buying up clubs only to attempt to sell them on profit. Simon Kuper, author of the recently released book, Soccernomics, said it rightly that buying football clubs is not a business decision and is more an exercise in philanthropy. Even when clubs fail, they are eventually rescued by benefactors (in many cases out of love for the club) with not much hope of actually making money out of it -- and this has happened to smaller clubs in England quite often now. Which brings us to the last section.

Individual franchises and fan interest:

Amit Varma makes another assumption when it comes to the extremely rich franchises (that fan interest will flag resulting in some sort of an automatic self-correction over time) and I quote:

2] Make the far-fetched assumption that Ambani somehow pulls it off, and his team is by far the strongest, and is thrashing everyone else. What happens? Because the matches are one-sided, the crowds lose interest, ratings fall, revenues go down, and it is no longer sustainable for Ambani to be spending those big bucks. He scales down, the players drift to other teams, and we move towards an equilibrium again.

The problem with this assumption is, if one manages to build a rabid enough fan base, the demand becomes inelastic eventually. You will always have fans flocking to stadiums if they have a love for the sport. Something that's not a problem in India. And it's been the case with hot sporting centres in Europe as well as in the US. Boston Red Sox fans underwent over 80 years of agony, before being rewarded for their support. There's something about supporting sports clubs that makes them beyond just products of soap one can use and throw away if it's not to their liking. It's also why clubs like Real Madrid and Barcelona have become too big that they would even get bailed out by local governments and community banks if they faced bankruptcy.

Also, if ratings were to fall due to an era of dominance by a couple of teams, it wouldn't be in the IPL's interests (of maximising revenues) to afford an era of dominance of a few -- especially in a nascent league that's trying to build up fan bases. And financial advantages clearly give a side a better shot at getting higher profile players.

In a free market without such wage caps, fiscal irresponsibility becomes a bigger problem than in a controlled environment like the NFL, NBA and, in our case, the IPL.

If I were to start a sporting model from scratch, I would gravitate more towards a centrally controlled IPL structure rather than the free market situation of football clubs, simply for this reason.

Which is why, whilst I do have a problem with a base price, I think the concept of parity works well for a competitive league. And success/failure should be down more due to gaffes in decision making in the auction (and coaching/playing) rather than a matter of financial inferiority.
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