[#20]The Economics of Sports Leagues in India

What do we need to do to see sports leagues take off?

The economics of sports leagues in India are a little warped. Let me phrase it a bit better. Only the IPL is a self sustaining league. Every other league is losing money. And not just from a league perspective. The team owners are losing crores every year with no path to profitability.

Let’s look at the IPL central & team numbers, and compare them with a non-cricket sports league like the Indian Super League (ISL for short, football league in India). Do note, the numbers here are pieced together from annual reports, and public newspapers, and are all indicative.

IPL Economics (Source: BCCI Annual Report)

Majority of IPL revenues come from the media rights income. This is the fee that is paid by broadcasting companies, to be able to stream the sport on their platform. I’ve taken a look at the latest numbers that were available in the BCCI annual report. This is the BIGGEST piece of the revenue not just for the league, but for the teams, and is what is required to make this whole business sustainable. From 2018 - 2022 this was ~3200 Cr per year (Star paid 16,347 Cr for the rights to stream this from 2018 - 2022).  From 2023 - 2028, Viacom bought these rights from ~23,000 Cr, growing the annual fees by ~55%.  This is important because the way the league business model works is that the media rights, along with the central sponsorship generated constitute the central pool. For the first 10 years, 60% of this central pool is given back to the franchises. This % of the central pool is the biggest source of revenue for the IPL franchises. 

The second biggest share of income for the League comes from the Franchise Fee. This is the fee that is paid by the franchisee every year to the league for the right to own and operate the team. Normally this is paid out as a fixed number of installments for the first 10 years, after which the owners own the team until perpetuity. While the earlier teams started in 2008 (Mumbai Indians, Chennai Super Kings etc) paid ~850 - 900 Cr in total over the years as Franchise fee, newer teams such as Gujarat Titans (started in 2021), and Lucknow (Started in 2021) have to shell out a total of ~5600 - 7100 Cr, which comes to roughly ~560 - 700 Cr every year as franchise fee that they have to pay to the league, add to the central income. The reason for this exponential increase is that when the earlier teams first came in the league was still new and unprofitable, and the media rights fees were not that high. Now teams stand to make ~300 Cr just from the Franchise share of  media rights fees. This is close to ~500 Cr if you count the entire central pool (media rights + sponsorship revenue). 

Take a look at the Chennai Super Kings P&L

Source: 2021-2022 CSK Annual Report
Source: 2022 - 23 CSK Annual Report

Some quick points here:

1. 70% of the Franchise revenue comes from the central pool. And this covers ~90% of the cost of operations. Which means that only the central revenue is majorly needed to fund the franchises. And that’s what makes them sustainable.
2. The Franchise Fee is paid only for 10 years. This is the cost of buying the team essentially. This ended for the original IPL franchises in 2018. The Franchise Fee that you see for the Chennai Super Kings is part of a clause added in 2018 - which states that Franchisees have to pay 20% of their revenue (which includes the central pool share) back to the League. But because everyone is making Crores, no one really complains about this.
3. After the new negotiated rights for the 2023 - 2028, the central pool (sponsorship + media rights) stands to be close to ~500 Cr, and teams are expected to jump in profitability from ~40-50 Cr in 2022-23, to ~300 Cr from 2023-24 onwards
4. And that’s why new teams such as Lucknow, and Gujarat are okay paying ~500-700 Cr every year as Franchise Fees. The original teams were profitable in 7 years, and have started recouping costs back on their original investment of ~1000 Cr. And even if they haven’t, they’ll make it back in this next 2023 - 2028 cycle.

But the key takeaway here is that:

The central pool earned by the League is what makes the Franchises self-sustaining. And this is essential for the first 10-12 years of the Franchise operating. The team owners have to see a path to profitability, and be supported by the central authorities. It’s also probably why in the IPL, no one complains about the 20% fee that the teams have to pay back to the BCCI. Everyone is making money.

Other Non-IPL leagues in India

Compare that with non-cricket leagues. When it comes to sports leagues in India, while everyone seems to think they are making money, they’re actually not. And there is no long term visibility as well, as to when they’ll start making money. People keep looking at the big sports leagues in the world; EPL, MLB, NBA, NFL, and in India the IPL, and hold them as examples of how much money leagues are making, and what the potential value here is, when there are some very stark differences. See the Snapshot of the ISL League, and Team Financials. (these are all estimated financials).

ISL League Financials

ISL from a league perspective has been consistently losing money since its inception. The current edition (started 31st Jan 2024) could potentially be profitable if the revenues and expenses follow similar trends. But they’ve been consistently losing money for the last 9 editions.  And Franchisees have lost a minimum of ~100 Cr (at a very conservative ~10 Cr loss per year). You can see the estimated Franchise P&L below:

ISL Team Financials (Source: link)

The Central Pool share covers only ~ 50% of the operating cost. And it being football, the ability to generate money from gate & team sponsorship is limited. Compare this to the IPL, where ~90% of operating costs are covered by the Central Pool share. 

What’s the difference between non-cricket sports leagues, and the top Leagues of the world?

1. In the case of other sports in India (apart from cricket), they license the league out to a 3rd party, so the League Operators are not the Sports Association, unlike in the case of the BCCI. So here, they are outsourcing the risk, since by licensing the right to operate the league, they are getting a fixed amount each year (similar to a Franchise Fee). Here now, the incentives are misaligned. Since the Association is already making money, they have less incentives to help to make the other stakeholders, i.e The League Operators, and the Franchises profitable.

2. There will always be a market for cricket in India. The Indian population also watches heroes. Cricket is an established sport in that sense. And that makes it easier to get viewership, and as a consequence sell sponsorship, and media rights, which then trickles down to the Franchises. Compare that with football, badminton etc. IPL has ~600M viewers. ISL has ~80-100M. Premier Badminton League (PBL) has ~40-50M.

3. While the goal is to get the Franchises to be profitable by 7-8 years (similar to IPL), this is not possible if the Central Pool does not support it. And for the League to support this, they need to have the support of the National Sports Federation, both in terms of generating sponsorship & media rights, and streamlining costs.

4. At the end of the day, it’s all about building the brand of the team, and getting in other streams of revenue - merchandise, international streaming rights, and monetizing other avenues such as podcasts, YouTube channels, and Instagram handles. How do you do that? Some possibilities are things such as Stadium Ownership. In India, the majority of the stadiums are owned by the Central / State Government. Only Jamshedpur FC has ownership of their stadium where they play home games. And this is important, since this is a tangible asset that teams can monetize, build a hub, and rent out for other events, further padding the revenue of the team.  

 For ex: Manchester United retail, merchandise and product licensing revenue for FY23  were £113M, which is ~18% of the total revenue for the year. SoFi stadium is the home stadium of the Los Angeles Chargers & Los Angeles Rams, both of which are NFL teams. The 10 year naming rights to the stadium were sold to SoFi for $400M, from 2019 - 2029.

Sports Leagues only make sense if you empower teams. Why should someone buy a team, and run it, if you don’t give them independence, and allow them to create an asset off this investment? This has already started happening for IPL - Chennai Super Kings reportedly wants to build a “state of the art stadium.” 

Note: Pro Kabaddi League is a different animal. It has 74% ownership by Star, so they are able to broadcast it on all their 20 channels, which boosts viewership, and gets reach, no doubt. And there were probably bundled sponsorship deals sold until last year (As Star also had IPL)  - where sponsors were onboarded for IPL, and some % of that was allocated to PKL.

The Major League Soccer (MLS) has aligned the League & Franchise interest through the concept of “Investor - Operators.”

The MLS has been structured in a different fashion. Currently in the League model, there are different competing interests. The Sports Federations, the League, the Franchises, and the Media (Streaming). For one to make money, the others have to take less, and generally as-is the case with stakeholders, people generally take the short sighted view, instead of trying to build, with the view that when money will be made, everyone will make a piece.

MLS has (as much as possible) tried to align incentives with the concept of “Investor Operators.” Essentially, the Franchise & the League is one unit. The Franchise Owners have to invest into the league, and in return, they get the right to operate one of the Franchises, and are called Investor Operators. They receive a share of the profits if the league makes money, or write off the loss, if the league doesn’t. Here are the differences:

•  Local Revenue rights are held by the Franchise, with some share payable to the League: Some of the revenues can be earned directly by the Franchises (such as local streaming rights, ticket sales, merchandise sold in the stadium, and local sponsors.) Some of the revenue earned by the Franchises directly requires a certain % to be paid back to the Central league (such as 30% of ticket sales, and 25-44% of player transfer fees). 

• National Level Revenues sit with the MLS: MLS directly takes all revenue from national broadcast rights, league-level sponsorships, and online merchandise sales.

• The MLS pays all normal player salaries up till the salary cap. 

• Operational Expenses are taken care of  directly by the Franchise: Other operational expenses such as rent expense/ construction cost of stadium, front office salaries, and the salary for special players above the salary cap are paid by the teams themselves. 

And the reason why this works is that because all the Investor Operators are invested in the league, even if they don’t see the central revenues directly, they see it through the profit sharing mechanism. 

There are no confirmed numbers available since the MLS is a bit secretive about the actual operating numbers. It’s possible that everyone is operating at a loss. But this model does make an effort to get everyone on the same team, and work together for the betterment of the sport. And the potential for this league is huge, especially since the rising focus of the USA into building up football, and the already wildly successful sports leagues that exist. The USA women’s soccer team is a multi-gold medal winner at the Olympics, as well as a 4-time World Cup Champ, with the most recent win coming in the 2019 FIFA Women’s World Cup. The 2026 men’s football world cup is going to be held in 3 cities in the USA (one of the locations could reportedly be SoFi stadium - so more revenue allocation to the teams :D). 

PE / VC investment into sports teams could be an option to solve for liquidity and fund growth

One way to look at this would be to get PE / VC investment into Leagues / Teams to fund the losses for the first few years. On the face of it - it is like any other start-up. Loss making in the favour of growth for the first few years, but once you gain a big user base, then you can start monetizing through sponsorships, media rights, ticket sales, and there is scope for exponential growth. And this is not a new concept. It already happens. Here’s a snapshot of what’s happening in the USA teams. (Source: Pitchbook).

Not only are there major ties between PE firms and teams, this is a trend that is on the rise. And it makes perfect sense. With the advent of smartphones, internet access, and the ease with which people get access to content, sports , while previously constrained to certain regions / geographies, has now the potential for rapid expansion, and global appeal. And now there is a demand for Women’s sports, Cricket, American Football, among others. Here’s another chart by S&P global, which shows how the proportion of investment from PE / VC firms into the sports sector has been increasing. (Source: S&P Global)

But there are some challenges with regards to this in India

IPL has seen investment into their teams. A US-based PE firm, RedBird Capital Partners, had bought a 15% stake in the Royals in 2021 at a valuation of over $250 million. In 2021, Luxembourg-based CVC Capital Partners became the first PE firm to own an IPL franchise outright - the Gujarat Titans. But like discussed earlier, the IPL teams have reached a stage where they can make money regardless of doing anything, since the central pool takes care of everything. And also, the owners of the IPL teams, bar a few, are all big conglomerates, such as JSW group, RPSG Group, Diageo etc). They don’t really need external investment to grow.

The big opportunity here could be non-cricket sports leagues in India. It’s still nascent, and these are teams that could benefit from more efficient operations, and liquidity. But there are some issues which could prevent PE / VC investment.

1. BCCI is the richest cricket board in the world. What it says and does holds a lot of sway. It also operates the League itself, not through a third party. Non-cricket sports leagues are governed by Sports Federations, which have their own challenges. These federations themselves are fragmented, and leadership can change overnight, and dictate operations according to their whims and fancies. For an external investor to come in, and invest for the long term, some guarantees need to be made which becomes hard for a third party operator to give. And without these guarantees it becomes tough to make this significant investment.

2. The operational inefficiency is not really a team / league problem but a structural problem. If you’re operating under an inefficient structure where incentives are not aligned then operations are going to be inefficient. And a lot of times the structure is such that the leadership of the sports association / sports board in question has political ties, which can add another layer of complexity.

So how will non-cricket sports leagues in India take off then?

1. There has to be a structure, which is focused on 1) taking care of the players and 2) ensuring that Franchises get profitable as soon as possible. Without Franchise profitability, or a path to it, it is near impossible to run a sports league, not just in India, but anywhere in the world. The perspective has to be of stakeholders working together, and in some cases, waiving license / franchise fees until the third party operators and franchises make money. Otherwise no one will really want to invest in building this

2. Enable team owners to build this into an asset. Stadium ownership, player access, access to land to build stadiums, academies and high performance centers creates an ecosystem around the team. It is not enough for Sports Associations to make the decision to license the rights / operate the league. There needs to be more thought around how this will grow, and what enablements are required to make this successful. Currently, it seems like most Sports Federations are solving for the annual license fee that they make from the League Operators, and that's it. 

3. Support with Central Pool Revenues. This is what makes a team sustainable. And at the start, the scope / ability to generate own revenue for teams is limited. At the end of the day, while a sports league HAS to be a profit making venture for it to grow, they are also incredibly beneficial for the ecosystem. That is what the Premier Badminton League did. Firstly, it got the players paid, who could then use this money to take care of their families, and invest in their training. Then, it got our Indian players to play against & with the top badminton in the world, which made them get better, and increases their confidence when they face these top players in tournaments. And thirdly, it gives these players a lot of visibility in front of the Indian public, which then makes the public invested in their performance, leading to higher viewership, and then higher sponsorship revenues. One solution is to allow CSR funds to be put into sports leagues, to solve the liquidity problem in the early stages. I had written an article previously on this topic, you can read it here.

Sports has to be a part of the “2030 is India’s decade” story

All in all, there are structural changes required to be able to see Sports Leagues take off in India. We have potential. Let’s also not forget that we’re relatively new to this whole Sports League business. IPL, our oldest league, will have its 17th Season in 2024. The English Football League (EFL) in comparison, was started in 1888, close to ~140 years ago. Even the EPL, which broke away from the EFL in 1992 has had ~30 Seasons. They’ve had > 8x the time we have had to figure out what works for them. So it’s not that these things happen quickly. They take time. But that’s why we need to start making these structural changes now. To give ourselves that time.

There are multiple studies done, which talk about the relation between the sports industry and economic growth. Developed countries in particular, have embraced this as a way of life, and contributed it as a source of economic growth. We need to start looking at sports leagues as that. If 2030 is to be India’s decade, and if we are aiming to be the world’s third largest economy by 2030, sports HAS to be a part of that.