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Explained: IPL’s financial model, and how the withdrawal of Vivo impacts the balance sheets of franchises

Vivo, the Chinese smartphone maker, acquired the IPL title sponsorship in 2018 for Rs 2,199 crore in a five-year deal. Accordingly, the company gives the Indian cricket board Rs 439 crore per year as sponsorship commitment.

Written by Shamik Chakrabarty , Devendra Pandey , Edited by Explained Desk | New Delhi |
Updated: August 11, 2020 1:04:36 pm
IPL 2020, IPL Vivo, Vivo sponsorship, IPL 2020 news, IPL start date, IPL dates, IPL matches, IPL fixtures, IPL teams, Indian Express Virat Kohli, who plays for Royal Challengers Bangalore, hits a shot during an IPL match in 2016. (Express Photo/File)

Even as stakeholders of the Indian Premier League (IPL) were counting the extra cost of this year’s tournament moving to the United Arab Emirates (UAE), came news of title sponsor Vivo pulling out.

Playing the tournament away from India will increase overheads — including the additional expenses for creating bio-security — while sponsorship revenues will likely decline, and there could be no gate receipts if the matches are played behind closed doors. With Vivo pulling out, some franchises believe that let alone making profits, they would do well just to break even this year.

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IPL 2020: How could the withdrawal of Vivo impact balance sheets?

Vivo, the Chinese smartphone maker, acquired the IPL title sponsorship in 2018 for Rs 2,199 crore in a five-year deal. Accordingly, the company gives the Indian cricket board Rs 439.8 crore per year as sponsorship commitment.

Vivo had in fact, come to the IPL fold in 2016 itself — as a short-term sponsor after Pepsi pulled out of its five-year deal over a betting and spot-fixing scandal. Vivo’s first two-year sponsorship was worth Rs 200 crore — before the company signed a fresh deal after the 2018 edition of the T20 league, outbidding its nearest rival, Oppo, which had bid Rs 1,432 crore.

Pepsi as the title sponsor was to pay the BCCI Rs 396 crore over five years. The deal with Vivo, therefore, had raised the sponsorship revenue of the tournament by 454% annually.

Also read | IPL 2020 in the UAE: How will this year’s tournament be different?

How do the BCCI and franchises benefit from title sponsorships?

There’s a central pool of revenue that mainly comprises broadcast revenue and sponsorship revenue. Star holds the media rights of the IPL for Rs 16,347.5 crore for the period 2018-2022. This means that the official broadcaster pays the Board Rs 3,269.5 crore per year.

Vivo as the tournament’s title sponsor was paying the BCCI Rs 439 crore annually. The total revenue from the central pool is distributed between the BCCI and franchises in a 60:40 ratio. The revenue share is actually 50:50, but as a Board functionary informed, the BCCI has a 20 per cent share in the franchises’ respective revenues. So eventually it comes down to 60:40.

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How will Vivo’s departure hurt the BCCI as well as the franchises?

A BCCI official told The Indian Express that Vivo, in all likelihood, would seek a one-year moratorium in its sponsorship commitment, keeping the door ajar for a 2021 return. So the Board will have to find a short-term replacement sponsor.

The BCCI is expected to issue a new RFP (request for proposal), but amid the Covid distress, even the IPL governing council members seem to have resigned themselves to the fact that the new sponsorship amount would be “much less” than what Vivo forked out. A reduction in title sponsorship revenue will adversely affect both BCCI and the franchises.

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In what other ways can Covid and an IPL away home affect the revenue streams of franchises?

Usually, according to market estimates, the eight franchises collectively earn an approximate sponsorship revenue worth Rs 500 crore from their own sponsors. Their combined gate revenue is around Rs 250 crore.

“It’s important to tell our sponsors whether we would be able to commit to our deliverables. If we are not able to do so, then there will be a reduction in the sponsorship amount. This year, branding in the stadium is not available — teams are not playing at their home venues — and that’s just one example. Sponsorship revenue will come down,” said the chief executive of an IPL franchise.

According to this official, overall sponsorship revenue may come down by 10-15 per cent. Also, without gate receipts, franchises are going to lose around Rs 20-25 crore each.

The whole logistics, including bio-security and travel arrangements for overseas players, is going to cost every franchise a bomb. And if the BCCI gets a reduced title sponsorship this year, it would be extremely difficult for it to compensate the franchises.

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How do expenditures, income and profit work for the franchises in a normal season?

In a normal season, as per figures obtained by The Indian Express, franchises on average make a profit of around Rs 102.6 crore each.

IPL 2020, IPL Vivo, Vivo sponsorship, IPL 2020 news, IPL start date, IPL dates, IPL matches, IPL fixtures, IPL teams, Indian Express The 2018 IPL trophy is seen. Vivo has been a sponsor since 2016.

A franchise has around Rs 167.4 crore on the debit side. The break-up is like this: stadium operations cost, Rs 8 crore; stadium rent, Rs 2.4 crore; team support staff hiring costs, Rs 3 crore; team purse, Rs 85 crore; travel costs, Rs 4 crore; franchise staff, Rs 1.5 crore, marketing, Rs 6 crore, administration cost, Rs 1 crore; accommodation expenses, Rs 1.5 crore, miscellaneous, Rs 1 crore and franchise fees to the BCCI, Rs 54 crore.

And on the credit side: a franchise’s income from its own sponsorships is around Rs 40 crore; gate revenue on average is Rs 25 crore; Rs 5 crore comes from licensing; while revenue share for each franchise from the BCCI’s central pool is around Rs 200 crore. So, earning per franchise per season is roughly around Rs 270 crore.

And will Vivo’s departure affect Star?

On the face of it, there’s no apparent connection. But then again, the title sponsor holds the first right of refusal with regard to procuring prime time slots on the host broadcaster’s channels for its commercials.

For example, if Vivo doesn’t book prime time slots, its competitors in the market are presented with the opportunity to acquire quality airtime by forking out one-sixth of the title sponsorship value. So Vivo needs to pay Star the money required to reserve prime time slots for its commercials. Now, hypothetically, if the IPL’s new title sponsor operates in a monopolistic market, it might not require prime time slots on telly.

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