IPL rights will be a good catch for BCCI

IPL made its debut in 2008. For nine years, IPL has made sure that it always remains in the news. Match fixing, financial irregularities, political intrigue, cheerleaders — we have discussed it all! Notwithstanding the inevitable naysayers, IPL has become an important fixture for cricket lovers, advertisers and the media industry in general. And while the 2016 season just got over…IPL is in the news again.

IPL rights (television and digital) for the 2018-27 seasons are to be bid out this year. Given that Sony currently holds the television rights, it has the right to make an opening bid by July 2016. If Sony and BCCI are unable to come to terms on their opening bid, other parties will be allowed to bid. Sony will be given one last chance to match the highest bid (right of first refusal — ROFR). Since both TV and digital rights will be on offer, given the convergence in both media, it is very likely they will attract a combined bid. In fact, I believe they should go together as only the very brave would venture a guess on what will be TV and what will be digital in 2027!

Thanks to the digitisation of the television industry, the revenue dynamics for large networks are changing rapidly. The big revenue wars are being fought not for advertising but for subscription. The value of IPL rights to any bidder will depend primarily on three factors: Expected advertising revenues, Expected incremental subscription revenues, Strategic value to bidder. Most external commentators who are valuing the opportunity have ignored points two and three, choosing to focus only on the expected advertising revenues. This is understandable as it is easier to focus on what is visible than what is relevant. So let us get down to valuing IPL now …

This is the easy part. IPL is widely estimated to have TV advertising revenues of around ₹1,100 crore in the 2016 season. Taking a conservative 8-10 per cent growth rate over the next ten-year period and including digital in the mix without trying to differentiate between the two, we get a cumulative estimate of ₹17,000-20,000 crore over the next 10 years. There will be naysayers who will say that IPL is losing its relevance but the facts on the ground do not bear this out. TV viewership is increasing every season and advertising revenues are on the rise. In addition, significant digital adoption has been reported by HotStar for the just ended 2016 season.

Subscription revenues are the portion of fees paid by consumers to watch IPL on TV (or on mobile/any other device) which will flow back to the rights owner. They are a bit more difficult to estimate and will vary depending upon which broadcaster one is talking about. Subscription revenues in the short and medium term depend on a variety of factors. Practically, the stronger the existing bouquet of the broadcaster, the lower will be the incremental revenues.

Sony will clearly have the highest incremental subscription revenue (its entertainment ratings are currently poor and it has no other major sports rights) followed by Star and Zee. I estimate that Sony gets over ₹500 crore of incremental revenue as a baseline which will grow quite strongly as the TV business in India digitises over the next decade. A cumulative estimate of ₹15,000-17,000 crore looks reasonable. Subscription revenues tend to be higher than advertising revenues and hence the number is eminently achievable.

This will be the highest for Sony in my estimate. As mentioned earlier, Sony is currently lagging behind Star, Colors and Zee in the entertainment sweepstakes. It has been trying to make a major push into sports (had bid aggressively for ICC rights as well) and recently formed a joint venture with ESPN. There are no other major cricket rights available till March 2018; this is really its last chance. It is in a favourable position due to the ROFR as well. Without IPL, Sony will lose a major driver of subscription revenues and a platform that could help revive its entertainment business. There are some other critical factors. In the longer term, Sony is the only major TV network available for sale in India. Its role in the overall strategy for Sony Corp has always been suspect and along with their own issues, they could look to sell the India business. A list of potential bidders is long, but Disney, Comcast/NBC and Discovery will clearly head that list. A simple comparison with Zee shows that the asset could be worth $5-7 billion currently. Safeguarding this value will be extremely important to Sony/Sony Corp.

Bringing it all together, advertising revenues of ₹17,000-20,000 crore, incremental subscription revenues of ₹15,000-17,000 crore and a strategic premium of 15-25 per cent offset by costs on average of around 20 per cent of revenues imply a whopping ₹30,000-37,000 crore or a $4.5-5.5-billion opportunity.

I have focused on Sony in the above calculation simply because IPL has the highest incremental value to it. For all other bidders, the rational value will be less than or equal to Sony. Star could completely sew up cricket rights if it wins IPL. It has already indicated a stalking horse bid of ₹25,000 crore and given its aggressiveness, it will have to be taken seriously. In any event, it would like to ensure that the eventual winner pays a stiff price so will bid aggressively.

Zee will bid as well although it tends to be conservative and doesn’t have anywhere near the same incremental subscription opportunity as Sony (which already gets significant subscription revenues). The dark horses could be Reliance Jio/Network18, Airtel, Neo Sports backed by a large PE player, Google or Facebook. It is a bit too early for the telcos (Network18 doesn’t have a sports business as well), Neo Sports probably doesn’t have the gravitas and the global players have yet to get into the sports rights business.

Am I smoking Punjab’s finest? No. As the above analysis implies, this increase would neither be unprecedented nor illogical. Global experience with sporting rights suggests this inflexion point comes in the life of every major league for much of the same reasons — significant advertising opportunity, subscription revenues and live sports being largely ‘technology-proof’. IPL is also unique in the sense that no other league in India comes close to its popularity, and hence revenue potential, at this time.

Could it all end up being a damp squib?

What could make the above analysis not play out? Apart from any radical changes to the IPL offering —’(rights not given out for ten years, change in number of matches, implementation of SC strictures on no advertising between overs); — the major threat is any understanding reached between Sony and Star. If they really want to be logical about it, right now Sony wants the TV rights and Star the digital rights. Sony has more of a near-term challenge and could take a punt that it can manage without digital rights given the ensuing lower costs. Star has enough cricket already locked up so it can take the view — ‘let us focus on digital as that is what will really matter in the long term.’

Can Sony afford to pay this much?

If one looks at Sony alone, then this will be a real issue – a $5-billion bid will need at least $1 billion of financing in the early years to offset the losses. However, once one looks at it as a Sony-ESPN combine, then it seems much more manageable. ESPN (Disney) has deep pockets.

If you have read so far…

In my opinion, IPL rights for the 2018-27 period should go for at least $4.5-5.5 billion unless there is some understanding reached between Sony and Star. This is eminently justified by the fundamentals and the value to Sony. For Sony, this is a must win battle.

And before I sign off, I want to emphasise again — this is not just about Sony and Star and networks. There could just be a surprise in store – a telco or a digital player with deep pockets may just decide that the IPL rights are the game-changer they have been waiting for. Let us wait and watch as to how the drama unfolds over the next few weeks.