IPL auction format may not result in best price discovery
For a property that is hard to value, the BCCI seems to have chosen a rather difficult auction format for the Indian Premier League, which perhaps may not result in the best price discovery.
By Irshad Daftari & Shishir Prasad, TNN |
MUMBAI: For a property that is hard to value, the BCCI seems to have chosen a rather difficult auction format for the Indian Premier League, which perhaps may not result in the best price discovery. All franchise bidders will submit one document with their best bids for different teams. In case a bidder ends up winning more than one team franchisee, he will have to pick one and drop the other.
The problem for the bidder is that the value of the team depends on two components, one relatively certain and the other very difficult to value at this stage. The first is a certain portion of the money that BCCI will get from the auction it ran for the media rights, which Sony-WSG won for $1.1 billion.
The second component is the gate money and merchandising. This portion is difficult to estimate largely because merchandise and gate money will depend on the kind of international stars — Glenn McGrath, Jacques Kallis or Lasith Malinga — that the franchisee owner will be able to bag through another auction scheduled to be held in February.
The problem for the bidder is that the value of the team depends on two components, one relatively certain and the other very difficult to value at this stage. The first is a certain portion of the money that BCCI will get from the auction it ran for the media rights, which Sony-WSG won for $1.1 billion.
The second component is the gate money and merchandising. This portion is difficult to estimate largely because merchandise and gate money will depend on the kind of international stars — Glenn McGrath, Jacques Kallis or Lasith Malinga — that the franchisee owner will be able to bag through another auction scheduled to be held in February.
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In such uncertain scenarios, if the auction procedure is like a painting auction, where rivals keep bidding more and more till there is only one bidder left, it is easier for all bidders to arrive at a better estimate of the bid because they can learn about the value of the franchise from rivals’ bids. There is a likelihood that winners might end up bidding too high.
“I think franchisee winners should look at players’ salaries as a source of value as well as cost. They should work out a base case in which they should estimate the cost they would incur if they don’t get big names,” says Ranjit Shastri, MD, Psi, a strategy consulting firm. One important factor that the bidders have to allow for is the income from media rights, $100 million a year or $1 billion over ten years.
Currently, BCCI will give all eight franchises 80% of media income for the first two years, i.e. each team will rake in Rs 80 crore for the first and second year. Subsequently, the media income will de-escalate 10% every two years and will be 50% in ninth and tenth years of the IPL.
This is a potential loss of income for the franchises. Says Anirban Blah, CEO, Globosport, “What sounds a lucrative amount today could be easily eclipsed three years from now. Media rights should have been staggered into three separate blocks instead of one fixed block of ten years, and the value for the second and third blocks would be much higher than the first.”
The potential incomes in fourth and fifth years would be at least 15% less because the media rights have been locked in for ten years.
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