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At IPL auction, teams strove for balance

At IPL auction, teams strove for balance
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First Published: Mon, Jan 10 2011. 09 58 PM IST
Updated: Mon, Jan 10 2011. 09 58 PM IST
Mumbai: Believe it or not: Star power has become less important in the Indian Premier League (IPL) auctions.
The record-breaking salaries offered to the likes of Gautam Gambhir, Robin Uthappa, Rohit Sharma and Irfan Pathan grabbed headlines over the weekend, as 10 teams fought each other to grab the wealth of cricketing talent on offer in the fourth auction conducted for IPL. Some, such as the Kolkata Knight Riders, were trying to completely rebuild their teams. Others, such as the Mumbai Indians, were trying to bring in fresh talent to support players such as Sachin Tendulkar, Harbhajan Singh, Kieron Pollard and Lasith Malinga, the four players the team owners retained.
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However, look at the data in the table. Almost every team has spread its money around more evenly since 2008, with the proportion of the budget used to buy the five most expensive players falling sharply. IPL auctions now seem to be more about building winning teams rather than thirsting for marquee names to draw in crowds at a time when IPL was an audacious but untested experiment. The only exception to this trend is the Rajasthan Royals, which won the inaugural IPL despite spending very little money on stars. A team of relative unknowns had famously eased ahead of star-studded opponents. The proportion they have spent on their five most expensive players has climbed.
It is always hard to second-guess what goes in the mind of team owners when they go into an open auction, but some of the principles of auction design and strategy outlined by economists and game theorists may help us make some sense of what happened at the recent IPL auction. The rules of an auction are important because participants take decisions within these rules. Economist Paul Klemperer of Oxford University, in a 2001 paper called “What Really Matters in Auction Design”, said that the two core principles of a good auction are broadly the same as the basic principles of a competitive economy: encourage entry of new players and prevent collusion.
The IPL auction design seems to meet these requirements, especially since the addition of two new teams this year—Pune Warriors and IPL Kochi—was one reason why the sale prices for various players shot up. The highest salary paid to a cricketer has gone up from $1.5 million (Rs 6.82 crore) in 2008 to $2.4 million in 2011, partly because there were more bidders in the fray and some teams such as Kolkata Knight Riders were almost starting from scratch. However, the controversial episode when no Pakistani player was bid for in 2010 stinks of collusion.
There is another noteworthy part of the IPL auction design. As in many other sporting leagues, teams have budget limits to ensure that one fabulously well funded outfit does not bag all the best players and the other teams are left with second-grade cricketers. Team owners need to think strategically about how to maximize their goals within a tight budget constraint, rather than just use financial firepower to blow the other bidders out of the water. Also, such monopoly could make IPL matches one sided and kill spectator interest. The underlying motivation for the budget limit is enlightened self-interest rather than some fuzzy commitment to fairness.
Game theorists have also provided some insights into what questions team owners have to deal with when they bid for sportsmen. The first issue is how to strike a balance between having a solid plan when you enter the bidding room and being flexible during the actual bidding. You should know which players you want and which players you do not want, but also be flexible enough to latch on to unexpected bargains. This is more of a challenge given the IPL auction rule that players are bid in a secret order that the team owners are not aware of. So while patiently waiting for your chosen players has its advantages, a team owner may end up missing many opportunities in the earlier bids because he or she wants to reserve money power when the favourite is offered for bidding.
The second big issue is how to build a portfolio of players. The tendency in the earlier IPL auctions was clearly to build teams around a few stars. Such portfolio concentration was a high-risk, high-return strategy. Many of the stars had been taken on because of their abilities in other forms of cricket; their T20 experience was limited because it was a new form of cricket in 2008. So there was a high risk that these stars would either adjust to the new form of the game (as Sachin Tendulkar eventually did) or struggle (as Saurav Ganguly did).
There was a clear preference for a more balanced portfolio this year. A strong second rung is always needed in case of injuries or bad form from the stars. So while the bidding for the stars always attracts the most media attention, the strategic actions taken to build the entire team is not always adequately appreciated. IPL team owners have clearly shifted their preference from highly skewed to more balanced player portfolios. These strategic dilemmas are a bit similar to what a mutual fund manager grapples with when designing his equity portfolio.
If IPL team owners have to think like mutual fund managers when building their teams, they also have to behave like venture capitalists. IPL has created its own universe of stars, cricketers such as Yusuf Pathan or R. Ashwin who have not yet made a huge mark in other forms of international cricket.
Even as a lot has been made of the fact that top-class players such as Ganguly and Brian Lara did not attract a single bid, less attention is paid to the rise of relative unknowns who have seen valuations soar in successive IPL auctions. Twenty players have seen salaries go up by more than 10 times between their entry into the IPL circus and the latest auction. Another eight players saw valuations go up between 500% and 1,000% and 21 players between 100% and 500%. This is from data about the prices of 101 cricketers that Mint analysed.
The upshot: As track records in T20 get established, IPL has created its own universe of emerging stars.
All the 20 players who got a wage hike of at least 1,000% were relative unknowns three years ago, when IPL started. They were all bought outside the auction and often for throwaway prices ranging from $15,000 to $50,000. About three-fourths of these players are Indians, including the likes of Virat Kohli, who was retained by Royal Challengers Bangalore for $1.8 million. Saurabh Tiwary was discovered by Mumbai last year but was purchased by Bangalore for $1.6 million this year. Among the other emerging stars, there are five overseas players. Australian David Warner returned to his team Delhi Daredevils for $750,000, some 37 times the wage he received in the previous edition of IPL. Pune bought Sri Lankan Angelo Mathews for $950,000 after he was discovered by Kolkata in the first year.
In another words, team owners have to also think like venture capitalists that can spot talent very early on in the game. Do not be surprised when there is more attention lavished on the bargain buys by the time IPL 2011 draws to a close.
Graphic by Ahmed Raza Khan/Mint
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First Published: Mon, Jan 10 2011. 09 58 PM IST