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T20 raises the bar for business

T20 raises the bar for business
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First Published: Mon, Jan 10 2011. 09 09 PM IST
Updated: Mon, Jan 10 2011. 09 09 PM IST
The advent of the Twenty20 format represents a major evolutionary change in the history of cricket. In the 1980s, World Series Cricket promoted by Australian tycoon Kerry Packer led to the One-Day cricket revolution. With the Twenty20 format, the length of the cricket match has been further shortened and is now comparable (in terms of duration) to other major professional sports in the US and Europe—football, baseball, basketball, etc. While the Twenty20 format was introduced by the counties in England, the Indian Cricket League (ICL) and the Indian Premier League (IPL) have added a new dimension by making Twenty20 cricket a franchise sport. Twenty20 cricket is now following the path of the American and European franchise sports.
All these developments are extremely interesting for an economist. Economists have in the last 20 years been looking at sports as a way to explain theories of human behaviour. Most of the initial work in the area of sports was conducted by labour economists, but now sports economics has become an independent discipline of applied economics, and it even boasts high-quality journals dedicated to this subject. Also, the services of economists and statisticians are now actively used by some leading sports teams and sporting event organizers to determine strategies relating to selection of players, measurement and evaluation of performance, and structuring tournaments.
What is sports economics?
Sports economics is the application of economic theories to explain the behaviour of sportspersons, teams, and organizers of sporting events. From the point of view of the sportsperson the issue centres around work-leisure choice, that is, the amount of effort that he or she should expend given the net expected payoff (expected winnings minus the cost to be incurred to win). For the teams, it is the identification of the type of player/players who will maximize the teams’ revenue, measurement of the work effort of the players and ascertaining the optimal salary that is to be paid. For the tournament/league organizer it is the structure of the tournament that will elicit highest level of competition and enhance fan appeal for the tournament/league.
Statistics are key to sports. The abundance of data (of good quality) makes sports a viable forum for economists to test their theories. For instance, in the early days (1970s), economists used sporting data to test the relation between pay and performance and the effect of superstars. A seminal article by Nobel laureate Sherwin Rosen and his colleague Edward Lazear in 1981 on tournaments spawned a large wealth of literature looking at the efficiency of rank order tournaments as a means of compensating workers.
Economics of cricket
Academic literature has a few instances where cricket data has been analysed. One study looked at the effect of Don Bradman on attendance and gate receipts. As one can imagine, Don Bradman had a significant positive effect on gate receipts. However, given the way the game was organized and administered, he could not share in the surplus he had created for the Australian cricket board.
With the creation of the Twenty20 professional leagues this has changed dramatically. Cricket teams are now the equivalent of firms (corporations) which are run for profit, and the market for players is a competitive one where players are paid according the team management’s perception of value they add to the bottom line.
Given this development, there are two main questions on everyone’s mind. One, whether this new experiment—Twenty20 format and the franchise system—will succeed, and two, what it would mean for the game of cricket?
The success of the Twenty20 format and the franchise system both depend to a large extent on the fans. If there is demand for the brand of cricket that is being marketed, then the chances of success are very high, provided the organizers of the sport and the event, and the management of teams take the right business decisions. After all, cricket is now a business, the business of entertainment, and it is important that the entertainment is provided in a manner that is attractive to fans/consumers.
The league organizer
In the long run, the level of competition in the Twenty20 leagues will determine the viability of the?franchise system.?Therefore, it is the task of the league organizers—the Board of Control for Cricket in India (BCCI) in the case of the IPL—to structure the league in such a manner that there is enough competition to keep the fans excited about watching a Twenty20 league game. Professional sports leagues in the US have striven for “parity” among the teams in order to make it exciting for the viewers.
In order to achieve this, it is important for the league to (a) structure the tournament in a manner that promotes competition—selecting between playoff system, round robin, relegation system, etc., (b) provide incentives to make it worthwhile for the teams to compete, such as structuring the right revenue-sharing mechanism from gate receipts, television rights, sponsorships, etc., and (c) determine the optimal number of teams and expand the size of the league in a phased manner keeping in mind the growth of demand.
As mentioned earlier, the theory of tournaments is a well-researched area in economics. In fact, the BCCI used the services of a well-known sports economist as an adviser in devising the structure of the IPL. In the US, the structure of the sports league has been observed to be important: The more unified structure of the National Football League has been more successful in marketing the sport than the less unified one of Major League Baseball.
The franchisees
The long-term viability of the league depends on whether the franchisees, who are the producers of the entertainment, are able to maximize franchise value and profits. From the standpoint of the professional Twenty20 league teams, the economic question is how to maximize profit. Profit is maximized by maximizing revenue and minimizing costs. Team managements have to devise the strategies that would help them achieve these goals.
The author is director at Nathan Economic Consulting India Pvt. Ltd.
This is the first of a three-part series on anlaysing the business of cricket.
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First Published: Mon, Jan 10 2011. 09 09 PM IST